Steven Schoenfeld is one of the index industry’s most knowledgeable figures. His classic tome, “Active Index Investing,” published in 2004, is a must-read for any die-hard indexing fan. He also was a founder of IndexUniverse, the predecessor to ETF.com.
Schoenfeld started the firm Blue Star Indexes with the ambition of developing benchmarks that go well beyond Israel, canvassing the entire eastern Mediterranean. Blue Star’s BIGI index is tracked in the U.S. by VanEck Vectors Israel ETF (ISRA), and Blue Star is the issuer of the U.S.-listed BlueStar TA-BIGITech Israel Technology ETF (ITEQ), which hit an all-time high earlier this month. ETF.com caught up with him to discuss Israel as well as Israeli tech stocks, and why he believes they are underowned and underappreciated.
ETF.com: There's a perception that Israel is in a bad part of the neighborhood, which is an added risk. As somebody who provides indexes based on Israeli equities, do you get that a lot? If so, how do you overcome that?
Steven Schoenfeld: When you think about where Israel is, obviously you have to be aware of geopolitical risk. Israelis certainly are. The overall Israeli economy has to deal with it and it has done that well. They invented technology to help you manage that risk.
Even though the broad Israel economy has certain sectors that are exposed more heavily to geopolitics, the tech sector in particular is the most separate from it. So if you think of tourism or banking or retail or some kind of manufacturing and things like that, those will be affected if there's more than a week or two of conflict.
But Israel's tech sector exports by basically clicking a mouse. Not all; some of it's manufacturing. And it's not just Israeli companies. Intel has a very major chip manufacturing fab there, too. But if the threat is from the south, from Hamas, they'll ship out of the port in the north, Haifa. If the threat is from the north, from Hezbollah, they'll ship out of the southern port, Ashdod. No country in the world is more prepared to deal with the economic fallout geopolitical risk.
Most of the time, we get this question in relation to the broad market. Our BIGI index is the underlying index for VanEck’s U.S.-listed ISRA ETF. There, you have a little more impact. But historically, the Israeli market is impacted not by the local regional geopolitics, which can be short term.
But the big moves—up or down—in the Israeli market are global economic. The tech meltdown in 2000/2001 affected Israel a lot more than the Gulf War of 2003. When you had the global financial crisis in 2008/09, that affected Israel more than the war with Hamas in 2008/09.
And almost invariably, when there is a short-term flare-up from some of Israel's enemies, invariably it ends up being a buying opportunity, for two reasons: One, the market, the foreign investors, overreact; and two, people forget that Israel has a very deep domestic investment industry—pension funds, insurance, mutual funds and ETFs. It's the tenth-largest ETF market in the world. If foreigners sell and push stocks down to a certain level of value, the domestic investors will buy it up. So there's a floor there.