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ETF News And Commentary

Tensions in the Middle East are really starting to ratchet higher. Egypt is seemingly descending into anarchy after recent decisions by Morsi, while the situation in the eastern part of the region isn’t much better.

There are now threats and worries over the use of chemical weapons in Syria, prodding America and other Western nations to consider stepping up their involvement. If that wasn’t enough, Iran continues to loom over the broader Middle East picture and is ever closer to what some believe is the capability to make a nuclear weapon.

With this brewing trend of uncertainty sweeping across the region, one would probably expect that those who have historically had an issue with many of the nations in the region, such as Israel, (to put it mildly) to be in a near panic (read Israel ETF Investing 101).

After all, not only has Israel faced issues with many of the nations in the area, but it is currently undergoing somewhat of a scuffle with Palestine once again, suggesting that it could be a rough period for the country and especially its stock markets assuming a risk off mood for Israeli-focused investors.

Yet this has really not been the case over the past few months in the country, at least when investors look to the main ETF way to target the nation, the iShares MSCI Israel Capped Investable Market Index Fund (EIS - ETF report). This product has actually been a pretty solid performer in the trailing three month period, gaining over 1,500 basis points more than the broad S&P 500 benchmark in the same time frame.

If anything, the product has actually been doing better now that there have been more risks impacting the country, as EIS was actually underperforming the S&P 500 for the early part. In fact, EIS is actually still underperforming in a YTD look, although this has been severely cut into thanks to the strong performance of the Israeli market as of late (see Is the Israel ETF Back on Track?).

What Happened?

Arguably the biggest reason for the solid performance of EIS as of late has been the stability in its largest holding Teva Pharmaceuticals (TEVA - Analyst Report). The stock, which makes up roughly 23.7% of the portfolio, is obviously a big driver of returns as it makes up an outsized portion of assets and more than twice as much as the next biggest holding Israel Chemicals.

The stock was getting crushed in the early part of the year, leading EIS sharply lower as a result. However, in the trailing six month period, TEVA has seemingly bottomed out, adding about 6% in the time frame and helping to end the losses for its corresponding ETF.

Additionally, investors have seen a greater demand for other developed markets beyond the U.S. and outside of the troubled European region. This has pushed many into the few smaller developed nations scattered across the globe like Canada, Australia, Singapore, and now Israel (see A Primer on ETF Investing).

This trend has only increased with the standoff in the fiscal cliff debate, as investors are starting to waver over American investments. This could be especially true if these negotiations reach into 2013 and approach the debt ceiling, causing many investors to abandon the U.S. for less politically risky shores.

Lastly, while the political situation in Israel’s backyard isn’t great, there really has been a lack of true escalation in the region, which has kept worries at bay for now. The nation has done a good job of staying out of regional conflicts so far, while its ‘Iron Dome’ has nearly eliminated the damage from Palestinian rockets (read Middle East ETFs: More Different Than You Might Think).

This has pretty much allowed the country to operate smoothly despite the ongoing risks, which very easily could have derailed the market. Instead, the country has focused in on its relatively decent situation from a growth perspective and come back at a key time when investors were looking for other, solid developed markets around the globe that are relatively unscathed by American and European woes.

The Bottom Line

So although the Israel ETF may still be facing some serious issues from a geopolitical perspective, it has more or less been able to shrug these off with ease. While this certainly could change in the near future if tensions reach a more fevered pitch, it may still be rough stretch for Israeli stocks in 2013.

Either way, it is pretty clear that EIS is more resilient than some investors might think, and that even in the face of political uncertainty, the fund can outperform.

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