by: Zack Miller posted on: February 07, 2008 | about stocks: BSI / CEL / CRNT / GAF / ISL / PTNR / SMLC / TEVA    

Someone called us recently to ask about a relatively new ETF called the SPDR Emerging Middle East & Africa (Amex: GAF). The ETF is heavily weighted around three countries — South Africa (65%), Israel (17%) and Egypt (6%). There are other ETFs that include exposure to Israel but as far as we know, this ETF currently has the largest exposure.

We like Israel (but hey, we’re biased). While Israel is not putting up double-digit GDP growth like China, we are seeing close to 4-5%. And, that's not too shabby. Foreign capital is flowing into Israel, looking for a home. Canaan Partners just announced another fund that will be targeting opportunities in Israel.

But, can Israel do better?

If you ask Benjamin Netanyahu, we could see close to 8%, if certain pro-market policies are put into place. Even Netanyahu’s detractors credit his cuts in welfare benefits, the removal of remaining currency and capital controls, and liberalization of the banking sector as cutting the way for an amazing economic recovery. Eze Vidra’s post, “Israel 2008: What the Bulls and the Bears are saying,“ has some good predictions about what various analysts are looking for from the Israeli economy in 2008.

The SPDR Emerging Middle East & Africa ETF

What are the GAF ETF's holdings? Click here for a complete list. What you’ll see is that Israel’s 11% weighting is driven by the fact that Teva Pharmaceuticals (Nasdaq: TEVA) is the ETF’s largest holding at over a whopping 9%. We then see Israel Chemical (2%), Bank Leumi (1.43%) and Bank Hapoalim (1.41%). Elbit Systems (Nasdaq: ESLT) is also in there (1.06%). The rest of the Israel holdings each account for less than 1% of the SPDR Emerging Middle East & Africa Fund.

Investors in Israel from abroad may like the fact that this fund holds locally traded companies that aren’t dually listed or carry a corresponding ADR in the U.S.

What should an investor interested in Israel do?

That said, 17% of a fund that has exposure to really different economies may not be enough for foreign investors looking to trade locally-traded Israeli shares. Also, TEVA’s weighting at 9% of the overall fund means that Teva alone accounts for over 50% of the total Israeli exposure. Teva may be a great company but it’s not indicative of the Israeli market as a whole.

I’d like to see more exposure to Israel Chemicals, the Israeli banks, Bezeq, 012.Smile (Nasdaq: SMLC), the Mobile phone carries including Partner (Nasdaq: PTNR) and Cellcom (NYSE: CEL), let alone all the newer, smaller, tech firms listed locally. What about mobile fixed telecom players like Alvarion (Nasdaq: ALVR) and Ceragon (Nasdaq: CRNT)? I’d also like to see a country ETF include local retailers like Blue Square-Israel (NYSE: BSI).

At this time, some Israeli investors may be better off by waiting for new offerings that are in the works. We hear that Barclays and another firm have an Israel ETF in registration.

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Zack Miller

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