Israel’s financial markets hold some of the most promising assets for investors today. Knowing how to navigate different options within these markets is vital for investors seeking to maximize their returns.
Broadly speaking, the Israeli financial market can be broken down to three categories:
- Israel Government Bonds
- Venture Capital
- Israel Public Equities
We will explore in detail each of the above in turn. Afterwards, we’ll discuss the very best way to invest in Israel: The Jersualem Portfolio.
Israeli Government Bonds
From the early days of Israel, bonds have been a strategic asset for the country. Since 1951, Israel has issued bonds through the Development Corporation for Israel, its U.S. securities underwriter. In recent years sales of bonds have approached USD 40 Billion.
Revenue from bonds has proved essential for building the nation’s vital infrastructure, such as Israel’s water delivery and Dead Sea industries. For this historical reason, bonds have traditionally been the security most promoted by both the Israeli government and investors abroad.
Over the seven decades following the first bond issuance in the middle of the Twentieth Century, Israel has succeeded in diversifying its security products, which in turn has enabled it to diversify its array of investors. Today banks, insurance companies, and even U.S. municipalities are major investors in Israeli bonds.
Israel bonds certainly have attractive features. Like most government bonds, Israel bonds come with the advantage of stability and a virtually-certain guarantee of return on investment. In Israel’s case, this guarantee is strengthened even more by the country’s low level of national debt relative to GDP (roughly 60% in 2019), a measure generally understood to represent a country’s ability to repay its debts.
While Israel bonds have redeeming qualities, they do not have high rates of return. Such bonds offer little in terms of actual appreciation, and with the highest yields on the longest-maturity Israel bonds still below the 2% mark, the bonds provide very little return to the long-term investor, and after taking into account inflation, may only break even in terms of real purchasing power over time. Put simply, Israel bonds are more like a loan to the Israeli government with a token interest at reimbursement, not a long term investment strategy.
The world of Israeli Venture Capital (VC) has exploded in recent years. This has been a direct result of the surge in technological innovations that have become the major wealth generators for Israel’s economy. The high technology industry alone pulls billions of dollars annually from foreign and local investors and is continuing to grow. In 2019, Israeli startups received $8.3 billion in capital which was a 30 percent increase from the previous year.
Despite the economic shocks caused by the COVID-19 pandemic, Israeli firms continue to break records. About $2.5 billion in VC was raised in the second quarter of 2020 alone. These trends have led to the flourishing of the venture capital industry. Legal infrastructure for VC firms, rules governing crowdfunding, and other administrative frameworks have been put into place, many within the past two to three years. Increases in investment deal sizes has also increased the valuation of fund-raising companies, helping to secure new investors. Today, there are approximately 70 operating venture capital funds operating in the country, the vast majority of which are Israeli.
Despite the thriving VC scene, this asset class is far from a sure win for investors. Venture capital in Israel comes with a very high degree of risk, more so than similar investment environments in other countries. Even with the world renown of their successes, the ‘start-up nation’ produces a high number of failures. The country sees 40,000 companies close every year. Nearly all new enterprises – upwards of ninety percent – fail in the first twelve months after opening. While returns on venture capital investment can be high, on the whole the industry presents investment with low liquidity and extremely high risk.
Israel Public Equities
The opening up of Israeli financial markets over the recent period has also meant more opportunity in Israel Public Equities, commonly known as Israel stocks.
The opportunities for public trading have created a surge in Israeli companies appearing on trading indexes. As of November 2020, there are 79 companies from Israel listed on NASDAQ with another 10 appearing on the New York Stock Exchange. For years now, market assessors have been hailing Israeli stocks for their high return potential and wide range of industry diversity.
Israel stocks have also outperformed many other investment areas in terms of stable returns. According to the Bank of Israel, Israeli stocks, on average, paid better over the long term than even the high value of the real estate market. Another obvious advantage of the Israel stock scene is that stocks with real growth potential do not require major upfront investments. As stock surveyors have noted, there is perhaps no other country with a comparable economy and currency stability where investors can consistently find real bargains.
In this way, Israel stocks strike a stable balance not found with other options in Israel’s financial market. On the one hand, stocks are a much more stable and somewhat more predictable option than risk fraught venture capital. At the same time however, stocks present investors with concrete opportunity for substantial growth, more than the miniscule yields of bonds and similar securities.
The Jerusalem Portfolio
Now that we’ve established that Public Equities are the best vehicle for investing in Israel, one then should determine how exactly to invest one’s capital.
Because Israel has many companies in which to invest, an individual could simply pick a handful of companies to select that are listed on U.S.-domiciled stock exchanges. Such an approach is easy to understand and implement. However, it presents the challenges of constantly managing the portfolio, particularly determining which companies to hold or sell, as well examining potentially new candidates for inclusion into the portfolio.
Another method is to invest in so-called Exchange-Traded Funds (ETFs). ETFs are simply a collection of companies, typically in groups of 30-60 stocks, that enable an investor to immediately include those companies (indirectly) in his or her portfolio. ETFs, like many Israel stocks, both trade on U.S. stock exchanges and trade like stocks in that they provide liquidity throughout the trading day, every day. In a nutshell, ETFs are an excellent way to invest in Israel stocks.
The Jerusalem Portfolio (“TJP”) takes the excellent 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), as well as sector allocations, particularly Technology, that have demonstrated excess returns over time.
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.thejerusalemportfolio.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!