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Eight years later, Israeli ETF market is booming and diverse By Sarit Menahem Tags: Exchange-traded funds  Tali 25, the first Israeli exchange-traded fund (ETF), was launched in 2000. In the eight years since then, this young industry has grown at a dizzying pace. There are now 240 ETFs managing NIS 30 billion. Even in comparison to the United States, the birthplace of the ETF, the success of the Israeli ETF market is noteworthy. The ratio of ETFs to mutual funds is about 25%, compared to just 15% in the U.S. In terms of capital raised annually, ETFs in Israel and the United States are about equal. In 2007, ETFs in both markets attracted more funds than mutual funds. Advertisement One unique aspect of the Israeli ETF market is the abundance of ETFs on various indexes. In some other countries, one or a few ETF managers may have exclusivity over an index. Israel has no such restrictions, however. Thus five companies have issued ETFs on each of the TA-25, the TA-100 and the Tel-Bond 20. This profusion of ETF options is good for investors because it increases competition and results in lower management fees and better service. Still, such a large variety makes it difficult to know how to choose an ETF. In light of the huge selection and the identical yields offered by the ETFs, choosing an ETF involves parameters such as management fees and transaction costs. Management fees for ETFs on local indexes have been lowered in recent years, and now average just 0.33%, compared to 0.46% in Europe. Alongside the competition over management fees, ETF issuers are waging a no less important contest over transaction costs - which are usually dependent on how an ETF tracks the yield of an index. First, an ETF must be purchased during trade on the stock exchange. This means that the most influential factor on an ETF's yield - apart from the management fee - is its purchase price. Furthermore, while the differences in management fees are fractions of a percentage point, the price spreads on ETFs during trading can be significant, in particular since the fees add up with every transaction, and many investors buy and sell several times over the course of a year. Price spreads represent the difference between the Buy and Sell price quotes. This is essentially the source of the difference between ETF managers - and they all try to generate the best purchase and sale prices for investors, and usually succeed. This has led to a unique phenomenon whereby ETFs tracking stock indexes have better Buy-Sell price spreads than shares in the indexes themselves. The average price spread for shares in the TA-75, for example, is 0.75%, while the average spread for several of the ETFs is just 0.1%, reflecting a 0.6% gain for ETF investors. In the first study of its type ever conducted in Israel, Prof. Eugene Kandel of Jerusalem's Hebrew University examined the transaction costs for ETFs that track the most popular indexes and the leading index favored by institutional investors - the TA-100. Incidentally, these ETFs have no management fees. The one-year study drew from a vast database of actual purchase and sale orders and sampled all the ETFs that track this index. The study examined the liquidity of the ETFs under various market conditions, in order to determine which ETF provided investors with the highest liquidity, thus enabling investors to minimize spread costs during trade. In general, liquidity is an expression of several parameters that measure the accuracy, cost and simplicity of ETF transactions. Liquidity is measured via factors including purchase-sale price spreads under a variety of market conditions, the scope of the orders in the various levels of trade, trade volume and the number of transactions. The researchers first examined the spreads during trade for all the ETFs that track the TA-100. The sampling was conducted every minute during every trading day for a year. The average price spread for all the companies was very low compared to the spread in shares on the TA-100 - an average of 0.2%. KSM had the lowest spread - just 0.05%. Since the theoretical spread during trading is insufficient, the researchers checked price spreads during actual transactions, to see whether the spreads remained small. To this end, ETF purchase-sale spreads were checked 5 seconds before and 60 seconds after transactions, to see whether the actual price quotes were different from the running quotes. The data showed that the spreads at most of the companies remained small, both before and after the transactions. KSM and Mabat ETFs provided investors with the best value. Bookmark to del.icio.us   Raining on the parade World Likud chief calls for cancellation of Nakba Day procession. Perfect match TA court sentences 'DNA Rapist' to 25 years in prison.

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