Ways to Invest Financial Markets: Which one is the best?


Introduction to Investing in Israel

Israel’s entry into the financial markets began in 1951 with the government’s decision to issue debt securities, known as Israel Bonds, in order to fund the country’s development.

In the nearly seven decades since that time, Israel has blossomed into a “startup nation” with significant achievements in technology and healthcare fields.  Such relatively stable growth and low debt have enable Israel to have relatively strong financial health, and hence has fueled interest from investors outside the country, even considering occasional political unrest in the Middle East region of the world.

Popular ways to invest in Israel financial markets include the following asset classes:

  • Israel Bonds
  • Venture Capital
  • Israel Public Equities

We consider each of the above in turn below.  Afterwards, we discuss the very best way to invest in Israel, The Jerusalem Portfolio.

Israel Bonds

Since their first issuance to fund development projects in the middle of the Twentieth Century, Israel Bonds has diversified its product offerings, among them LIBOR bonds with floating rates. With a diversified product came a multiplicity of investors, including insurance companies, banks, and U.S. municipalities.

In the middle of November 2020, the yield of the Israeli government bond was about 85 basis point (or 0.85%).  If one considers that the yield on a bond to be a surrogate for its estimated future total return, then that 0.85% return will almost certainly be lower than that earned by a diversified basket of publicly-traded Israel stocks.

Although Israel Bonds, like U.S. Treasuries, have low default risk, that is the risk that the issuer does not pay its interest and principal obligations on time, Israel Bonds do have significant liquidity risk, in that an a holder of an Israel Bond cannot simply sell the bond on the secondary market before it matures due to government regulations.  This is in contrast to Sovereign Bonds, which have much less liquidity risk since they can be sold in the secondary market before they mature.

 

Venture Capital

Israel is known as the ‘startup nation” for good reason. The country is ranked number one in the world for startups per capita.  According to the Times of Israel, Israel has over 430 institutionalized investors in Israel, of which 23% are based overseas.  Increasingly, these overseas venture capital firms have been active in the early stages of investing.

Venture Capital (VC) is a high-risk and high-reward form of investment.  The final total return on a VC investment could be as high as 50%.  Losses, however, can also be substantial. If a company fails financially, a company’s management must first make its debtholders whole before – if any capital is still left – paying its equity holders.

VC investors see a return when a company goes public or if another investor buys their share. Since the timing is unclear, there can be a long wait until investors see a return – on the order of five-to-ten years, which makes venture capital less liquid than other forms of investments, such as stocks, for which significant positive returns can be made in a relatively short period of time.

 

Israel Public Equities

Israel Public Equities, or Israel Stocks, enable an individual to directly invest in Israeli companies in a low-cost, transparent manner.  Like most stocks around the world, Israel stocks are among the most liquid investments, unlike bonds and real estate.

Israel Stocks provide the right tradeoff between risk and reward.  While Israel Bonds are low risk, they are low reward, and while Venture Capital is high reward, they are very high risk.  Israel Stocks, on the other hand are moderate on the risk-reward scale, enabling the vast majority of investors strong returns in the long run.

One significant advantage of Israel Stocks is the ability to easily adjust holdings depending on the movement of the market.  Making such adjustments to a Venture Capital is nearly impossible to do.

One disadvantage of stocks is the capital gains tax when stock is sold. However, some of these tax issues can be avoided if the returns are reinvested or placed in a Roth IRA. Holding Israel

growth stocks or an Israel ETF can prevent the need to buy and sell frequently which can cause fees and taxes to accumulate.

Of particular note to U.S. investors, many successful Israeli companies trade on American stock exchanges; just to name a few:

  • Fiverr (FVRR)
  • Cellcom (CEL)
  • Can-Fite Biopharma (CANF)
  • Teva Pharmaceuticals (TEVA)
  • Taro Pharmaceuticals (TARO)

Thus far, we’ve focused on the characteristics of Israel Stocks.  But, how should one actually go about investing in Israel Stocks?

One way, of course, is for an investor to select his or her own basket of individual companies.  While this method provides a high degree of customization, doing so is a time-intensive process, requiring not only researching companies, but also ensuring that the investor’s portfolio adheres to proper portfolio principles, such as ensuring one is not overly concentrated to a particular company or sector.

Another approach is to invest in a product which provides the depth of diversification already accomplished for the investor.  Such a product is known as an Exchange-Traded Fund (ETF), which is both listed on a U.S. stock exchange and traded just like a stock, with active buying and selling throughout a trading day, every day.

ETFs consist of a collection of stocks related to a sector or country.  Four primary ETFs exist for investors interested investing in Israel stocks:

  • BlueStar Israel Technology ETF (ITEQ)
  • iShares MSCI Israel ETF (EIS)
  • Van Eck Vector Israel ETF (ISRA)
  • ARK Israel Innovative Technology ETF (IZRL)

 

The Jerusalem Portfolio

While ETFs are a wonderful way for one to invest in Israel stocks, there is still one critical element still missing in the investment process: How to determine which ETFs to invest in and in what quantities.  In addition, an investor needs to ensure the portfolio is managed well not only at inception but going forward as well.

You can leave that part of the investment process to us, the managers of The Jerusalem Portfolio (TJP), which examines various factors, such as sector allocation (e.g., Technology, Financials) and stock characteristics (e.g., Market Capitalization, Growth vs Value) to determine the allocations of ETFs which are best for our clients.

In addition, an investment in TJP gives you professional portfolio management, such as periodic rebalancing, done in a tax-efficient, low-cost manner.  Also, 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!