Israel ETFs Bounce Back From Regional Drama

The iShares MSCI Israel Capped ETF EIS and the Market Vectors Israel ETF ISRA both languished as tensions in Syria escalated.

Amid speculation the U.S. could launch a military offensive against Syria, EIS fell nearly six percent from August 12 through September 3 while ISRA, the newer of the two Israel ETFs, lost 3.5 percent.

Related: Israel ETF Plunges After Hamas Strike.

Those declines, while underscoring the risks associated with any ETF with significant exposure to the Middle East, should not obfuscate the fact that Israeli stocks have recently been solid performers, a story that is not getting much attention.

Tel Aviv's benchmark TA-25 Index rose again today, extending its winning streak to nine days. While stocks in Tel Aviv trade at the highest levels in over two years, they are not richly valued. The TA-25 trades at 11.7 estimated earnings, or 29 percent lower than the average for the MSCI World Index of developed markets, according to Bloomberg data.

ISRA debuted in late June as the first real competitor to EIS and since that debut, the new Israel ETF has gained 7.3 percent. EIS, with $75 million in assets under management, has not been a slouch over that 90-day period, either, returning 5.3 percent.

Recent strength in Israel ETFs might be attributable to the central bank's Federal Reserve-esque ultra loose monetary policy. In May, Bank of Israel lowered interest rates twice, taking rates to 1.25 percent in an effort to guard against a strong shekel. The moves make sense because exports account for 40 percent of Israeli GDP.

Both ETFs feature significant allocations to Teva Pharmaceuticals TEVA, the generic drug giant. EIS has a weight of 22.3 percent to the stock, making ISRA's 12.8 percent weight to Teva look small by comparison. There are, however, significant differences between the two ETFs for investors to consider.

While Israeli stocks are cheap, foreign investors should consider opting for increased exposure to Israel's booming tech sector, one that accounts for a quarter of the country's exports. ISRA devotes 32.5 percent of its weight to tech, nearly five times the weight EIS allocates to the sector. That is an important factor because if the recent rate cuts have the desired impact of weakening the shekel, Israeli tech exporters will be more profitable and that should translate into higher prices for ISRA.

U.S.-listed tech names in ISRA's lineup include Check Point Software CHKP, Amdocs DOX and Mellanox Technologies MLNX.

At the end of August, ISRA had P/E ratio of 15.3 compared to 27.25 for EIS, according to Market Vectors data. ISRA has brought in $23.3 million in assets since coming to market.

For more on ETFs, click here.

Disclosure: Author does not own any of the securities mentioned here.