Interview with Dave Fry, ETF Digest

The full interview can be found in Israel Opportunity Investor, our subscription newsletter:

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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.

We’ve argued long and hard for inverse ETF products, currency and commodity issues and these are finally upon us.  This has allowed us to feature the ability for individuals and financial advisors to create hedge fund-like structures using ETFs.  In fact, I couldn’t write the book: “Create Your Own ETF Hedge Fund” [Wiley Finance] without these products being available.

Lastly, many [certainly not all] investors like our daily blog for the charts we post of what we perceive as timely and critical markets which provide a sense of “possibilities” that provide comfort to anxious investors.  And, they comment frequently about the former and our sense of humor which gives them a chuckle from time to time.

You’ve been following the Israeli market for some time.  What are your thoughts on Israel as an investment?
DF: The Israeli market looks very promising.  We cover 60 different international indexes apart from the US.  We’ve been following the TA 100 for two years in a beta format.  We’ve done this in anticipation of ETFs being issued within those markets linked to the major index within each country.  However, I’m finding with some notable exceptions that most of these international indexes are trending in the same direction with the same characteristics.  The changes appear regionally - Latin American regions, Gulf States, Asia and so forth, may trend more similarly.

We are, after all, trend followers and study market trends from a longer-term perspective.  With the TA 100 we’ve been on the sidelines for the past few months waiting for a change in trend.

 

Fundamentally, many investors such as Buffett are keen on the potential of Israeli investments.  Naturally, every country conveys impressions to outsiders that can be quite incorrect.  With Israeli the constant threat of war and terrorism is on everyone’s mind and that’s understandable.  Beyond that not many people doubt the business skill and determination of the Israeli people to overcome these issues and prevail.

 

We’ve lived in a third world country in South America—Ecuador for the past two years.  Our impression before visiting the country was negative like many others.  Do they have running water, etc?  But we’ve found a peaceful and friendly place from which to write and enjoy life.  So these misimpressions are common from place to place.

 

Can you speak to the Israeli ETF products like the iShares MSCI Israel Capped Investable Market Index Fund (NYSE: EIS)?

DF: Barclay’s just launched EIS which is the U.S.-based Israel ETF.  It should prove popular given prevailing acceptance of single-country funds from them.  However, they’re using an MSCI index which always presents problems for us.  First, a common problem with recent ETFs is getting index history and then having quote vendors [Reuters, Bloomberg, etc] to load the data in a timely fashion.  New indexes are being launched in the thousands as firms scramble to create and corner index products globally.  So, the MSCI Israel index is in the same state of limbo.

 

The exciting news for us is that Northern Trust is launching an ETF soon based on the TA 25 [Editor: Northern Trust has subsequently launched].  Why are they doing this and will it become popular?  I believe it should prove popular among institutions since they will find “options” linked to that index within Israel to trade against for arbitrage and implementing other complex strategies.  The TA 25 and TA 100 track well one to another and should prove a better match to what we’ve been doing.  I just met with CIO, Steve Schoenfeld in New York City two days ago and we discussed this issue at length.  We’re very pleased to see an ETF come away from MSCI indexes, frankly.

 

You’ve pointed out in recent articles the mismatch in weightings on the EIS product to conventional Israeli indexes.  We concur with your views.

 

How do recent Israel ETFs stack up with closed-end funds?

DF: Prior to launching EIS, which we’re now covering by the way, we used ISL the closed-end fund for these investments.  We prefer the ETF structure given premiums and discounts.  We do use closed-end funds in certain circumstances.  For example, in India the previously popular ETN from Barclays (INP), is now broken due to Indian government restrictions on new issues.  Therefore no shorting of INP is permitted as new shares can’t be released making INP a de facto closed-end fund.  For that reason we turned to closed-end fund India Fund, Inc. (IFN)  to satisfy our India needs.  And, at last glance, IFN was trading at a large discount compared with INP while holding the same allocations/constituents.

 

So, investors have to be diligent.

How should investors think about investing in Israel using dollar-denominated products?
DF: I have never felt that buying a non-dollar ETF was a good way to invest in another country’s currency.  There would only be marginal benefits/detriments for using an “equity” based ETF for this purpose.  A bond ETF denominated in another currency could produce more benefits given the high income stream from a rising currency.

Van Eck has recently launched Chinese RMB and India Rupee ETFs which should prove popular at some point.  Rydex has a half dozen or so currency ETFs available and Deutsche Bank through PowerShares has dollar index ETFs.  All of which we use for our subscribers.

 

Thanks, Dave.

 

DF: Thanks for letting me participate.

Comments

[tommy u]

i am thrilled to see two of my favorite organizations exchange some excellent ideas on the same page!!!!