As a country with virtually no natural resources that is surrounded by hostile neighbors, Israel’s path from an emerging market to first world status mirrored to some extent that of Singapore, embracing innovation and technological know-how in order to propel itself to developed status. This model has served the small country of just over seven million people remarkably well over the years and especially well in the face of the recent global economic slowdown. In fact, Israel has resiliently plowed through the Great Recession and its GDP is projected to grow at a 3.5% rate for 2010. With a bright future outlook, many investors seeking to diversify developed market exposure to a technology-driven, market economy are taking a close look at the Israel ETF.
One of the main reasons for the resilience of the Israeli economy through the recent downturn is its diversification. The country is a market leader in a wide variety of industries such as solar power, pharmaceuticals and manufactured goods. In fact, Israel has become such a dominant player in the drug production industry that pharmaceutical products exports totaled $4 billion in 2008, almost 10% of total exports for the country. Israel has also pushed for more solar power in order to free itself from dependence on Arab neighbors. Israel already uses solar power to heat water in over 90% of homes and a new start-up seeks to provide energy for 10% of Israel’s population using only 12 sq km of land. Rounding out the economy, Israel spends roughly 7.3% of its GDP on defense, which helps to ensure a robust military industry. This hefty spending can ripple through the broader economy, boosting everything from technology companies to infrastructure firms.
Perhaps the most important industry to modern Israel is the technology sector, home to “Silicon Wadi.” Israel has the most high-tech start-ups per capita in the world and it attracts as much venture capital as France and Germany combined. This level of capital and firm creation has established Israel as a technology hub for the entire region, attracting talent from across the Mediterranean and Southwest Asia. Several high profile technologies have been invented in Israel, including PHP computer language and Intel’s dual-core processor.
Although the industry is still in its infancy, high tech exports comprised more than half of all Israeli exports and were more than $6 billion more than high tech imports (in 2008).
Not surprisingly, perhaps the biggest concern for an investor considering Israel is geopolitical in nature. The country is surrounded by several countries that oppose its policies and in some cases, its very existence. Tense relations with Palestinians and Iranians have been well documented, and seem likely to remain in place (or perhaps even intensify) for the foreseeable future. Iran has consistently been hostile towards the Jewish state and indicated its desire to see the Israeli government collapse.
Unfortunately, violence is a not-so-uncommon occurrence in Israel, an occasionally dark cloud hanging over an otherwise promising economy. Should tensions continue to escalate, the attractiveness of Israel to foreign investors could be diminished considerably.
Israel ETF Options
While Israeli equities are included in global and developed markets funds, the allocation to the country in these ETFs is almost immaterial. One of the best ways for U.S investors to access the Israeli market is with the iShares MSCI Israel Capped Investable Market Index Fund (NYSEARCA:EIS). This fund tracks the MSCI Israel Capped Investable Market index, a benchmark that seeks to capture 99% of the publicly available market capitalization in the Israeli equity market. The fund also imposes a weighting cap of 24% for an individual security in order to make sure that no one firm dominates the index.
EIS, which charges an expense ratio of 0.63%, has performed very well over the past 52 weeks, gaining almost 80%. With a beta of just 0.42, the fund offers potentially valuable diversification benefits to portfolios that are heavy in U.S. equities.
The largest holding for EIS is Teva Pharmaceuticals (NYSE:TEVA), which in addition to being one of the largest firms by market capitalization on the NASDAQ, is one of the largest drug companies in the world. TEVA makes up just under 22.5% of EIS. Other large holdings include Israel Chemicals Limited (OTCPK:ISCHY) (9.8%) and Check Point Software Technology (NASDAQ:CHKP) (7.5%). For the sector breakdown, the fund can be broken down into four relatively equal sections; financials, health care, information technology, and materials. (Click to enlarge)
Disclosure: No positions at time of writing.