Four exchange-traded funds are likely to get a boost beginning in January after Israel amended a pension fund regulation to limit overseas investments.

The funds — ARK Israel Innovative Technology ETF (US:IZRL), VanEck Israel ETF (US:ISRA), iShares MSCI Israel ETF (US:EIS) and BlueStar Israel Technology ETF (US:ITEQ) — all have a mix of Tel Aviv-traded and overseas traded stocks permitted under the “Investment Tracks in Provident Funds” definitions as set out by a amendment to the Capital Markets, Insurance and Savings Authority in a circular published earlier this month.

The circular disallows funds solely exposed to overseas markets, with one exception, those tracking the S&P 500 index.

Over the last 12 months, the S&P 500, as represented by the SPDR S&P 500 ETF Trust (US:SPY) is up 16.8%, while the broadest Israel gauge, the TA-125 index, is down 10.2%.

As for those four Israel-focused exchange-traded funds, ISRA is down 20.1%, EIS has shed 19.6%, ITEQ is off 15.3% while IZRL is down 7.1%. Meanwhile, the Israeli shekel has weakened 15.4% against the dollar.

Those declines come as the country has been embroiled in a political firestorm over a judicial reform effort by Prime Minister Benjamin Netanyahu’s right-wing ruling coalition. Opposition to that overhaul has brought hundreds of thousands of protesters into the streets for more than 30 consecutive weeks.

One local capital market economist said that the political uncertainty is the main element driving the strong volatility on Israel stock and foreign exchange markets.

‘Acute’ Home Bias

That change in pension manager choices could also exacerbate the “particularly acute” home bias evident among local investors in Tel Aviv-traded stocks.

“Investors in most countries exhibit a home bias, but it is particularly acute in Israel,” S&P Dow Jones Indices Senior Analyst Sherifa Issifu wrote in a March 17, 2023 report. “On average, Israeli investors allocate a higher amount to domestic equities than their developed market peers in the U.K., Europe and Canada, and thus may not be fully accessing the potential benefits of global diversification.”

That seems to belie the observation by Nobel Prize laureate Harry Markowitz, who is often cited for the quip that “diversification is the only free lunch in investing.”

Opportunity Ahead

Looking at those four ETFs, the strongest trading opportunity is evident in the relative strength index for BlueStar Israel Technology ETF (US:ITEQ).

The relative strength index, or RSI, is an often-used technical signal to surface near-term trading opportunities. Readings above 70 generally indicate an asset has been overbought, and readings below 30 suggest something has been oversold.

As ITEQ, it is now at the closest it has been to 30 — that is, oversold — since May 3.The price of the fund climbed 15%, from $42.49 on May 3 to $48.90 on June 19, before a downturn into August. At current levels, just below $45 a share, the ETF sports a $96 million market capitalization.

Institutional Irony

One key institutional buyer of late is Susquehanna International Group, which bought 7,607 shares on Aug. 11 at an average price of $45.38.

A close follower of Tel Aviv stocks could be forgiven for seeing a certain irony in that transaction, as the political turmoil cited above has ties back to that fund, or at least its founder and co-CEO, Arthur Dantchik.

He funded the Kohelet Policy Forum, the think tank behind Israel’s judicial overhaul plan.

Those donations came to a halt earlier this month. “I stopped donating to think tanks in Israel, including the Kohelet Policy Forum. I believe what is most critical at this time is for Israel to focus on healing and national unity,” the billionaire said in the statement published by Israel business daily Calcalist.

This article originally appeared on Fintel

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