ETF.com: Let's talk about Israel through the ETF lens. Your firm provides the index for the Market Vectors Israel (ISRA | C-26), which launched in 2013. The first U.S. ETF to the space was the iShares MSCI Israel Capped (EIS | C-58). Can you speak to the differences between the funds? For instance, EIS is heavy on Israel-based companies—almost 99 percent of the underlying companies—while ISRA is Israel 57 percent, followed by 40 percent in the U.S.
Schoenfeld: [Blue Star] looked at the issue of country classification and company classification. Do you attribute a company to where it's listed or to where it’s headquartered? BlueStar built a pretty sophisticated methodology that looks at qualitative and quantitative factors that define an Israeli company.
The goal, very simply, was to be broad, deep and complete in defining what is an Israeli company, and then, of course, applying liquidity screens, minimum market cap and all the best practices of index design.
As a proportion of its market, Israel is very impacted by this issue of domicile. Some of the biggest and best Israeli companies are either dual listed—such as [pharmaceutical firm] Teva, which is traded in the U.S. as well as in Tel Aviv—or listed abroad. The best example of that would be Check Point Software.
Check Point literally was the company that developed the term "firewall." The company is legally registered in Israel. It pays taxes in Israel. It's headquartered in Israel. But because it's a tech company, the company went public on the Nasdaq in the U.S.
You have dozens of Israeli companies that have followed in those footsteps. Mobileye is headquartered in Jerusalem, all the intellectual property is domiciled in Israel, but it went public in the U.S. It wanted to get the analyst coverage and the visibility.
You also have a number of Israeli companies going public in London. These companies are no less Israeli than a company that’s based in Israel but happens to be listed in Tel Aviv.
We broke this artificial divide of listing exchange versus where the company is based. We used some very sophisticated criteria, both quantitative and qualitative, to have a robust framework on what is an Israeli company. The end result is an index that’s broader, deeper and more complete, and most importantly, fully representative of the Israeli economy.
ETF.com: What are some of the financial problems facing Israel? What is its monetary policy?
Schoenfeld: Israel has an enviable position of having to worry about its currency—the shekel—being too strong. If ever the central bank intervenes, it's often to keep the shekel weak. The Israeli market actually is correlated more with global markets than with all the small and medium-sized geopolitical risks in the region.
That said, there's always the risk of hostilities. If Hezbollah or Hamas decide to start a conflict, it can affect the domestic economy. It definitely affected the local economy last summer.
If Iran, as part of its efforts to establish hegemony in the region, decides to encourage Hezbollah to attack Israel, it absolutely can affect the market in the short term. Historically, these dips have been dips to buy on. That is just the way the economy has been set up.
There are other risks. There are risks of strikes. Even though Israel is very much a capitalist economy, it was started as a sort of utopian labor socialist country back in the '40s and '50s, so the labor unions have strong power.
But right now on the horizon, we don't see major economic risks. Obviously, if China's growth slows down, emerging market growth slows down as well, and these have become more and more important markets for Israel.
Contact Cinthia Murphy at [email protected].