With few natural resources, hostile neighbors in every direction, limited water supplies and a heavy dependency on imports for many staples such as cars, trucks and industrial equipment, you’d suspect the Israeli economy would struggle to stay afloat. Yet this economy has managed to neatly side skirt the recent global economic woes and expanded at a nearly 5 percent pace in both 2010 and 2011. Though growth slipped to 3 percent in 2012 and is likely to remain at that level this year, the Organization for Economic Cooperation & Development (OECD) predicts growth will move back up to 4 percent by next year.

What’s Israel’s secret? It’s not an abundance of milk and honey, as the Bible suggests. Instead, it’s a culture that fosters entrepreneurialism, and a strong emphasis on technology research.  “A lot of tech firms got their start in Israel, even though they now derive the bulk of their sales elsewhere,” says Steven Schoenfeld, founder of BlueStar Global Investors, a research firm focused on Israeli equities.

Schoenfeld is also the chief investment officer for BlueStar Indexes, the index partner for the Market Vectors Israel ETF (ISRA), which formally launched yesterday on the NYSE Arca exchange. The fund seeks to replicate the BlueStar Israel Global Index, a rules-based index that tracks publicly traded companies considered to be Israeli and Israeli-linked companies.

The Market Vectors fund joins the iShares MSCI Israel Capped Investable Market Index Fund (EIS) as one of two Israel-focused equity ETFs on the market. EIS has been plodding along since its March inception date in March 2008 with an annualized return of just barely above break-even.

Based on historical data, the ISRA fund’s underlying index has had annualized gains of 5.3 percent during the past five years.

The relative weakness in the iShares fund may be due to the fund’s construction––it weights its holdings by market cap and has a 24 percent maximum on any given holding. As such, its 24 percent weighting in drug maker Teva Pharmaceuticals has bogged down the fund because the stock trades lower than it did five years ago.

The Market Vectors Israel ETF, in contrast, aims to have greater diversification and limits any holding to 12.5 percent of the portfolio. The top 10 holdings account for less than 50 percent of the portfolio, compared to 68% for the iShares fund.

And while the iShares fund seeks to focus on companies that are domiciled in Israel, the Market Vectors fund will hold stocks that meet one of four criteria: A listing on the Tel Aviv stock exchange, corporate headquarters in Israel, 50% or more of its revenue base derived in Israel, or is determined to be a local company by Israeli tax authorities.

Another distinction: The iShares fund tends to more squarely focus on Israel’s biggest stocks, while the Market Vector fund also has exposure to mid- and small-cap stocks. The smallest stock in the fund has a market value of around $130 million, and the average holding is worth $1.9 billion.

In terms of costs, the iShares fund sports a 0.60 percent expense ratio versus the 0.73 percent expense ratio for the Market Vectors fund. (Though Market Vectors is rebating 0.14 percent of that fee to investors until May 2014, meaning the current net expense ratio is 0.59 percent).

One Part Developed, One Part Emerging

Israel has more companies listed on the Nasdaq (86) than any country outside the United States, except for China. And China’s population is 172 times larger.

Though there’s a strong connection between Israel and technology in the minds of many U.S. investors, the iShares fund actually has its heaviest weighting in financial services, which accounts for 30 percent of the portfolio. The Market Vectors Israel fund is led by information technology stocks with a 30 percent weighting. Both funds count on healthcare stocks as the second-biggest sector concentration.

“There’s no question that technology is under-represented in other Israel-focused ETFs,” says Schoenfeld.

As investors wrestle with the current meltdown in emerging markets, is this a bad time to invest in a country with just 7.8 million people? Schoenfeld notes that when Israel joined the OECD in 2010, it agreed to a wide range of “best practices” in terms of regulation, transparency and corruption. Pair that with the country’s impressive economic growth rates, and “Israel offers the best of both the developed and the emerging economies,” Schoenfeld says.

Investors are rightly concerned about Israel’s geo-political risk, and the possibility of an Israeli economic slump in the face of fresh Middle East tensions? But almost all major Israeli companies derive the majority of their revenues from abroad, and are fairly well insulated against domestic demand concerns. Only the Israeli banking sector derives the bulk of its revenue domestically.

Investing in Israel would seem to be quite risky in light of the headwinds the country continually faces. Yet those constant pressures have led to a battle-hardened attitude that has fostered a dynamic business culture and impressive investment returns. Market Vectors’ new Israel-focused ETF looks poised for success as the country continues to deliver robust economic growth rates.