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Pharma Focus Fabulous for Israel ETFs

Increased mergers and acquisitions in the pharmaceuticals space has been a boon for healthcare-heavy Israel exchange traded funds.

Year-to-date, the Market Vectors Israel ETF (ISRA) and the iShares MSCI Israel Capped ETF (EIS) are up an average of 11.6%, an advantage of 260 basis points over the MSCI EAFE Index.

The two ETFs were jolted higher last week on news that generic drugmaker Mylan (MYL) offered to acquire Israeli rival Perrigo (PRGO) for $205 per share, or $28.86 billion. At the start of trading April 8, the day Mylan announced its offer for Perrigo, the latter was the second-largest in ISRA at a weight of 12.5%. [Healthcare Weights Lift International ETFs]

However, there is potentially more to the story for the Israel ETFs, particularly ISRA, which tracks the BlueStar Israel Global Index (BIGI). Although shares of Perrigo hover near Mylan’s $205 per share offer price, Perrigo management Perrigo management has yet to respond to the offer from Mylan.

“Although Perrigo is domiciled in Ireland, the company has a dual listing on the NYSE and the Tel Aviv Stock Exchange (TASE), the latter of which automatically qualifies it for inclusion in BIGI,” according to BlueStar Indexes. “The TASE listing is a legacy of Perrigo’s 2004 acquisition of Israel-based Agis Pharmaceuticals.The Irish domicile is a result of Perrgio’s 2013 acquisition of Elan Pharmaceuticals in a ‘tax inversion’ deal.”

Shares of Teva Pharmaceuticals (TEVA), one of the largest generic drugmakers in the world, have also risen since Mylan announced its bid for Perrigo. There has been some analyst and media speculation that Teva could make a move on Mylan. Teva, which previously announced its intent to go shopping, is the largest holding in EIS at a weight of 26.1%. Teva is ISRA’s second-largest holding at a weight of 13%. [Teva Could Lift Pharma ETFs]

Beyond the obvious help from healthcare mergers and acquisitions, there are reasons for optimism with Israeli stocks and the country’s broader economy.

“Even though the Israeli economy capitulated to deflationary pressures five months ago, the Israeli economy is forecast to grow 3.4 percent this year, strengthening to 3.7 percent in 2016, assuming its territory abutting any of its neighbors (like Palestinian-controlled Gaza and the West Bank) does not fall prey to another round of terrorist attacks. Anticipated modest declines in joblessness in 2015 and 2016 should reinforce the improving pattern in private consumption arising from elevated real disposable personal income as a result of expected additional tax reductions and declining living costs. Exports too are likely to contribute to a pickup in economic activity thanks to the shekel’s steep, nine-month depreciation against the US dollar. Consequently, the current account surplus as a proportion of nominal GDP will steady at three percent this year before swelling to 3.5 percent in 2016,” according to S&P Capital IQ.

In shekel terms, Tel Aviv stocks trade at less than 12 times earnings, according to S&P Capital IQ. The multiple on ISRA is higher at closer to 15, which is understandable given the ETF’s 33.5% to Israel’s vibrant technology sector.

Market Vectors Israel ETF