The Israeli shekel, which in recent years has been one of the strongest currencies in the world, has in recent weeks been on a significant weakening trend against the dollar and the euro, in view of the exciting events at home and abroad, and especially investors’ concerns about the consequences of the planned reform of the legal system on the economy.
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When in the background part of the public in Israel is already converting shekels into foreign currency, whether in order to protect the investment portfolio or to spend some of the cash balances abroad, and foreign investors are reconsidering whether to invest here in the face of a series of warnings from global investment banks – the dollar has strengthened since the last week of January About 5% against the shekel.
In the current situation, many Israeli investors seek to protect their money from the continued weakening of the shekel, by investing in products traded in foreign currencies, with their favorite being of course the dollar.
“Of course there are foreign securities denominated in all currencies, but the dollar is the most liquid currency in the world, with the largest number of products,” says Karin Elner Fiada, head of global investments at the Kelly Pension Arrangements Group.
“Because when an Israeli decides to invest abroad, he exposes himself to currency, unless that person has expenses or income in a currency other than the dollar, choosing the American currency makes the most sense. The Euro has risen recently, but it suffers from much more fundamental problems than the US has, such as the war in Ukraine.
“In addition, the interest rates on the US dollar are the highest among the currencies of the developed countries, and whoever does not want the entire exposure to be in stocks, but let’s say in a fund that invests in US securities of 30%-70% (30% in stocks and the rest in bonds), is He will receive adequate returns on the bond part of between 5%-6% per year.”
For an Israeli investor who wants to be exposed to foreign currency investments, there are several products on the market that can help him do this without taking the money out of Israel, so he can “hedge” his money against the shekel’s depreciation through local entities.
It is understood that it is also possible to purchase investments abroad in shekels, in currency-neutral products, but this choice does not define the risk of devaluation of the local currency, because it is done in shekels.
On the other hand, it must be remembered that investing in dollars or any other foreign currency involves currency exchange costs, on which a conversion fee is charged, and this is in addition to other fees that are established similarly to the activity of Israeli real estate companies, such as buying and selling fees, custody fees and management fees.
Dollar financial funds
The first option for investing in a product that is conducted abroad is to do so through mutual funds. These are divided into two main types – dollar monetary funds or basket funds based on foreign indices.
Dollar financial funds – in fact, this is a product similar to shekel financial funds that became a hit in the fund market in the last year, right after the start of the Bank of Israel’s interest rate hikes. Although they are defined as mutual funds, they are more similar to a bank deposit; They are relatively solid and allow a somewhat higher interest rate than the interest rate offered by the central bank relevant to them, in the case of the dollar funds – the American Fed.
Since the interest rate in the US is higher than the interest rate in Israel, they also offer a higher interest rate than the interest rate in the local financial funds, and in addition they also benefited from the strengthening of the dollar over the shekel, so that their yield jumped last year.
As of today, five entities manage dollar monetary funds – Harel, Meitav, Psagot, Kesem and Migdal. The scope of the assets that these funds manage together is about NIS 750 million.
These are very solid and liquid funds, so the investor can sell them immediately, but you should know that as the Fed decides to lower the interest rate, the guaranteed return (these funds are short-term) will also decrease along the way. Another advantage is that there is no need to invest large sums, but the target yield is also relatively low compared to the one that can be obtained in more adventurous portfolios.
Dollar bank deposit
If we are dealing with financial funds, which are more of a savings product than a trust fund, another option for saving is through a dollar bank deposit. Here, too, the interest rates have risen with the Fed’s interest rate hikes, but this is a product intended mainly for capitalists who are currently interested in a fixed interest rate, and who can close the large sums of money for extended periods of time. This is because there is a large gap between the interest rate offered by the banks to savers with tens of thousands of dollars, and between the interest rate for those who arrive with hundreds of thousands and even millions of dollars – sometimes even a threefold difference in interest rates.
ETF funds on foreign indices
The second type of mutual funds that allow exposure to the dollar is ETFs, basket funds that follow indices abroad. The Israeli entities offer a series of such funds, which follow, for example, the leading indices in the US, such as the S&P 500, Nasdaq or Dow Jones, as well as by leading indices in other countries in the world or in the Eurozone.
Those who wish can also follow sectoral indices on foreign exchanges. Of course, tracking is not limited to stock indices, and it is possible to track bond indices as well.
Securities abroad
Beyond the purchase of mutual funds, it is also possible to make a direct investment in shares and bonds traded in dollars abroad. “If it is a stock portfolio, the funds can be invested outside of Israel in foreign exchanges, but it must be remembered that dual stocks are also traded in Tel Aviv,” says Aviram Neah, VP of Investments at Meitav Portfolio Management.
“The price of many of the dual shares is not determined in Israel, but abroad, such as Teva and Nice, even if they are traded in shekels, the price is in dollars.”
Pension biased abroad
The weakening of the shekel also affects long-term savings, but since these are savings that are spread over many years, let’s remember that over the years quite a few changes in currency exchange rates are expected, so it is not possible to assess whether a change of course would be worthwhile.
On top of that, a large part of these savings (over 50%) is currently invested in foreign markets, so the investment is made in dollars (the institutions hedge their investments in dollars against changes in currency rates).
Those who nevertheless wish to adjust their savings to foreign markets can switch to a route that follows foreign indices. A considerable number of the governing bodies have such a track, and the vast majority of them focus on tracking the S&P 500 index.
Shekel-dollar options
And there is another possibility, which is not open to the majority of the public: “In the Tel Aviv Stock Exchange there is an options market on both the Shekel-Dollar and the Tel Aviv-35,” says Yaniv Pagut, Vice President of the Exchange’s Trading, Derivatives and Indices Department. “The TA-35 options instrument is very liquid and tradable, and allows protection of the share portfolio without selling the portfolio.
“The vast majority of retail customers and also of the advised customers, approximately 95%, do not sign an authorization to operate in derivatives. Therefore, they cannot react in the options market, nor buy options on shekel-dollar or synthetic contracts in shekel-dollar, and be exposed at the click of a button in shekel -dollar”.