Investors offered easier way to buy hot Israeli stocks - DALE JACKSON

North American investors can commemorate Israel's 60th anniversary by owning a part of the country's benchmark index without the hassle of investing overseas.

Starting today, the first overseas exchange-traded fund that tracks the Tel Aviv Stock Exchange's TA-25 begins trading on the New York Stock Exchange under the symbol TAV.

Chicago-based Northern Trust Corp. is introducing the NETS TA-25 Index Fund as part of a series of foreign ETFs that include South Africa and Portugal.

Israeli equities have surged 150 per cent over the past five years, thanks in part to a rapidly emerging pharmaceutical, medical equipment and technology sector. The country's gross domestic product has been growing at a steady pace of 4 to 5 per cent a year and is expected to continue at that rate to 2012.

The changing face of Israel is prompting debate over the country's developing market status. Morgan Stanley lists it as an emerging market but next month the FTSE Group will upgrade Israel to the same designation as the United States, Europe and Japan.

"It's a country in the process of graduating to developed market," says Northern Trust chief investment officer Steven Schoenfeld. "It's moving to the big leagues on the economic scene."

The Tel Aviv Stock Exchange, or TASE, has a combined market value of $232-billion (U.S.). The TA-25 index tracks the shares of the 25 companies with the highest market capitalization. Nearly half of the TA-25 companies are industrials and 40 per cent are financials.

Most Canadian trading accounts currently have direct access to a vast array of Israeli stocks listed on U.S. exchanges. In fact, Israel is second only to Canada in terms of the number of stocks from a foreign country listed in the United States. However, Mr. Schoenfeld says most Israeli companies listed in the U.S., such as Checkpoint Systems and Amdocs, are too narrowly focused on global technology. "You don't have a complete Israeli portfolio without also having the domestically listed stocks. What this ETF provides is easy access for Canadian investors to the Tel Aviv-listed stocks where they don't have to worry about converting to shekels."

Cliff Goldstein has first-hand experience with both the unofficial and official Israeli equity markets. His Pennsylvania-based $3.7-billion Amidex 35 Israel index fund has been investing in the 35 largest Israeli companies trading in both countries for the past decade. He says he has witnessed a stark change in the nature of both markets. "We put in the New York side for stability and growth and the Tel Aviv side for volatility and risk. What we discovered was exactly the opposite."

Mr. Goldstein says Israel's maturing domestic economy and diversified export base have acted as a cushion against the U.S.-based credit crunch and the threat of inflation from Asia. "Israel has become a huge exporter to the world and they ain't selling oranges any more."

He expects established technology exports to continue driving the Israeli equity market. One of his holdings and the darling of global equity markets is Teva Pharmaceuticals - the largest distributor of antibiotics in the world.

Banking and insurance is the largest weighting in the Amidex 35 fund at 18 per cent, with technology accounting for 16 per cent and chemicals taking a 13-per-cent stake.

He also sees opportunity in the further privatization of public enterprises and the transfer of military technology for civilian uses. But he adds that the future for Israel is environmentally related industries. "The hot up-and-comer is green-related technologies; from water desalinization to electric cars to solar panels to hydrogen-powered vehicles."

However, as Israel looks forward to the next 60 years, investors must still come to terms with the ghosts of its past. Decades of political tension and acts of violence between the Jewish state and its Arab neighbours continues. Mr. Goldstein says that in his experience, there has never been any direct correlation between political and military events and Israeli business performance. "The fact that 50 shoppers were injured in a mall in the south of Israel is not going to affect Teva Pharmaceutical's ability to make drugs in Horsham, Pa., and ship them to India."

Amidex 35 Israel is a U.S. mutual fund and is not available in Canada for regulatory reasons. In addition to the Northern Trust TA-25 fund, investors wanting direct exposure to Israeli equities can purchase the NYSE-traded iShares MSCI Israel Capped Investable Market Index Fund, which tracks a broader assortment of stocks traded primarily on the TASE.