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Originally Posted On: https://www.thejerusalemportfolio.com/blog/the-best-way-to-invest-in-israel/
Although Israel is small in size and often overlooked, the country is at the forefront of innovation in the world with a vibrant start-up ecosystem. Despite being the size of the U.S. State Rhode Island with a population of around only 8.6 million people, Israel has over 6,000 active startups – a staggering figure. Many of the most important inventions in the world were also created in Israel.
Agriculturally, Israel invented the drip irrigation system. Technologically, Israel produced the first USB flash drive, developed the first Intel computer with IBM, started the very first instant messaging software, and built the first Voice over Internet Protocol (VoIP) based PC-to-Phone software solution. Many of the most important computer and mobile software companies today are Israeli as well. Gett, Mobileye, Viber, Waze, and Wix, for example, are all Israeli.
Furthermore, multinational corporations such as Tata, Kodak, Citi, and others have established innovation centers in Israel. Not to mention, Israel is a world leader in defense and security products and solutions. As a US-based investor, you are probably asking yourself “what is the best and most convenient way to invest in Israel?” Hopefully, once reading through these options, you will conclude that investing in public stock, including Israeli companies and ETFs listed on non-Israeli exchanges, is the best way to invest in Israel.
What vehicles can an individual use to invest in Israel?
The four primary vehicles for investment in Israel are:
- Israel Government Bonds
- Venture Capital
- Public Equity Markets
- Individual Stocks
- Exchange-Traded Funds
- The Jerusalem Portfolio
We consider each of the above in turn below.
Investment Vehicle One: Israeli Government Bonds
Israel bonds issued by its government are one way to invest in Israel. Oftentimes, these bonds are purchased on behalf of someone else as a gift and way to show support for the State of Israel.
Israel bonds are considered very safe investments as Israel has never defaulted on any of its bond since the founding of the nation. Furthermore, the country’s bonds have strong ratings across the board from the three main credit agencies keeping these credit ratings: (1) Fitch = A+, (2) Standard & Poor’s = AA-, (3) Moody’s = A1. These very high ratings are despite the COVID-19 pandemic causing downgrades and defaults elsewhere in the world.
While Israel bonds are indeed a safe investment, an investor should keep several issues in mind:
- While the yields on Israel bonds are higher than those of U.S. Treasury bonds, Israel bonds still offer higher risk than their U.S. counterparts.
- Although the ratings and track record of Israel bonds are top of the line, many still view Israel as a developing country.
- Israel is also very prone to regional turmoil. In 2011 during the Arab Spring, for example, outflows from Israel bond funds surged.
- For investors looking for liquidity and long-term appreciation, Israeli government bonds will simply not give you what you’re looking for. These bonds provide little appreciation and are very difficult to trade. These bonds are unlisted and do not trade on any exchange, market, or trading platform. Because of this, Israeli bondholders are usually required to hold onto these bonds until maturity.
Investment Vehicle Two: Venture Capital
Venture Capital is another exceedingly popular way to invest in Israel. After all, look at Israel’s startup ecosystem, and some of the companies that have sprouted out of Israel with lucrative exits. Many refer to Israel as “The Start-Up Nation,” and compare it to Silicon Valley of the Middle East.
However, Venture Capital (“VC”) introduces tremendous risk and little liquidity. The VC industry as it currently exists introduces specific risks. Due to the COVID-induced economic slowdown, as well as country-specific risks in Israel’s VC landscape, Venture Capital is advised to be avoided. Although Israel’s start-up ecosystem is robust, Venture Capitalists as a whole in 2020 are more cautious.
Additionally, with Israel’s unfavorable corporate tax rate, political situation, and macro-level geopolitical risks, the climate for VC investing in Israel is not a good one at this time. With this high-risk climate, investing with unsecured capital is simply reckless at this time. If a business fails – which seems to be the standard occurrence in 2020 – that investment is lost forever.
Investment Vehicle Three: Public Equity Markets
When one considers the potential downside characteristics involved with investing in Israel Bonds and Venture Capital, the third primary investment vehicle, that of the Public Equity Markets, or individual stocks, should be given serious consideration.
Many people believe that an investment in Israel’s public equity markets requires opening a brokerage account in Israel and transferring funds to the country prior to making an investment. As we will see, one does not need to go through such challenges to invest in a single or portfolio of individual Israel stocks.
Option One: American Depository Receipts
For a U.S.-based investor, perhaps the easiest way to invest in the stock of public Israel companies is to put capital into so-called American Depository Receipts, often abbreviated as ADRs. Such ADRs offer U.S.-traded exposure to individual Israeli companies as diverse as:
|Check Point Software||NASDAQ||CHKP|
|Nice Systems, Ltd.||NASDAQ||NICE|
These well-known companies are just a handful of the nearly 100 other companies whose ADRs are easily investable by a U.S.-based individual. Some of these companies have experienced some of the most robust returns in the market since the bottoms were hit in March.
While individual ADRs are certainly a viable method for investing in Israel publicly-traded companies, the choice of which companies to invest in can be quite challenging, not to mention time-consuming, for many investors. Having a properly diversified portfolio is important when investing in Israel stocks, just as it is for investing in U.S. or even Global stocks.
Option Two: Exchange-Traded Funds
Perhaps the best method for investing in a diversified portfolio of Israel stocks is via an Israel-focused Exchange-Traded Fund (ETF), which offer diversification at low cost and trade just like any other stock on a U.S. exchange. Israel ETFs provide investors with a comprehensive basket of stocks that offer instant exposure to the country. Put another way, Israel ETFs contain combinations of Israel ADRs.
The iShares MSCI Israel Capped ETF (Ticker: EIS), which is traded on the New York Stock Exchange, is one of the original and most popular options for investors looking for exposure to Israel. EIS offers comprehensive and diverse exposure with 67 stocks in its portfolio. While EIS is certainly a decent, low-cost option for investing in diversified Israel, if investors want more exposure to cutting edge Israeli technology companies, investing in EIS may not be the best option. Nearly a third of the fund is exposed to financials and nearly 20% is invested in Teva.
The BlueStar Israel Technology ETF (Ticker: ITEQ), which is also traded on the New York Stock Exchange, is one of the newer and increasingly popular ways to invest in Israel. Launched in 2015, ITEQ tracks an index composed of globally listed Israeli technology companies, providing investors with exposure to the innovative side of Israel’s economy. ITEQ top five holdings by market value are:
- SolarEdge Technologies, Inc.
- NovoCure Ltd.
- NICE Ltd
- Check Point Software
Investment Vehicle Four: The Jerusalem Portfolio
The Jerusalem Portfolio (“TJP”) takes the very good investment method of ETFs to create the very best way to invest in Israel Public Equities: A combination of Israel ETFs that provides maximum exposure to all sectors in the Israel economy. The result is that an investment in TJP provides exposure to over 100 Israel Equities.
We use the appropriate weightings of multiple ETFs in TJP to arrive at that mixture of Israel Equities that maximize risk-adjusted returns over time, by looking at well-known academic factors that drive returns (e.g. Small-Cap versus Large-Cap stocks, and Growth versus Value stocks).
Furthermore, we professionally manage TJP so that well-established proper portfolio management practices such as rebalancing occur at structured intervals. Unlike managing your own portfolio of individual Israel stocks, or even portfolio of individual Israel ETFs, you will be able to simply contribute your capital and let your investment grow over long periods of time. Indeed, you will be able to “set it and forget it,” which is the very best approach to investing in general.
Finally, just like the ETFs themselves, TJP is completely liquid and both contributions and withdrawals from an investor’s TJP account can be accomplished easily and with zero transactions costs.
We make it very easy to being investing in TJP. Simply visit us at www.thejersusalemportfolio.com or give us a call at 855-5-ISRAEL (855-547-7325) to open an account, which, in just a few minutes, will enable you investing in getting the best of both worlds: Investing in Israel and doing so in the very best way possible!