Questioning MSCI's Israel Index

MSCI recently announced that it had made some changes to its MSCI Israel Capped Investable Market Index Fund (ETF tracking this index: EIS). Among the changes was lowering weightings in hi-tech and insurance, which is not unusual. It also raised the index weighting on the banking sector. Once again, this move is not significant.

It’s only when you look at the individual stock weightings that you may want to scratch your head. Teva Pharmaceuticals (TEVA) has a staggering 44.8% index weighting. My question to the folks at MSCI is what’s the point? Why bother having an index that is essentially comprised of one company? After all Teva is about 9.5% of the local Tel-Aviv index.

For ETF investors this re-balance is important. Investors who either have purchased, or are thinking about purchasing the iShares MSCI Israel ETF (EIS) should be warned. Essentially, they are just buying Teva, and are certainly not getting any meaningful type of linkage to the local Israeli index. For investors looking for more diversified exposure, you may want to check out the new NETS TA 25 Index Fund (TAV). In fact, fellow IOI colleague Zack Miller had a real must read in-depth analysis of the differences in the two ETFs.

MSCI is often criticized for the same reason. They take the largest position in a particular index, and make it a very large chunk of the index they are trying to create. What’s the point? Shouldn’t a market index be a bit broader?

Disclosure: The author’s fund has a position in TEVA. He has no position in any other stock mentioned as of June 6, 2008.

Comments

[tradeequity]

Aaron,

You make a great point. There could be only one reason that I can think of for MSCI to raise the level of Teva to this extent. Teva could be going higher on news that is not yet announced. Teva has traded in the $44-49 range for the last 6 months, and has formed a level of support right around $46. This stock could be set to move higher if the right fundamentals were offered.
Good Fortune from Trade-Equity.com!!!

[Nancyi]

Surprised to see the high weighting of Teva in EIS, I mentioned it to a friend who contacted ishares.com. Here is their response "With regard to your request, our Israel ETF tracks the MSCI Israel Capped Index. The "Capped" part of that index refers to the holdings of Teva Pharmaceuticals. If the index was market capitalization weighted, the holdings of Teva would be what they suggested right around 45%. This product has and always will follow the "capped" index so that holding in Teva will never go that high. One great place to find more information on this would be the Statement of Additional Information." Do you agree that perhaps a correction might be appropriate? Thanks.