Foreign direct investment (FDI) has pushed Israel’s Tel Aviv 100 (TA100)  into positive territory in the past 12 months, and the index is now outperforming the S&P 500 by more than 20%, writes Daniel Harrison for IndexUniverse. Between May to July, FDI made up $1.02 billion of share purchases, which allowed TA100 to experience 60% in value year-to-date.

Many investors see the potential in Israel’s high-tech, chemical, metal and service industries. Some index investors are uncertain whether the country should be categorized as an emerging market or a developed country, although it was upgraded to developed by FTSE Group last year.

There are also more broad-based ETFs that include a small weighting of Israel, but these portfolios tend to have volatile, high-growth countries that overshadow Israel’s exposure. There are two ways to invest in Israel: The ETF iShares MSCI Israel Cap Invest Mkt Index (NYSEArca: EIS) or the closed-end fund (CEF) First Israel Fund Inc. (AMEX: ISL). Both invest in Israel-listed securities.

• ISL trades at a discount to its net asset value (NAV), which makes it more attractive to bargain seekers. The fund, however, contains a 10.4% exposure to venture capital projects, which could make the fund riskier but potentially more profitable.
• ISL is seen as more diversified, with 49% of its capital invested in the fund’s top 10 holdings. The largest holding is Teva Pharmaceutical Industries (NasdaqGS: TEVA) at 12.6%. The fund is also more heavily weighted in financials, with 31.9% focused on commercial banks, venture capital investment funds and insurance.
• EIS has a higher stack in TEVA at 23%. It should be noted that pharmaceutical companies are more defensive plays compared to higher-growth sectors. Financials make up around one-fifth of EIS’s weightings.

• iShares MSCI Israel Cap Invest Mkt Index (NYSEArca: EIS): up 59.4% year-to-date; expense ratio of 0.63%
• First Israel Fund Inc. (AMEX: ISL): up 69.5% year-to-date; expense ratio of 1.7%

For more information on Israel, visit our Israel category.

Max Chen contributed to this article.

MSCI has announced they are upgrading Israel to developed markets status, upon recent market classification analysis. Five “bubble” countries have been watched closely, but for the time being, only Israel was promoted, reports Matther Hougan for Index Universe. Israel is 4% of the MSCI Emerging Markets Index.

The countries of Kuwait, Qatar and the United Arab Emirates are still waiting to go from frontier market status to emerging market level. MSCI is encouraged by the progress made in opening up these markets, while it said Kuwait still faces too many market accessibility issues to be considered.

South Korea is staying put as an emerging market for now, but will be back up for promotion in 2010. Israel’s promotion will take place during MSCI’s May 2010 semiannual index review.

Reclassifying South Korea would have a major effect on the MSCI Emerging Markets Index, as Korea is the third-largest country in the index by weight (12.4%). South Korea wasn’t classified as a developed market because its currency isn’t fully convertible and its stock market’s real-time data didn’t meet the requirement for the change, MSCI said. The South Korean market was not interested in the upgrade either, reports Tal Barak Harif for Bloomberg.

Israel has a stock market valued at $131 billion, and stock indexes that have around $3 trillion in assets. Israeli tech and chemical companies may have attracted the increased investment.

Emerging markets are economies in transition, moving from a closed to an open market while building accountability, says Investopedia. What defines a frontier market is open to interpretation. In general, though, they’re considered a subset of emerging markets. They’re investable, but have lower market cap and liquidity.

• iShares MSCI Israel Investable Market Index (EIS): up 33.6% year-to-date

• iShares MSCI South Korea Index (EWY): up 24.6% year-to-date

• iShares MSCI Emerging Markets (EEM): up 28.3% year-to-date

For more stories these markets, visit our category pages for  South Korea and Israel.

Since 2000, the Middle East has seen growth above 5% and has become the second richest part of the emerging world, according to ETF Grind. But Mideast economies were slower to recover in the beginning of 2009 and there were concerns over the ability of the region to pay down debt accumulated in the good years.

Over the long-term period, there are several ETFs that an interested investor could keep an eye on:

• iShares MSCI Turkey Invest Mkt Index (TUR): up 30.9% year-to-date. Turkey’s economy isn’t tied too heavily to oil. It remains dependent on exports to the EU. The country’s industrial sector can profit from its close proximity to oil producers.
• Market Vectors Agribusiness ETF (MOO): up 36.6% year-to-date. Economic develpment and population growth would make the Middle East would effect global food demand more than elsewhere since the region has little arable land. Middle Eastern countries are already securing land for a steady food supply and will need the necessary equipment and supplies.
• PowerShares Global Water (PIO): up 10.8% year-to-date. Needless to say, the region has a scarcity of freshwater. The Middle East has the biggest market for desalinization plants and expensive water engineering projects. PIO holds 29 global water resource firms.
• Market Vectors Gulf States ETF (MES): up 15.4% year-to-date. MES covers Middle Eastern countries that border the Persian Gulf. It is weighted toward finance, real estate and services. Its expense ratio is 1.00, but it is a pure play on oil related economies.
• iShares MSCI Israel Cap Invest Mkt Index (EIS): up 33.5% year-to-date. Israel has reputable pharmaceutical and tech sectors.
• Claymore/Robb Report Global Luxury (ROB): up 13.3% year-to-date. When crude oil rises again, Middle Eastern royals will be swiping their super platinum cards in purchasing luxury goods.
• PowerShares MENA Frontier Countries (PMNA): up 15.9% year-to-date. PMNA is similar to GULF but excludes gulf nations of Qatar, Bahrain, and Oman. It also has a higher expense ratio. It is broadly diversified with Morocco and Egyptian firms. The fund mainly invests in large and mid caps.
• Claymore/Delta Global Shipping (SEA): up 31.8% year-to-date. Recovery in oil prices and Middle East production could translate into strong earnings for global shippers. Crude oil makes up aruond 1/6 of global trade.
• WisdomTree Middle East Dividend (GULF): up 8.4% year-to-date. GULF has a broad market Middle East and North Africa exposure. It has a wider selection of holdings than PMNA or MES, a lower expense ratio, and is dividend weighted rather than capitalization weighted. But the funds competition, GULF is a little low on volume.
• iShares Dow Jones U.S. Oil Equipment Index (IEZ): up 39.7% year-to-date. Major equipment and service companies included in this fund have business in the Middle East. IEZ has outperformed crude oil ETFs and indexes of major integrated oil companies year-to-date.

As always, watch the trend lines to see what actually materializes.

For more stories on the Middle East, visit our Middle East category.

For full disclosure, Tom Lydon’s clients own shares of MOO.

Max Chen contributed to this article.

It is clear that the emerging market is recovering faster than developed ones, according to ETF Grind. While developed markets are spurred by consumption, emerging markets are driven by investments. ETF Grind provides some funds that an investor may peruse so as to capitalize on the emerging markets over the next few years.

We should note, too, that there are many other ETFs that can provide similar exposure as the world decouples – this is merely a sampling:

• First Trust ISE Glb Engineering and Construction (FLM): up 12.2% year-to-date. The FLM  includes firms that specialize in designing and building infrastructure products. It also includes big-margin engineering and design firms, and focus less on materials and equipment.
• iShares MSCI BRIC Index (BKF): up 53.4% year-to-date. Emerging market funds often include countries that may not decouple as easily, such as South Korea, Mexico and Poland. But BKF provides exposure to the four BRICs emerging markets.
• PowerShares Emerging Markets Infrastructure (PXR): up 55% year-to-date. PXR it invests almost exclusively in firms that build infrastructure, and not in companies that operate and maintain infrastructure. The fund includes emerging market leaders and a few Western companies.
• Claymore/Delta Global Shipping (SEA): up 32.7% year-to-date. SEA invests in companies within the global shipping industry.
• PowerShares DB Commodity Index Tracking (DBC): up 12.7% year-to-date. DBC invests in the six most traded commodities: crude oil, heating oil, aluminum, wheat, gold, and corn.
• iShares S&P Global Materials (MXI): up 30.5% year-to-date. MXI tracks globally active firms that deal in materials. The fund is heavily weighted toward firms situated in developed markets, but they are international conglomerates with operations in emerging markets.
• Emerging Global Shares DJEM Energy Titans (EEO): This brand new fund holds 40 energy firms in emerging markets.  It is weighted toward Russian companies, which make up around one-third of the holdings.
• CurrencyShares Australian Dollar Trust (FXA): up 15% year-to-date. The Australian Dollar is a true “commodity currency” since its value is dependent the country’s natural resource exports.
• Market Vectors Agribusiness ETF (MOO): up 36.2% year-to-date. MOO invests in international agribusinesses.
• WisdomTree Dreyfus Emerging Currency (CEW): up 0.4% in the last week. CEW is new on the scene. It invests in a range of emerging market currencies that could appreciate against the U.S. dollar. It includes currencies such as the Chinese Yuan, Indian Rupee, Brazilian Real and South African Rand.

Emerging markets do have a higher risk profile than those of established foreign and U.S. markets, writes Jim Lowell for MarketWatch. But high inflows into emerging market ETFs warrants another look into this potentially lucrative area. Lowell provides the following areas of interest in the emerging markets:

Brazil. It is a viable and diversified economy that has also has good ties to the global economy.

• iShares MSCI Brazil Index (EWZ): up 64% year-to-date

South Korea and Taiwan can be traded depending on the technology sector.

• iShares MSCI South Korea (EWY): up 33.8% year-to-date
• iShares MSCI Taiwan Index (EWT): up 50.2% year-to-date

India moves along side with the global economy and China is an economic powerhouse in the global stage.

• PowerShares India (PIN): up 57.8% year-to-date
• iShares FTSE/Xinhua China 25 Index (FXI): up 35.9% year-to-date

In Emerging Europe, Russia could be played in relation to the price of oil.

• Market Vectors Russia ETF (RSX): up 97% year-to-date

Israel has strong industries in technology, biotech, and defense.

• iShares MSCI Israel Cap Invest Mkt Index (EIS): up 40.1% year-to-date

South Africa is noted for its metals and mining, or gold industry.

• iShares MSCI South Africa Index (EZA): up 27.6% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

For full disclosure, some of Tom Lydon’s clients own shares of MOO.

Max Chen contributed to this article.

MSCI Barra is thinking of switching up its country lineup in its emerging markets Index, reports Sam Mamudi for The Wall Street Journal. Some fund managers think the changes could create more volatility, and more importantly, affect performance.

• iShares MSCI Emerging Markets Index (EEM): up 8.2% year-to-date; China is 15.4%, Brazil is 13.2%, South Korea is 12.7%, Taiwan is 11.1%, South Africa is 9.5%, India is 6.7%, Russian Federation is 5.4%, Mexico is 5.4%, Israel is 3.7%, Chile is 2.7%, Hong Kong is 2.5%, Czech Republic is 2.0%, Thailand is 1.7%, Indonesia is 1.5%, Philippines is 1.4%, Hungary is 1.3%, Turkey is 1.1%, Peru is 0.6%, Egypt is 0.6%, Malaysia is 0.4%, Colombia is 0.4%, United States is 0.3%, Argentina is 0.1%

In June, South Korea and Israel could be upgraded to the status of “developed markets.” These two countries would then be included into the MSCI EAFE Index, which includes Europe, Australasia and the Far East.

• iShares MSCI South Korea Index (EWY): up 13.2% year-to-date

• iShares MSCI Israel Cap Invest Mkt Index (EIS): up 14.7% year-to-date

• iShares MSCI EAFE Index (EFA): down 11.5% year-to-date

In the short term, it is thought that the South Korea’s withdrawal would negatively affect the performance of the Emerging Market Index and make the emerging markets more volatile because of the absence of its stable market.

It has been announced that Kuwait, Qatar and the United Arab Emirates could be inducted into the Emerging Market Index.

Max Chen contributed to this article.

The recession has provided a forum for companies playing out a Darwinistic-styled scenario of the most fit. Companies have the chance to obtain greater efficiency and to take away market share from the incompetent, reports Jim Jubak for MSN Money.

Investors can see the early indications of efficiencies that some companies have implemented so as to come out of this recession better of than competitors.

• Dividends. While most companies are cutting dividends, a few are ignoring the trend. The board of directors at Monsanto (MON) have voted to increase its company’s dividends by 10%. It has also reported earnings higher than forecasts and has raised its forecast for the rest of the year. The ETF Market Vectors Agribusiness (MOO) is up 3.1% in the last month with holdings of 9.4% in MON.
• Hiring. As more companys are laying off workers, Teva Pharmaceuticals (TEVA) has been hiring an additional 100 workers for its Jerusalem facility. The ETF iShares MSCI Israel Index (EIS) is up 4.4% in the last month with holdings of 24.4% in TEVA.
• Stable capital investments. Savvy companies are looking at the long-term by investing during a recession. Intel (INTC) is investing in personal computers for every slowdown and now is no different. The ETF Technology Select Sector SPDR (XLK) is up 0.9% in the last month with holdings of 4.8% in INTC. BNSF Railway (BNI) has announced that it would spend $2.7 billion to upgrade tracks, signal systems and freight cars, and to buy 350 more locomotives. The ETF iShares Dow Jones Transportation Index (IYT) is down 12.1% in the last month with holdings of 12.1% in BNI.
• Acquiring. US Bancorp (USB) was busy buying up Downey Savings and Loans, and PFF Bank and Trust back in November. The ETF iShares Dow Jones U.S. Regional Banks (IAT) is down 29.5% in the last month with holdings of 20.1% in USB.
• Fewer future competitors. Ericsson (ERICY) CEO Carl-Henric Svanberg plans on picking up share from Nortel and Motorola. Because its competitors would be weakened, Ericsson could add to its 40% share in the sector. The ETF iShares MSCI Sweden (EWD) down 7.3% with holdings of 14.3% in ERICY.

Israel continued its bombing of the Gaza strip and it looks like it may not be as threatening to its economy as previous hostile situations and may actually benefit their economy and the exchange traded funds (ETFs) that track the market.
How?

• For starters, an increase in government spending will most likely boost the economy which has been engulfed by the global recession.  The country plans on beefing up spending on small and medium-size businesses and pour money into bridges and roads.
• Secondly, the topography that is being blasted is mainly desert and uninhabitated, unlike during the Lebanon war, which hit a major port and tourist destination. 
• Third, the Israeli government has allowed the reopening of all factories with adequate security and protection near the Gaza Strip. 
• Fourthly, the border crossings have been opened to allow the delivery of food, and other staples into the Strip
• Fifth, the casualty toll has been minuscule; only four Israeli’s have died since the inception of the bombings, states David Rosenberg of Bloomberg.
• Lastly, in an effort to deter air bombings and move the fighting on the ground, the Israeli government has increased its ground troops on the Gaza border and the cabinet has openly announced the recruitment of 6,500 reserves, reports the Economist.

This should enable the Israeli’s to contain the fighting in a specific region and prevent destruction of key economic targets, resulting in not so devastating of an effect on its economy.

Wars and hostile environments generally cause volatility and instability in economies, but in this case, it appears that the effects will not be as devastating to the Israeli economy as previous hostile encounters. An ETF that will most likely be influenced by this fighting is the iShares MSCI Israel Cap Invest Mkt Index (EIS), which is down 58.2% since its inception in March of this year.

Market Vector Gulf States (MES) gives easy access to the gulf states of Bahrain, Kuwait, Oman, Katar and United Arab Emirates.

The fund’s expense ratio is 0.50%, with total net expenses at 0.98%. The ETF tracks the Dow Jones GCC Titans 40 Index. The Gulf region has been on a run, thanks to high energy prices. The spending on infrastructure and urbanization is growing and sustainability will only be known in the future.

The top country weightings are: Kuwait, 52.3%; United Arab Emirates, 25.9% and Qatar, 14.9%. Banks are the most well-represented sector, with 38.5% of the holding. Financial services follow at 21.6%; real estate is 10.5%.

This fund comes on the heels of the WisdomTree Middle East Dividend Fund (GULF), which shares a similar makeup. The top countries are Kuwait, 27.2%; United Arab Emirates, 16.9%; Qatar, 16.5%. Financials is the top sector, with 51.6%, while telecommunications comes next with 24.7% of the holdings.

The Middle East has been a hot place lately, for both temperature and ETF attention:

• iShares MSCI Israel Capped Investable Market Index (EIS)
• iShares MSCI Turkey Investable Market Index Fund (TUR)
• SPDR S&P Emerging Middle East & Africa (GAF)
• Claymore/BNY Mellon Frontier Markets ETF (FRN)
  

MoneyShow.com interviewed us regarding the ETF as a gateway to going global.

The major hurdles investors want to avoid with foreign investing are regulatory, economic, currency and market risks. Many investors are not aware that two-thirds of the market capitalization is outside the United States, and with the use of an ETF, professional management and diversification occurs within a group of companies that the fund is representing.

Another plus with ETFs is that you don’t have to pick just one country. Investors can choose a region, which is represented by the basket of companies in the ETF. Recent selloffs have scared many investors away from foreign investing, but consider these points:

• Not all countries are created equal. Some have greater risk than others and for different reasons. Russia is dependent on energy, and Israel has instability within the political system. Points such as these can cause a fund to take a huge hit.
• Smaller countries have more volatility. Some of the smaller countries have smaller stock markets, so a company that has a hard day could cause the ETF to take a dive.
• Remember to have an exit strategy and stay disciplined. Sell if a fund drops below its 200 day moving average or 8% off its high.

On that note, areas of the market to avoid would be ETFs sitting below their 200-day moving average. Areas such as financials and housing are trading 16-36% below it, and European and Asian ETFs are trading 12% and 15% off. Even if there are bargains to be had, investors tend to do better when they are not chasing trends and instead focusing on buying and selling when certain milestones are reached. However, the badly beaten down areas of the market are going to gain the most attention.

In recent years, Israel has benefited from high global domestic product growth (GDP), a low rate of inflation, a disciplined budget, strong currency and a skilled workforce. It’s all added up to a growing economy with room left to grow, according to a presentation by Steven A. Schoenfeld, chief investment officer for Northern Trust, which launched an ETF focused on the TA-25 earlier this year.

In fact, Israel is going to graduate from “advanced emerging” status to Developed Market Status in FTSE’s index this September. MSCI is looking into graduating Israel sometime in 2009; the Dow Jones Wilshire and Russell Global Indexes already include it as a developed market.

The challenge on graduation day is going to be for Israel to stand out among those already developed markets.

GDP growth for Israel in 2005 was 5.2%, compared with 3.2% for the United States. While the forecasts for 2008 have it slowing to 3.3%, it’s still on pace to outperform the United States’ growth, predicted to be 0.8%.

Sometime in 2009 or 2010, Israel should be granted membership with the Organisation for Economic Cooperation and Development (OECD), an organization that brings together the governments of countries committed to democracy and the market economy. The government has said that achieving membership is “a matter of strategic importance.”

Because Israel wants membership in the organization, the country has already implemented reforms, including pro-market and pro-competition reform and legal reform.

Israel’s economy is being challenged by the rising inflation that has hit many countries in recent months, reports Amotz Asa-El for MarketWatch. In the year ending June, prices rose 4.8%. On the bright side, it’s a far cry from the 415% inflation the country grappled with in 1984.

One of the largest industries in Israel is the pharmaceutical, as it’s home to the world’s largest generic drug maker, Teva (TEVA). In the second quarter of 2008, it was one of only two of the country’s industries to increase exports; pharmaceuticals were up by 44%, while mineral and quarry industry exports went up 26%, reports Yael Gross-Englander for Globes Online.

This year, two funds with differing constructions have been launched to give investors a chance to access this growing and changing area of the world. They feature similar top holdings, but very different weightings:

• NETS TA-25 (TAV): The TA-25 is Israel’s flagship index of the largest companies listed on the Tel Aviv Stock Exchange. The index is 26% financials, 26% telecommunications and technology, 21% chemicals and industry and 10% pharmaceuticals and health care. TAV launched on May 21 of this year. Teva is 8.8% of the fund and is the third-largest holding. The top two holdings are Israel Chemicals Limited (9.2%) and Bank Leumi (8.8%).

• iShares MSCI Israel Cap Investable Market Index (EIS): The pharmaceutical industry is given a much heavier weighting in this fund, with 40.6% of the assets. That’s followed by 21.8% in chemicals and industry; 15.4% in financials and 14.6% in telecommunications and technology. Teva is the top holding, with 22.5% of the assets, followed by Israel Chemicals at 14.6% and Bank Leumi at 4.7%. The fund launched on March 26 of this year.