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Investing in Israel: Exposure to InnovationSeptember 30, 2019
For investors seeking to build a comprehensive or opportunistic global equity portfolio, Israel should not be overlooked. Although Israel is a relatively recent addition to developed international markets indices—having been promoted from emerging markets indices in 2010—it maintains a consistently higher than average gross domestic product (GDP) growth rate compared to other advanced economies, as well as enviable demographics, including a relatively young and educated population. Despite a small population, Israel has become known for its impressive economic successes in the global marketplace. Israel is also home to a young, educated workforce with an innovative entrepreneurial spirit that may contribute to the long-term economic success of the “Start-Up Nation”.
Macroeconomic Fundamentals Support Growth
Israel’s macroeconomic fundamentals may also lend support to a long-term investment in Israeli companies. Since the re-classification to a developed market in 2010, Israel has consistently exhibited GDP growth rates that exceed other advanced economies.
Israel GDP Growth Rate vs Advanced Economy GDP Average Growth Rate (2010-2018)
Source: International Monetary Fund as of 2018
Israel’s demographic profile may also provide long-term, multi-generational support for economic growth. Israel has one of the youngest populations in the developed world, and is also one of the most highly educated. Of the entire population, 27% was under the age of 14 in 2017 (43% under the age of 25), compared to the Organisation for Economic Co-operation and Development (OECD) average of 18%. According to the OECD, as of 2017, 48% of Israelis aged 25-34 have completed tertiary education (beyond high school), compared to the OECD member average of 43%. Combined, this large and growing group of educated young people may provide long-term support for Israel’s economic success going forward.
“Start-Up” Spirit Meets Capital Markets
The innovative spirit in Israel has led to numerous highly successful startups and publicly traded companies, many of which have created an outsized impact on the world economy. Israel has been so successful in creating and launching innovative new companies that it has been dubbed the “Start-Up Nation.” Israel is widely known as a leader in three key sectors of the global economy—technology, consumer services and healthcare. One of the underlying characteristics of Israeli companies is that they are deeply connected to the day-to-day lives of consumers around the world, and are essential partners with large multinational companies. Here is a small selection of Israeli companies that have been making global headlines:
- In 2017, Intel announced the acquisition of Mobileye, a company that pioneered the technology essential to the development of self-driving cars. Intel’s purchase price of $15.3 billion was the largest acquisition of an Israeli tech company. Mobileye’s technology is used by some of the world’s leading auto manufacturers, including BMW and Volvo.
- In 2018, PepsiCo announced the acquisition of SodaStream, popular around the world for its home carbonation products. SodaStream was founded in England in the early 1900s, but was bought by an Israeli company in the late 1990s. SodaStream listed on the NASDAQ stock exchange in 2010, and was purchased eight years later for $3.2 billion.
- Israel’s Check Point Software literally invented the term “firewall” in the late-1990s, and remains a world leader in the dynamic cybersecurity space. Check Point has a global footprint, with headquarters in both Israel and California, and development centers in Sweden and Belarus.
- No discussion of Israeli companies can occur without mentioning Teva Pharmaceutical Industries. Teva is currently the largest manufacturer of generic pharmaceuticals in the world, and one of the three largest stocks trading on the Tel Aviv exchange. Despite some share price troubles over the last few years, Teva remains a healthcare giant with a global reach and a market cap north of $30 billion.
Thoughtfully Designed Exposure for Investing in Israel
Thinking globally is important when considering an investment in Israeli companies. Because of its relatively small population and the global and forward-thinking mindset of its companies, some of the most successful Israeli stories are not limited to the local economy. This has led to some of the most successful Israeli companies listing on foreign exchanges.
The VanEck Vectors Israel ETF (ISRA) seeks to track the Bluestar Israeli Global Index® (BIGI®), which comprises the largest Israeli companies in the world, whether they list locally in Israel or on foreign exchanges. BIGI is a thoughtfully constructed index with unique features that we believe provide benefits to the end investors.
First, the index is exchange agnostic. Bluestar uses both quantitative and qualitative measures to determine if a company meets the requirements to be considered “Israeli” and thus included in the index. This methodology provides investors access to Israeli companies in a complete and pure construction.
Second, the index is modified-market cap weighted, with a 10% max weight on individual constituents after rebalancing. This serves to diversify the index by including smaller names which may otherwise be excluded if there were no capped weighting scheme. Capping individual names also serves to lower the single-security risk for the entire portfolio.
When thinking about how to access the opportunity provided by Israeli companies, a diversified basket approach utilized by ISRA may provide investors the opportunity to capitalize on Israel’s position as a global innovator.
This material is for informational purposes only. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and are subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the companies mentioned herein. Fund holdings will vary. For a complete list of holdings in the ETF, please click here https://www.vaneck.com/etf/equity/isra/holdings/.
Indices are unmanaged and are not securities in which an investment can be made. Index returns do not reflect a deduction for fees & expenses. Certain indices may take into account withholding taxes.
The BlueStar Israel Global Index® is the exclusive property and a trademark of BlueStar Global Investors LLC and has been licensed for use for certain purposes by Van Eck Associates Corporation for VanEck Vectors Israel ETF (the "Fund") based on the BlueStar Israel Global Index®. The Fund is not sponsored, endorsed, sold or promoted by BlueStar Global Investors LLC, and BlueStar Global Investors LLC makes no representation regarding the advisability of trading in the Fund.
An investment in the Fund may be subject to risks which include, among others, investing in Israeli issuers, foreign securities, foreign currency, depositary receipts, financials sector, health care sector, information technology sector, small-, medium- and micro-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's return. Small-, medium- and micro-capitalization companies may be subject to elevated risks.
Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.987.9779 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.