Is a newish ETF a good way to invest in the Jewish state?

Someone called us recently to ask about a newish 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.

Israel as a destination

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%.

Not too shabby.

Foreign capital is flowing

We’re continuing to see money coming into Israel looking for a home. Canaan Partners just announced another fund that will be targeting opportunities in Israel.

Can Israel do better?

And if you ask Netanyahu [subscription required], 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.

Check out Eze Vidra’s post, “Israel 2008: What the Bulls and the Bears are saying“, for some good forecasts of what various analysts are looking for from the Israeli economy in 2008.

What does the ETF hold?

Check out the GAF’s holdings. 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 US.

So, what’s an investor interested in Israel to 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)? Both have taken a worse beating than Britney has received from the paparazzi.

I’d like to see a country ETF also include local retailers like Blue Square-Israel (NYSE: BSI)

Israel investors may be better off weighting for new offerings in the works as we hear that Barclays and another firm has an Israel ETF in registration.

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