Invest in the ‘New Silicon Valley’

There’s a small country in the Middle East. It’s about the size of New Jersey, with just 8.5 million people. It may be easy for investors to overlook it, but that would be a big mistake. That’s because this mighty mite is a global technology powerhouse.

It holds the following world rankings:

  • #2 in innovation (World Economic Forum in 2016)
  • #3 in quality of scientific institutions
  • #3 in company spending on R&D
  • #3 in university-industry collaboration on R&D
  • #4 in capacity for innovation
  • #5 in patent applications per million citizens
  • #2 in R&D spending as a % of GDP

And when it comes to technological advancements, it actually scores higher than the U.S.!

This country has more scientists, engineers, tech companies and venture capital investment per capita than any other country in the world …

More than 270 major international technology and industrial companies have significant operational and R&D centers there.

That long (and growing) list includes 3M, Apple, Cisco Systems, General Electric, General Motors, Google, Hewlett-Packard, IBM, Intel, Lockheed Martin, Microsoft, Procter & Gamble, Qualcomm, Renault-Nissan, Samsung, SAP, Siemens and Tata Group.

Plenty of universities and governments also partner with this country’s campuses and institutions, or on bilateral R&D projects:

But the thing is, few people know about it — or don’t make the connection.

That means this country is an uncharted territory for the overwhelming majority of the investment community. So amateur and professional investors, and even many large institutional investors, are missing out on its potential.

However, some pretty smart folks DO know about it. And they have commented on this country’s investment prospects. But you won’t find their comments in the mainstream media …

Warren Buffett stated:

If you’re going to the Middle East to look for oil, you can skip [this country]. If you’re looking for brains, look no further. [This country] has shown that it has a disproportionate amount of brains and energy.

[This country] is the leading, largest and most-promising investment hub outside the United States.

Bill Gates declared:

The innovation going on in [this country] is critical to the future of the technology business.

Rupert Murdoch commented:

Armed with the energy and drive of a young nation, [this country] has overcome its small size and population to achieve some truly remarkable developments in science, technology and medicine.

With such a wealth of creativity and drive, I fully expect [this country] to remain at the forefront of technological development into the future.

Even Albert Einstein saw its promise when he once said:

[This country] can win the difficult battle for survival only by developing, painstakingly, the intelligence and expert knowledge of her young people in the field of technology.

Warren Buffett and Bill Gates aren’t the only prominent investors with vested interest in this country’s burgeoning tech sector. Carlos Slim, Mark Cuban, Jeff Bezos and Donald Trump are investing there. And celebrities Leonardo DiCaprio, Ashton Kutcher, Toby Maguire, Bono, Serena Williams, Lance Armstrong, Billie Jean King and Jay-Z have investment dollars there, too.

So, what do all these companies, colleges, governments, institutions, masterminds and famous affluent people know about this country that most investors don’t?

Well, they recognize Israel is a sleepy technology dynamo with an abundance of innovation and intelligence.

They understand why Israel has been named the "Start-Up Nation." And why it’s home to more start-ups and innovative companies than any other country in the world.

They know the "technology" coming out of Israel goes beyond just computers and chips. A wide range of innovative technology is derived from Israel: biotech, agriculture-tech, defense-tech, clean-tech, info-tech, etc.

And they’re aware of one key ingredient that’s present in most Israeli companies …

The real genius of Israel — specifically, its tech sector — comes from the military.

There’s obligatory military service in Israel. Men must serve from age 18 to 21. And women must serve from age 18 to 20.

In terms of imagination and creativity, the mind at 18 is very different than the mind at 30. So, this nation has a lot of really diverse, well-educated, well-trained, highly motivated young people who are constantly coming up with new ideas.

Young Israeli men and women are forced to assume leadership responsibilities and to be self-sufficient …

After all, you have to be innovative when you’re outnumbered 100-to-1, if not 1,000-to-1, by your enemies. Israelis can’t fight by manpower, so they fight with brainpower.

They’re constantly reinventing technologies. The help of the government really brings that intelligence to market.

When Israeli computer engineers and intelligence department workers finish their military service, they go out into the Israeli business world. They’re free to use everything they learned in the military and build new technologies that will be important to the rest of the world.

Private and public Israeli companies — and U.S. companies with R&D operations in Israel — covet these workers. Remember, more than 270 major international technology and industrial companies have chosen to set up offices there to tap into the country’s tech talent.

Virtually every Israeli tech company that’s involved in communications has its roots in the Israeli military. Most of the publicly traded and private-sector companies have founders who came from intelligence units or the engineering department of the military.

Many of the military-to-business-world transformers are responsible for creating innovative technologies …

For example, high-tech Israel companies have developed:

  Machine Vision Technology. Using advanced camera technology and sophisticated algorithms to assist in driver navigation and collision avoidance.

  Smart Drip Irrigation. Releasing water in controlled amounts has allowed for precise crop irrigation and water conservation.

  PillCam. A "pill" capable of recording images of the digestive tract. It has revolutionized the visualization and detection of digestive-tract diseases and medical disorders.

  USB Flash Drive. A compact device that allows for easy storage and transportation of files.

And there are many others, as well.

How can a country with such a massive footprint in the global tech ecosystem fall through the cracks?

An Under-covered, Under-researched, Not-yet-realized Opportunity

Most people … and most investors … have no idea that many of the world’s leading companies have important R&D facilities — or are domiciled — in Israel.

Nor do most technology users — from online shoppers to Fortune 500 companies — know that they’re using Israeli tech applications and solutions daily, and that there is a lot of "Israel Inside" their devices and technology.

Israeli tech is in the news all the time. But the media, readers and watchers usually don’t make the connection.

Israeli tech companies frequently provide the critical "back end" to companies like Amazon (AMZN), IBM (IBM), Microsoft (MSFT) and Samsung (SSNLF).

Many Israeli-born, technology-related companies like Check Point Software Technologies (CHKP), Mobileye (MBLY) — with Intel’s major $15.3 billion buyout announced mid-March, Amdocs (DOX), Stratasys (SSYS), CyberArk Software (CYBR), Mazor Robotics (MZOR), SodaStream International (SODA) and Wix.com (WIX) are leaders in their fields.

On top of a general lack of recognition, most of these companies don’t make it into the portfolios of actively managed funds, popular indexes or ETFs.

Part of the reason is Israel moved from an emerging market to a developed market in 2010. While that’s an upgrade for the country, its weight dropped from 3%-3.5% in emerging-market indexes to 0.4%-0.5% in developed-market indexes.

Because of this large weight reduction, most active international equity managers can either completely ignore Israel equities … or simply grab a name or two to fill a miniscule weight in their portfolio.

So, even with Israel’s importance in the global tech supply chain, investors still don’t get exposure through major tech indexes and ETFs.

Steven Schoenfeld, the Founder and CIO of BlueStar Indexes, told me:

The Nasdaq-100 Index (tracked by the QQQ ETF) has only one Israeli company … the Nasdaq-100 Technology Index (tracked by the QTEC ETF) has one Israeli company … the S&P Global 1200 Information Technology Index (tracked by the IXN ETF) has zero Israeli companies … and the S&P Small Cap 600 Information Technology Index (tracked by the PSCT ETF) has just three Israeli companies.

Clearly, the representation of Israeli tech stocks in the world’s most-prominent tech indexes/ETFs does not comport with Israel’s significance in the global tech sector.

There’s a solid workaround (actually, two efficient ways) for this. And you don’t need to be a billionaire or private equity or venture capital investor to capture Israeli tech in your portfolio.

The BlueStar TA-BIGITech Israel Tech ETF (ITEQ) and VanEck Vectors Israel ETF (ISRA) can make investing in the new Silicon Valley accessible to investors of all types and sizes.

The Nasdaq-listed ITEQ tracks the TASE-BlueStar Israel Global Technology Index. This index currently has 56 constituents that are Israeli companies, regardless of their listing venue. This ETF and the index provide exposure exclusively to Israeli "high-tech" companies such as information technology, cyber-security, biotechnology and defense technology.

The NYSE-listed ISRA tracks the BlueStar Israel Global Index. The index currently has 118 constituents made up of Israeli companies, including those listed on the NYSE, Nasdaq, London Stock Exchange and the Tel Aviv Stock Exchange. This ETF and the index provide exposure to all sectors of the Israeli economy, including pharmaceuticals, technology, real estate, energy and consumer-related sectors.

Both Israel ETFs are off to a nice start in 2017. For Q1, ITEQ finished up +14.3%, while QQQ finished up +12%. And ISRA was up +8.7%, while SPY was up +5.9%.

Combined, these two ETFs have less than $50 million in assets. Considering there’s about $15 trillion in U.S. mutual funds and another $3 trillion in U.S. ETFs, that’s barely a blip on the radar.

Whether Israeli tech companies are shunned due to their domicile, a negative country stance or other index methodology restrictions, they will likely receive more recognition — and investor interest — at some point soon. The compelling Israel Tech story and the two ETFs’ outperformance in Q1 2017 should help raise the profile of both ITEQ and ISRA.

BlueStar Indexes Director of Research Joshua Kaplan suggests an Israeli equity discovery could be under way …

When we speak to financial advisers about investing in Israel they are often confounded as to how their clients have such little exposure to Israel. The country is one of the most stable and strongest economies in the world with an explosive tech sector.

Israeli equities have the potential to be strong alpha generators outside the well-covered large cap space and more informationally-efficient areas of the market. There’s also strong fundamental investment case for Israeli stocks to boot.

To learn more about the BlueStar TA-BIGITech Israel Tech ETF (ITEQ), click here. To learn more about the VanEck Vectors Israel ETF (ISRA), click here. And to learn more about BlueStar Indexes, click here.

Best,
Grant Wasylik

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Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…