Market Extra: How the Israel-Hamas war is rippling through markets and hurting Israel-focused ETF

Geopolitical tensions in the Middle East are weighing on investor sentiment in the exchange-traded fund market as traders watch for ripple effects from the Israel-Hamas war.

Shares of the iShares MSCI Israel ETF
which holds Israeli stocks, finished Monday 0.7% lower while equities in the U.S. broadly rose, according to FactSet data. The fund has tanked since the Israel-Hamas war began earlier this month, down 10.2% so far in October, while seeing outflows over the past week. 

Last week the iShares MSCI Israel ETF suffered its biggest weekly loss since the COVID-19 crisis of March 2020, sinking 9.8%, FactSet data show. The fund tumbled 7.1% on Monday, Oct. 9 alone as investors reacted to Israel’s declaration of war following a surprise attack by Hamas. 

“The market is going to be watching if Iran gets involved” should Israel carry out a ground invasion into Gaza, said Anthony Saglimbene, chief market strategist at Ameriprise Financial, in an interview with MarketWatch on Monday in New York.

Spillover effects from the war could harm the U.S. economy should oil prices spike as a result, complicating the Federal Reserve’s efforts to bring down inflation to its 2% target in a so-called soft landing, according to Russell Price, chief economist at Ameriprise. High oil prices risk leading to a pullback in consumer spending in the U.S., with increased gas prices at the pump making it tougher for people to make purchases elsewhere in the economy.

“It would definitely hit consumer discretionary spending,” which could tip the U.S. into a “long forecast recession,” Price said during the interview. 

See: Yardeni raises odds of a recession after Hamas attack on Israel

U.S. oil prices fell Monday, settling at $86.66 a barrel after a sharp jump on Friday. Despite the recent rise, West Texas Intermediate crude
remains below levels seen in late September, before the attack by Hamas, according to FactSet data. 

In the U.S. equities market, energy stocks stand to benefit from any rise in oil prices while airlines would risk falling under pressure from higher jet fuel prices and a potential drop in air travel on concerns tied to the war, said Justin Burgin, vice president of equity research at Ameriprise. 

Shares of the U.S. Global Jets ETF
closed 1.6% higher on Monday, bouncing after a more than 5% slump last week, according to FactSet data. By contrast, the Energy Select Sector SPDR Fund
surged 4.5% last week. 

The S&P 500’s energy sector
ended Monday up 0.7% as the broader U.S. stock market climbed even higher. The S&P 500 index
a measure of U.S. large-cap stocks, rose 1.1%, while the Dow Jones Industrial Average
gained 0.9% and the technology-heavy Nasdaq Composite
advanced 1.2%, according to FactSet data.

While the iShares MSCI Israel ETF, which has $118 million of assets under management, fell Monday, shares of smaller Israel-focused ETFs increased.

The ARK Israel Innovative Technology ETF
closed 0.5% higher, while the BlueStar Israel Technology ETF
gained 1% and the VanEck Israel ETF
rose 0.5%, according to FactSet data. But all three funds remained down so far in October. 

Investors pulled $2.6 million from the iShares MSCI Israel ETF over the past week through Friday, bringing this year’s outflows to $5.2 million, FactSet data show.

In equities elsewhere in the Middle East, shares of the iShares MSCI Saudi Arabia ETF
jumped around 2.8% on Monday. 

While analysts at Yardeni Research warned in a note last week that a potential tightening of sanctions on Iran oil could cause crude to spike above $100 a barrel and “trigger a worldwide recession,” they also said that it’s more likely “Saudi Arabia would increase its production and exports to keep the price of oil” below that level.

Meanwhile, aerospace and defense stocks stand to rise amid the war, said Ameriprise’s Burgin.

The iShares U.S. Aerospace & Defense ETF
Invesco Aerospace & Defense ETF
and the SPDR S&P Aerospace & Defense ETF
all booked gains on Monday, after each climbing more than 4% last week, according to FactSet data.

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