June was a tough month for the market in general and Israel stocks were hit with a double whammy: tech stocks proved they were no longer immune to the weakening economy and the shekel continued its march higher versus the dollar.

Both EIS, the iShares MSCI Israel Capped Investable Market Index Fund, and the TAV, the NETS TA-25 Index Fund, were down about 3-4% with the overall Nasdaq down about 8%.

If you look closer at the chart, you’ll see that the TAV just recently outperformed the EIS.  TEVA Pharmaceuticals (TEVA) was recently hit hard off of news of more imminent generic competition to Teva’s Copaxone (tables turned, eh?) in spite of some incrementally positive news on progress on a drug to treat Parkinsons.

We’ve written about the EIS’s extreme exposure to the generic pharma giant (weighing in at almost 25% of EIS) and this in turn, makes iShares’ Israel ETF more susceptible to fluctuations in TEVA’s stock price and ultimately, not as good a proxy for the entire Israeli market (of which TEVA constitutes less than 10% of market cap and which the TAV attempts to mimic).

Some additional reading:

• Introducing the First ‘Real’ Israel ETF
• Bulling up for some real TA-25 exposure for US Investors
• Dave Fry’s ETF Digest discusses existing Israeli ETFs

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Aaron Katsman
IsraelNewsletter.com

Volatile markets have impacted even the best of investors. Last week we heard that Warren Buffett had his worst first half of a year in 19 years, and news out yesterday shows that the hedge fund industry didn’t fare much better.

According to a report in Bloomberg: ” Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990.”

While hedge fund investors lamented the lack of volatility in markets for the last few years, they finally got their wish and, on average, weren’t able to deal with the high level of volatility.

But before we jump on the anti-hedge fund bandwagon, it’s important to note that the average equity hedge fund lost about 3.3% during the 1st half of the year. That thoroughly crushes the S&P 500 which dropped 19% from the October peak. This actually means that the hedge funds are doing what they are supposed to do and be a hedge against falling markets. To often recently hedge funds have become correlated to the market, exactly what they shouldn’t be.

It will be interesting to see the numbers from the mutual industry as well. If actively managed mutual funds also manage to beat the market, it may help slow down the explosive growth of the ETF industry. With investors constantly being told to simply buy and hold ETFs, double digit under-performance within traditional ETFs has burned investors.  This may cause investors to revert to more actively managed accounts.

After all, how many buy and hold investors wish that they would have only lost 3.3% so far this year?

Disclosure: Author’s fund has no position in any stock mentioned as of 7/10/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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The entire interview with Dave Fry of ETF Digest part of our new subscription newsletter, Israel Opportunity Investor. You can find out more about the product and the opportunities we cover at www.israelnewsletter.com.

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How did you become a leading analyst on ETFs?
Dave Fry, Founder of ETF Digest: I think being early in coverage of these fast growing investment vehicles is the easy answer.  Beyond that we have tried to be more honest and blunt in our coverage of new products.  We haven’t been “yes men” or suck ups for issuers and sponsors for example.  Where we’ve been critical some ETF sponsors won’t talk to us any more for example which isn’t a bother since we don’t use their products anyway.  Further where there are problems we’ve been out front in pointing these out.  That occurred with shorting problems for retail investors where the promised benefit didn’t meet reality. (Continue »)

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Aaron Katsman
IsraelNewsletter.com

Morgan Stanley (MS) just announced changes made to their MSCI Israel index. Among the changes was lowering weightings in hi-tech and insurance. Ok, nothing very unusual. They raised the index weighting on the banking sector. Again, nothing to write home about. It’s only when you look at the individual stock weightings that you may want to scratch your head. Teva Pharmaceuticals (TEVA) has a staggering 44.8% index weighting. My question to the folks at MSCI is, what’s the point? Why bother having an index which is essentially one company? After all Teva is about 9.5% of the local Tel-Aviv index.

For ETF investors this rebalance is important. Investors who have either purchased or are thinking about purchasing the iShares MSCI Israel index (EIS) had better be warned. They are in essence just buying Teva. They are certainly not getting any meaningful type of linkage to the local Israeli index. For investors looking for more diversified exposure, you may want to check out the new NETS TA 25 index fund (TAV) . In fact, fellow IOI colleague Zack “Billy Squier was underrated” Miller, had a real must-read, in-depth analysis of the differences in the 2 ETFs.

MSCI is often criticized for the same reason. They take the largest position in a particular index, and make it a very large chunk of the index they are trying to create. What’s the point? Shouldn’t a market index be a bit broader?

6/10/2008: An update on this post can be found here.

Disclosure: Author’s fund has a position in TEVA. He has no position in any other stock mentioned as of 6/6/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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