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.

The WisdomTree Middle East Dividend Fund (GULF) covers the same region as S&P’s GCC40 Index, which has no ETF yet associated with it, reports ETF Guide.

The underlying index is the WisdomTree Middle East Dividend Index, which is fundamentally weighted, and measures the companies domiciled in the region that pay regular cash dividends on shares of common stock.

One hundred companies are included, based upon market capitalization and no country represents more than 33%. At re-balancing, companies must have paid out $5 million in cash dividends for the cycle prior to the next one.

The Middle East has become one of the most attractive areas in the world for investors to access, as emerging markets become more correlated with developed ones. The Middle East, in particular, is drawing interest because of its potential for growth, as well as the fact that it has largely sat out the troubles that rising energy prices have caused around the rest of the world.

WisdomTree’s Director of Research Luciano Siracusano says that it’s the only real region where stocks have gone up uniformly in recent years.

The economies there are more than just oil, too. There’s increasing diversification in the economy, an improving legal framework, an effort made to diversify the economy and a younger urban population. The economies have also started to become integrated into global banking within the last three to five years.

Companies eligible for index inclusion must be incorporated in and have their shares listed on a major stock exchange in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar or the United Arab Emirates (including Abu Dhabi and Dubai). The fund comes with an expense ratio of 0.88% and is 36% weighted in banking, followed by telecommunications (25%).

This fund is just the latest in a series to launch that offer access to the Middle East, including:

• PowerShares Frontier Portfolio (PMNA)
• Market Vectors Africa Index (AFK)
• Claymore/BNY Mellon Frontier Markets (FRN)
• iShares MSCI Israel Cap Investable Market (EIS)
• NETS TA-25 Index Fund (TAV)