For a country with less than nine million people, Israel punches above its weight. For example, the nation spends more on research and development—as a percentage of its economy—than any other on earth.
Israel’s booming tech sector has historically prospered from deep ties with the U.S. and European tech sectors. But now investments from Asia are pouring in as well, says Steven Schoenfeld, founder and chief investment officer at Blue Star Indexes, a firm that focuses on Israel's capital markets. He adds that a growing roster of companies in South Korea, Singapore, Hong Kong and China are now opening offices in Israel.
Those nations are drawn to Israel’s advanced levels of research in areas such as defense technology, agricultural efficiency, autonomous driving, surgical robotics, cyber software and clean energy.
Israel has long been home to research centers run by global tech multi-nationals. Intel Corp. for example, developed the microprocessor at its Israeli R&D center. Yet local firms also play a major role, many of which go on to become acquisition fodder.
This past summer, beverage maker SodaStream and chip equipment company OrboTech each received buyout offers in excess of $3 billion. And Intel paid $15.3 billion last year to acquire autonomous driving firm Mobileye.
After such deals close, many of Israel’s leading researchers pivot to newer younger start-ups, which are driving innovation these days. That’s why Israel calls itself the “start-up nation,” and Inc. magazine recently profiled the nation’s 70 most dynamic start-ups, many of which may eventually be taken public or get acquired.
Launched in November 2015, the BlueStar Israel Technology ETF (ITEQ) has become a poster child for the sector’s success. After a modest four percent return in 2016, the fund returned 28 percent last year, and is up another 14 percent in 2018.
What explains the strong performance? Schoenfeld says the nation has the most important tech eco-system outside of Silicon Valley.
“World-class universities, robust capital markets and global alliances all aid these start-ups as they become part of the eco-system,” he says.
The BlueStar Israel tech fund, which charges a 0.75 percent expense ratio and has more than $60 million in assets, is based on the underlying BlueStar Israel Global Technology Index that comprises 77 leading Israeli tech firms that have a market value of at least $75 million. A modified market-cap weighted index ensures that no one holding amounts to more than 7.5 percent of the index.