Israel Joins Rate Cut Club; ETF Doesn't Care And Falls

From Brussels to Sydney to Hanoi, global central banks have been taking the ax to interest rates over the past several weeks. International central bankers can now welcome a new member to the no-longer exclusive rate cut club, that being Israel.

On Monday, the Bank of Israel lowered interest rates by 25 basis points to 1.5 percent while unveiling a plan to purchase $2.1 billion in foreign currency in an effort to weaken the country's currency, the shekel.

Economists and monetary policy gurus know that it takes a while for the full effects of rate cutting to be seen within an economy, but that does not mean traders wait to react to the news. Traders were treated to a spate of interest rate reductions from global central banks last week and it is safe to say reactions to the news, at least as far as some U.S.-traded ETFs are concerned, was tepid at best.

Actually, the marquee ETFs tracking Australia and South Korea finished the week in the red after central banks there cut rates during the week. The iShares MSCI Israel Capped Investable Market Index Fund (EIS) is on its way to repeating the same ominous feat.

On news of Israel's rate cut and currency-buying gambit, the iShares MSCI Israel Capped Investable Market Index Fund is trading lower by 1.6 percent Monday.

As is the case with so many other countries these days, Israel has the "problem" of a strong currency. That problem has been caused soaring production of natural gas at Israel's Tamar field, which is prompting an improvement in Israel's current account, Haaretz reported.

Bank of Israel said it would continue the foreign-currency buying program in subsequent years, until the government sets up a sovereign wealth fund for its natural gas earnings, according to Haaretz.

Another way of looking at this situation is that EIS, which features a mere 4.78 percent allocation to the energy sector, is being pressured by a problem caused by an industry the ETF offers little exposure to. Nearly 34 of percent of the ETF's weight is devoted to Israeli financial services firms, indicating that this is not an export-heavy fund. However, EIS has been something off a laggard relative to other developed market ETFs in recent weeks.

In the past month, while the shenkel has gained over two percent against the U.S. dollar, EIS is up just 0.74 percent. On the other hand, one could say a 0.74 percent gain over the past 30 days is not too shabby given that Teva Pharmaceuticals (TEVA), the largest holding in EIS with a weight of 21.7 percent, has traded slightly lower over the same.

To the Bank of Israel's credit, it is taking a proactive approach to stem the tide of the rising shenkel. However, this may be "an A for effort, incomplete for result" type of scenario. The central bank has intervened in the forex market four times in the past month, Haaretz reported, and that apparently did not work. Currency interventions often have mixed results as the Reserve Bank of New Zealand recently discovered.

EIS, which has $82.6 million in assets under management, is the lone Israel-specific ETF, though plans have been filed to launch a competing fund.

BY The ETF Professor