Teva's Deal-Making Spurs Inflows To Israel ETFs

Israel-based Teva Pharmaceuticals TEVA last week said it will pay $40.5 billion for Allergan AGN's generic drugs unit, a deal that sent shares of both companies higher on the week.

Teva's deal also sent investors rushing into Israel exchange traded funds. Although it might not sound like much, investors added a combined $33.6 million to the iShares MSCI Israel Capped ETF EIS and the Market Vectors Israel ETF ISRA last week. On a percentage basis, that is significant chunk of each ETF's current assets under management total.

With last week's inflows of nearly $20.2 million, EIS, the older of the two Israel ETFs, has nearly $141 million in assets under management. Thanks to inflows of $13.4 million last week, ISRA enters Monday with $72.4 million in AUM.

It's easy to see why investors rushed to Israel ETFs as shares of Teva surged. The stock has long been the largest holding in EIS and now accounts for nearly 26 percent of that ETF's weight. Heading into Monday, that weight means Teva commands more than 2 1/2 times the allocation in EIS as the ETF's second-largest holding. Another way of looking at Teva in EIS is this way: The stock is the ETF's entire healthcare weight.

Thanks to Teva, EIS has outperformed ISRA by nearly 500 basis points this year. Teva is ISRA's largest holding at a weight of just 13.7 percent. However, ISRA has some advantages of the competing Israel ETF, starting with a 12.5 percent weight to Perrigo PRGO.

Perrigo, the second-largest holding in ISRA, has rejected two takeover offers from Mylan MYL, but with the healthcare sector on a torrid pace of consolidation this year, it is impossible to rule out Perrigo as a target or buyer. Perhaps Mylan gets its way with Perrigo.

“While Perrigo’s board and management team are still resisting a sale, the stock is trading as if a deal will probably happen,” according to Bloomberg. 

ISRA, which tracks the BlueStar Israel Global Index (BLSNTR), has some other advantages, too, notably a 32.3 percent weight to the technology sector. That provides the ETF with significant leverage to Israel's “start-up nation” theme. ISRA is home to U.S.-listed tech darlings such as Mobileye NC MBLY and CyberArk Software CYBR. By comparison, EIS allocates just 7.5 percent of its weight to tech stocks.

But for those buying ISRA for the healthcare consolidation theme, rest assured, the potential is there for more. For example, Opko Health OPK, ISRA's ninth-largest holding, has been a buyer, but has also been mentioned as a possible target.