Holy Land Gets Its First Index Fund By Aviya Kushner May 9, 2001

"Profits in the Land of the Prophets."

That's the catchy slogan plastered across ads for the first-ever Israel index fund, Amidex 35, which was launched in June 1999. But can it actually be true?

For many investors, Israel is not only a country of Biblical heritage, hot tempers, and fiery politics, but also the home of dozens of profitable tech companies. Today, Israel has about 130 companies listed on Nasdaq - the third-highest country total, after the U.S. and Canada.

Israeli tech companies in particular "have had quite exceptional growth, even in the last month," says Amidex 35 fund manager Boaz Rahav. "You see that there is a kind of spark of ingenuity - a different business approach. Maybe it's aggressiveness, maybe it's a different kind of marketing. But it provides results for long-term investors," says Rahav.

Still, Israel is exotic and unfamiliar to most American investors. Why would an index fund investor who's loaded up on Vanguard offerings take a look at something as specialized as an Israel index?

"It's a multi-layered question and answer," says Rahav. "Why should an investor who already has a diversified basket look at any specialized index fund?"

"The answer is that S&P 500, small-cap, and mid-cap doesn't do it anymore. They are all fine but somewhat obsolete," he says. "There is a huge need for specialized investing that will take Vanguard's approach to the next level."

Amidex's approach is to index parts of the market that haven't been indexed in the past and that the company believes present opportunity. The Amidex 35, which now has $12 million in assets according to Morningstar, was followed by the still-tiny $1.5 million Israel Technology Index Fund, which focuses on newer tech companies. The Amidex 35 has a rather hefty expense ratio of 2.20%, according to the fund's prospectus. It also has a minimum initial investment of $2,500, and charges a 2% redemption fee if shares are redeemed within one year of purchase.

Fund/index	1 mo. ret.	3 mo. ret.	1 yr. ret.	YTD ret.
Amidex 35	17.04%	-25.19%	-23.12%	-22.80%
S&P 500	7.76%	-8.26%	-12.97%	-5.00%

Source: Morningstar returns as of 4/30/2001

The chart below shows the performance of Amidex 35 since February 2000:

Source: Reuters

The Amidex Technology fund, launched in February 2001, has an expense ratio of 1.45%, and likewise a $2,500 minimum investment. To discourage short-term trading, the fund charges a 1% redemption fee if you redeem shares within a year.

Next, Amidex plans to roll out a cancer research index, specializing in companies that work to find cures for cancer.

"We thought Israel was a great market. No index fund company had done Israel, and we wanted to be the first."  -Boaz Rahav, portfolio manager of Amidex 35 and Amidex Technology index fund

But the Amidex 35 presented a special problem for Amidex. Some Israeli companies are traded on the Tel Aviv Stock Exchange (TASE), but many of the newer, more exciting companies are traded on Nasdaq.

"Initially, we had the notion of creating a State of Israel Dow index," Rahav explained. "The only fault the TASE has is that it covers only the local market, which leaves out some of the tech ingenuity on Nasdaq."

"By our measure, more than half of Israel's equity is now traded on Wall Street," Rahav said.

There were other concerns as well. Because of tax issues, many Israeli companies are officially headquartered in the U.S., though their CEO and their entire research and development teams may be domiciled in Israel. Other companies hold their annual meetings a mile into Egypt, but are otherwise totally Israeli. So Rahav's first task was defining what the word "Israeli" meant. Finally, as Rahav wrote in The Journal of Index Issues, he decided it meant their "souls" were in Israel.

Eventually, Rahav settled on 35 companies he felt represented the Israeli economy. The binational index includes both TASE and Nasdaq stocks. That lessens the currency risk for investors, and gives them exposure to a broad swath of the Israeli economy, ranging from banking to retail to tech.

But isn't there an inherent risk to investing in Israel?

"That's a delicate question," Rahav allows. "Frankly, of course there's risk. Any focused fund presents special risk, because the fund is tracking a very narrow sector - whether it's gold or optical switches."

In Israel's case, though, the risk is well-known, since Israel's security problems make American newspapers almost every day of the week.

"Israel is not Beverly Hills, and won't be anytime soon," Rahav says. "That factor is already priced in. No one is surprised [by security concerns]."

For years, top Israeli companies traded at a discount just because they were officially located in Israel. But that discount is decreasing, and today Israel's economy is considered strong.

The best indicator of Israel's economic strength, Rahav says, is its consistently rising credit rating. At the beginning of the 1990s, Israel was in the double-B range. Today, it's rated A by both Standard & Poor's (S&P) and Moody's, making it solidly investment-grade.

Another sign is the exchange rate, which has remained steady despite the current situation. The combination of political volatility and economic strength makes it tough for everyone, including professionals, to describe Israel.

"One of the most fascinating things to do is bring five analysts into a room and ask them to characterize Israel," Rahav says, noting that the split of opinion on whether Israel is an "emerging" or "developed" market has never been fully resolved.

"Israel is really unique, because of its small size and because it only shifted from socialism to capitalism a few years ago," he says. "If you measure economy size, the total for Israel is about $100 billion. That's well within European range, similar to Spain, Italy, and Portugal."

"It's a democracy, everyone is wired, and consumption is pretty high," Rahav says. For the Middle East, "that's a pretty interesting mix."