Last week the Tel Aviv Stock Exchange (TASE) announced that it plans to launch an index of biomed companies. It is not yet clear when the index will be launched but the TASE has already indicated the criteria required for being part of the index.
The weight of a single company in the index will be capped at 9.5% and the index will include all companies with a minimum market cap of NIS 50 million, and free float of at least 20% with a market cap now lower than NIS 25 million.
According to the criteria, 24 of the 40 biomed companies traded on the TASE will qualify. Market analysts approve of the concept, and in particular approve the introduction of new instruments such as Exchange Traded Funds (ETFs) to track the index. The belief is that the launch of new ETFs will attract a new type of more conservative investor.
Most of the biomed shares are currently held by three types of investors: those who feel that they understand the sector well enough to choose which biomed companies are most promising; those who like the potential of a specific share and stick by it; and investors who like risk and are prepared to gamble about certain developments. Biomed is very much a "boom or bust" sector, which infatuates the third type of investor.
The investors who will be drawn to the ETFs will be those who do not understand the sector well enough to choose a specific share, and anyway are not interested in buying a specific stock but rather believe in the sector, and that a group of biomed companies traded in Tel Aviv can triumph in the market.
But are there enough investors in have faith in the overall sector? We will only see after the ETFs are launched. During 2009 a list of biomed shares rose by even more than the Tel Aviv 25 index. However, those biomed shares had fallen more sharply than the Tel Aviv 25 in 2008, and in 2009 many speculators bought biomed shares to take advantage of the volatility of these shares. ETFs can reduce the volatility of this sector.
Despite expectations of new groups of investors entering the biomed market, analysts believe that in the short term, after the launching of the ETFs, the market will not be flooded with enough buyers to raise the prices of the shares in the ETFs. The biomed sector is already the focus of attention, and when the new money is invested in the ETFs, some current investors will take advantage of the situation to indulge in profit taking.
The TASE has placed the bar at a height that will enable a relatively large number of companies - slightly more than half the biomed companies traded on the TASE - to be a part of the new index. This spread will facilitate a spread of risk, while also allowing volatile shares to enter the index. Investors in biomed ETFs will be able to diversify the risks, while also investing in an index of companies in their initial and relatively risky phases. From the point of view of the biomed industry, the index has got to be a good idea.
Published by Globes [online], Israel business news - www.globes-online.com - on January 25, 2010
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