EIS iShares MSCI Israel ETF

The nation of Israel has been under the microscope over the past few months as tensions continue to build between the country and Iran. Many analysts believe that Israel will not tolerate Iran possessing a nuclear weapon and that the small country will move to bomb Iranian facilities in short order.

While speculation over a skirmish between the two heated rivals continues to build and scare off some investors, the fact remains that only words have been exchanged so far. In essence, some are beginning to wonder if a more peaceful solution can be reached or if Israel can somehow learn to live with a nuclear armed Iran at its doorstep.

Although both situations seem unlikely, analysts must also remember the political trends that could heavily impact the developments in the region as well. Israel is scheduled to hold elections in October 2013 while the U.S. has its Presidential election later this year. Given that Israel probably needs U.S. support for such a strike, it appears as though any confrontation will likely be postponed until 2013 at the earliest (see Three ETFs With Incredible Diversification).

Since we can possibly rule out a military action by Israel in the short term, it could be worthwhile for investors to consider making a tactical allocation to the nation for the rest of the year. This can easily be done via a popular ETF tracking the country’s market, the MSCI Israel Capped Investable Market Index Fund (EIS).

This ETF seeks investment results that correspond to the performance of the MSCI Israel Capped Investable Market Index, a broad benchmark of Israeli equity returns. Currently, the fund charges investors 59 basis points a year and holds 77 securities in its basket (see Five Cheaper ETFs You Probably Overlooked).

So far in 2012, the Israel ETF has added about 9.5%, underperforming the S&P 500 in the time period. This has largely been due to worries over tensions with Iran as the real divergence between EIS and the U.S. market took place in mid-February when the Iranian issue was at the forefront of investors’ minds (see more on the Zacks ETF Center).

However, now that the problem has been put on the backburner, EIS has broadly moved higher and has actually outperformed S&P 500 ETFs over the past one month period. Given this shift and the broadly declining tensions, it could be time to cycle into EIS at least for the short-term.

Beyond the relatively favorable trends underlying the Israel ETF, investors can also take solace in the product’s value tilt as well. Health care stocks take the top spot at just under 25% of total assets while large caps account for 81% of the fund (read Three ETFs With Incredible Diversification).

Furthermore, EIS pays out a solid dividend of 3.15% suggesting that even if the market begins to slide investors should be at least somewhat protected thanks to this reasonable payout.

Given these factors, EIS could make for a great short-term buy on the dips for the rest of 2012. The ETF looks likely to shake off most Iranian tensions in the near term and as we have seen in recent weeks, tends to bounce sharply higher when the environment cools down a little (read Three Financial ETFs Outperforming XLF).

However, once the political picture in the U.S. and Israel become a little less cloudy, a strike by Israel could be very possible. When this happens, it seems very likely that Iran could retaliate either against Israel itself or American installations closer to Iranian borders.

If this is the case, I certainly wouldn’t want to be holding on to EIS, as the fund will likely face a heavy slump at that time. So while this fund seems to have some short term momentum, it looks to be a definite sell in 2013 or whenever the tensions between Israel and Iran finally bubble over into armed conflict.

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