Status Change=Bad News For Israel ETF

Ever wonder why the iShares MSCI Israel Capped Index Fund (NYSE: EIS) has lagged this year while other emerging markets ETFs have surged? The answer is simple: Israel is no longer an emerging market and the change in status to developed world economy could hamper EIS going forward.

MSCI (NYSE: MSCI), the company that provides many of the indexes that ETFs such as EIS track, shifted Israel to developed nation status and that led to large-scale selling of Israeli stocks such as Celcom Israel (NYSE: CEL) and Teva Pharmaceuticals (Nasdaq: TEVA) by big institutions.

Harvard's endowment has sold all of its Israeli equity holdings as has Eaton Vance and T. Rowe Price hasn't added to its positions in Israeli stocks since the status change, according to Bloomberg News.

EIS may be slow to recover because, as Bloomberg says, "funds focusing on mature economies have been slow to buy the shares because Israel accounts for just 0.4 percent of the developed markets index, compared with about 3 percent of MSCI’s emerging markets measure."

EIS has taken a mighty tumble from its 2010 highs, but has had a nice bounce recently. That said, resistance at the 200-day moving average could be a problem, but not being an emerging market anymore is a bigger issue for the ETF to overcome.

One analyst quoted by Bloomberg said "Israeli stocks might be in no-man’s land for a while." Not favorable sentiment for EIS. As a short-term trade, EIS could work, but the medium-term prospects are more muddled.

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