Kesef B’Kesef Alternatives: Part I

By now your money has been bitten by the aliyah bug and has begun to dream about a life in shekels. Ah, the shwarma it will buy! It probably has already started its aliyah list and is asking its friends for advice. (“My wallet is already a few years old. Should I bring it, or just buy a new one in Israel?”)

But does your money need to make aliyah in order to protect you against a weakening dollar? In the great capitalism of America, if you are willing to pay for it, someone will surely be there to sell it to you. Isn’t there a way that you could protect your money from a weakening dollar and still keep it in America?

You decided that aliyah was right for you by carefully weighing your alternatives, and your money should do the same. Maybe you wanted to live in Israel in order to be more deeply connected with a Jewish way of life. You evaluated the alternatives in America and decided they weren’t for you. You didn’t want to live in a beautiful home in Teaneck, in close proximity to the best Jewish day schools on earth and surrounded by an outstanding selection of kosher food establishments.

I don’t blame you. I couldn’t afford the tolls on the George Washington Bridge either. Or, you had your own reasons. Perhaps, all your friends started to write blogs for the Times of Israel and you wanted to also. Or maybe, you just couldn’t keep up with all the stress of collecting those Bed, Bath & Beyond coupons. Whatever your reasons, unless you made aliyah entirely by accident, your decision was based on weighing the alternatives.

For your money, there are two basic alternative approaches to aliyah which will allow you to keep your money in America while still protecting it against a weakening dollar. In today’s blog, we explore the first.

First Basic Alternative: Invest in Israel from America

Why not be like all real zionists in America and simply invest some of your dollars in Israel from the safety of your American brokerage account?

I found two mutual funds that you could use to do this. Both of them are alternatives for money that you are anyway planning to invest in the stock market:

Amidex (AMDEX) 

iShares(EIS) 

Amidex

The fund from Amidex invests in 35 large Israeli companies. The folks at Amidex are clearly experts because they understand that the experts generally do not beat the index. That’s why their fund tracks an index of 35 companies that they invented. Their index hasn't performed as well as the Tel Aviv 25, but that may just be because of the 3.77% that they take in fees. Hey, it's expensive to passively follow your own actively managed indexed! Also, it's expensive to move money back and forth from dollars to shekel.

I like the idea of inventing your own index. In fact, I have decided that as soon as I get around to it, I will publish Investing by Accident’s very own index, which I will call the Israel Price Ratio Asset Yield index, or I-PRAY. It will consist of stocks that I will pick based on a quantitative-intensive process that involves randomly copying what other people are doing, and then selecting only those stocks that have either prices, ratios or yields, and which I believe could be considered as belonging to at least one asset class. You will be able to passively follow this index and thus be guaranteed returns that exactly match whatever it is that these stocks return.

But returning to the Amidex fund for a moment, doesn’t it just beg the question: why not just buy the individual stocks on your own? After all, there are only 35 of them. On their website, Amidex only shows a "selected list" of the 35 stocks. It is almost as if the experts at Amidex are worried that someone may just passively copy the index that they have worked so actively hard to create. This is very odd to me because someone could easily just look at their annual SEC filing from last May and copy and paste all of the holdings in the fund into their blog. Like this:

	Exchange	Percentage
Israel Chemicals	Israel	9.2%
Bank Hapoalim	Israel	6.0%
Bank Leumi	Israel	5.0%
Israel Corporation	Israel	4.5%
Mizrahi Tefahot Bank	Israel	3.3%
Bezeq	Israel	3.3%
Delek Group	Israel	3.2%
Osem Investments	Israel	3.0%
Azrieli Group	Israel	2.4%
Migdal Insurance	Israel	2.3%
Strauss Group	Israel	2.3%
Israel Discount Bank	Israel	2.2%
Paz Oil	Israel	2.2%
Oil Refineries	Israel	2.0%
Harel Insurance	Israel	1.8%
Gazit-Globe	Israel	1.7%
First International Bank of Israel	Israel	1.2%
LivePerson	Israel	0.4%
Teva	US	9.4%
Check Point Software	US	9.0%
Amdocs	US	5.9%
Elbit Systems	US	3.0%
NICE Systems	US	2.9%
VeriFone Systems	US	2.6%
Taro Pharmaceutical	US	2.3%
Mellanox Technologies	US	2.1%
Verint Systems	US	1.8%
Ormat Technologies	US	1.6%
Partner Communications	US	1.4%
Cellcom Israel	US	1.3%
SodaStream International	US	1.0%
Electronics for Imaging	US	0.7%

Alert readers will have noticed that Amidex only has 32 companies in its index of 35. This is proof that they are real Israelis and that when they said “35” they really meant “until 35”. But no matter, as long as you hold at least 30 stocks in a given market segment, you will have the benefits of diversification.

You may have also noticed that about half (45%) of the fund’s holdings are traded in dollars in the United States. This is good for tracking the growth of Israeli businesses, but if your goal is to protect your money against the risk of a weakening dollar, this isn’t the best way to do it. You would protect yourself more (and save a considerable amount in fees) by buying all of these stocks directly in your very own Israeli brokerage account.

iShares EIS

The fund from iShares tracks a different made-up index that consists of way more than 35 companies (59 to be exact). It holds all of the stocks in Israel in shekel and has an expense ratio of just 0.61%. This would make for iShares EIS to be a fairly good option, if not for its one major downside: its top three holdings.

	Percentage
Teva	23.80%
Bank Hapoalim	10.06%
Bank Leumi	8.65%
Total	42.51%

Loyal readers already know that I am not an expert. However, during my time on Wall Street, keeping 42% of your money in just three companies was not considered diversified. This is a very unfortunate weighting which makes this fund very hard to recommend to people.

Also, I’m not crazy about the banks. First of all, I don’t really like them. Second of all, there is no second of all. I just don’t like them. How can they have much room left to grow? It’s hard to imagine that there any types of fees that they can invent that they are not already charging you.

So what’s the bottom line?

Even with all their drawbacks, either of these fund will do a passable job of giving you exposure to Israeli stocks. However, the best way to think about them is as options for Americans in America who are looking to add a bit of zionist diversity to their stock holdings. If you are living here, you would be better off investing directly in Israeli stocks from an Israeli brokerage account. You’ll pay much less in fees and achieve better diversification.

Does anyone know of any other funds that that may change this bottom line?

In the meantime, the first basic alternative is only an alternative for money that you were planning to invest in stocks. It won’t help you for money that you want to keep in cash to buy a house next year, or the money that you want to keep in something safer like bonds. For that, you will need to consider the second basic alternative.