Hidden Gem ETFs

December 01, 2017

BlueStar TA-BIGITech Israel Technology ETF

Israeli technology. The two words evoke a very specific image. Cutting edge. Market leading. The future of the future.

You start to think of specific companies; startups like Waze—acquired by google in 2013—and established global leaders like check point software, amdocs and nice systems.

But the funny thing is, most investors have no exposure to these companies. Due to a quirk in listing practices and index construction, major indexes in Israel—along with U.S. and global tech indexes like the nasdaq-100—miss huge swaths of the Israeli tech industry altogether. These companies—some of the most innovative in the world—literally fall into an indexing gap.

ITEQ fills that gap. Tracking a proprietary index, the bluestar ta-bigitech Israel technology ETFcaptures all of the Israeli tech industry, making it a critical component of any carefully considered global tech investing strategy.

If you want cutting-edge technology, you want Israeli tech. And if you want Israeli tech, you want ITEQ.

Matt Hougan, CEO, Inside ETFs: Why did you develop ITEQ?
Steven Schoenfeld, Founder and Chief Investment Officer, BlueStar Indexes: To fill a need for investors. The TA-BIGITech index that ITEQ tracks is the only index of Israeli technology companies listed worldwide.

Israel is well-known as the “startup nation.” It has the highest percentage of technology startups per capita in the world; its tech ecosystem is second only to Silicon Valley in absolute terms; and almost every major global technology company has a major R&D center in Israel or has done major acquisitions here. But despite Israel’s prominent role in global tech—and particularly the cutting-edge, transformational technology that is changing our world—before ITEQ, there was no ETF providing exposure to the complete Israeli tech opportunity set.

But don’t I get exposure through my U.S. and other international indexes?
That’s the thing; the answer is no. Israeli companies don’t quite make it into the U.S. or global tech indexes, and ironically they’re not in the local Israeli technology indexes either.

Why not?
The primary benchmarks in Israel are calculated by the Tel Aviv Stock Exchange, or TASE. TASE indexes only include companies listed in Tel Aviv, but most Israeli technology tends to list on global markets like NYSE, Nasdaq or the LSE, to assure better analyst coverage.

The problem is, if they’re listed only abroad, they don’t qualify for the local indexes. Check Point, Amdocs, Verint, Wix.com and dozens more aren’t listed in Tel Aviv, so they’re not in the benchmark for investors.

Where does ITEQ fit in an investor’s portfolio?
If you’re an advisor who has interest in technology, you should have exposure to Israel. and you’re likely not currently getting it. They fall in an “indexing gap,” so unless you take a proactive step, you miss out on some of the most innovative companies in the world.

Israeli tech companies generally don’t make it into either U.S. tech indexes tracked by ETFs, or many global indexes. There is only one Israeli company in the Nasdaq-100, just a handful in key biotechnology indexes and none in the S&P Global 1200.

Thus investors should consider a dedicated allocation to ITEQ within their U.S. and global technology exposure, both to “fill the gap” and to benefit from the innovation of leading Israeli companies. Furthermore, as tech is generally a lower weight in developed international than in the U.S. or emerging markets, ITEQ can be used to increase technology exposure to an EAFE/world ex-U.S.- benchmarked allocation

How do you define what is an Israeli tech company?
First, we take a very broad, deep and complete approach to defining technology. We include cybersecurity, IT hardware and software, big data, defense and security, 3D printing, biotech, medical devices, agritech and more.

We also have a rigorous methodology for defining an Israeli company. Some of the metrics are quantitative: Is it legally incorporated in Israel? Is it paying taxes in Israel? Those are black and white.

Then, there are more qualitative or subjective metrics: Does the company have a significant amount of its R&D or intellectual property in Israel? are a significant number of its employees in Israel? Do key management functions take place in Israel? In the qualitative areas, a firm can’t qualify with just one criteria; it has to meet at least two criteria.

Why is Israel such a hub for technology?
There have been books written about this, including “Start-Up Nation,” which explores exactly that question: How does a country about the size of New Jersey, with less than 9 million people, become so prominent in technological innovation?

Part of the reason is that Israel itself is a startup nation. It’s turning 70 years old this spring; it was built out of swamp and desert; developed under adversity—having fought five major wars in its first 40 years—and it’s a country of immigrants from all around the world. That’s a good foundation for entrepreneurism. Israel also has a very-well-educated population, world-class research universities.

Vitally, it also has a culture that accepts risk and failure. Most Israeli citizens, by law, must serve in the military after high school. Thus, before university, they learn about responsibility and risk-taking. When you’re a 19- or 20-year-old leading a platoon into battle, and five years later you’re leading a startup, your perception of risk is very different than your peers in Silicon Valley.

And finally, you have a solid ecosystem. U.S. companies like Intel, Apple and Microsoft have major R&D centers in Israel. The Israeli government provided major incentives to foster the venture capital community in the 1990s, and out of that grew a number of very successful companies and entrepreneurs.

There are now many examples of startups that’ve gone on to be world-leading companies, and they’re contributing back to the system, along with global tech companies active in Israel. It’s has become a virtuous circle.

If you had to explain in one sentence why every investor should look at ITEQ, what would you say?
You can’t be a serious global technology investor without including Israeli tech stocks, and ITEQ is the efficient way to get exposure to them.

 

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