Israel has a track record of smaller companies becoming global enterprises, and there are several markers indicating its innovative tech sector will balloon further. The country’s high-tech sector employs more than 200,000 people and represents some 10 percent of the country’s overall GDP.
Israel’s cybersecurity industry is second only to the United States in terms of investment dollars: Last year alone, Israeli cybersecurity companies big and small raised a combined $847 million, according to YL Ventures, an investment firm with offices in Tel Aviv and Silicon Valley. Equity deals in Israel-based companies made another large jump from 2016 to 2017, according to data from CB Insights: 158 deals representing $1.6 billion were made last year, compared to 131 deals totaling $1 billion the year before.
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The Israeli economy overall has solid growth prospects, with a mix of domestic industries such as banking and construction and export-oriented growth. Foreign companies, like Intel, have research-and-development centers in the country, too.
“Israeli companies, especially in the tech space, compete around the world,” Schoenfeld said.
But Israel doesn’t own innovation. Cutting-edge companies out of India, Japan and South Korea, to name just a few, also make attractive cases for more specialty investments that don’t focus on Israeli companies in particular.
“This is about as narrow a tracking ETF that I’ve ever seen,” Goldberg said. “To buy this, you really have to believe there is something special coming out of Israel, as far as technology innovation goes,” he said, adding that his preferred way to invest in tech companies is through individual stocks. “I can’t see any other reason to own it.”
And when it comes to Israel-based investors, another target market for the ITEQ, even the large companies can represent missed investment opportunities. That’s primarily because leading Israeli technology companies aren’t listed on the Tel Aviv Stock Exchange, but rather abroad, on the Nasdaq or the New York Stock Exchange, or in London, Singapore, Australia and, increasingly, Hong Kong.
“The Israeli stock exchange has never been a huge end market for Israeli companies to go to do their IPOs or anything like that,” said Tal Slobodkin, a partner at StageOne Ventures in Tel Aviv. “Most Israeli companies have always gone to the Nasdaq or the London stock exchange.”
For U.S. investors interested in tech — that’s a reason for them to invest in a Nasdaq-tracking ETF. Six of the top 10 fund holdings in the ITEQ are currently traded on the Nasdaq.
Where an ETF like the ITEQ could work is for the American investor with an aggressive tolerance interested in gaining diverse exposure to Israeli tech stocks that aren’t just listed on major global indexes.
“If you want exposure to Israeli tech companies and you believe they have high growth potential, then an ETF like this makes sense,” Mishra said.
— By Andrew Zaleski, special to CNBC.com