Although geopolitical instability due to a surge in Palestinian attacks and conflicts in neighboring countries including Iran, Lebanon, and Syria is rocking Israel, this small and open economy holds undeniable promise. Per International Monetary Fund’s (“IMF”) latest World Economic Outlook, aggregate real GDP in Israel has grown about 100% in 1996–2014 while economic superpowers like the U.S. and the EU have expanded 50% and 24%, respectively, over the same time frame.

Moreover, IMF data revealed that Israel is among the three developed economies (the others being Australia and South Korea) that continued to expand since the global economic crisis. Much of the sustained growth can be attributed to its market-friendly approach, well-organized labor market, high quality of education and a lower tax burden (read: Israel ETFs in Focus on Surprise Rate Cut).

Further, this Middle Eastern country has continued to remain economically competitive based on its robust research and development (R&D) activities, which comprise more than 5% of its GDP, and attracted a large amount of foreign direct investment (“FDI”). This has caused the nation to become a global hub for start-up businesses and venture capital.
 
Israel has been considered as the top ranking country for start-up businesses per capita, which is double that of the U.S. It is also the second most attractive country (after the U.S.) for venture capital financing globally, according to a survey by Deloitte. 
 
Most of the R&D activities in Israel are related to the high-tech sector. Global technology behemoths such as Alphabet (GOOG), Intel (INTC - Analyst Report) and Microsoft (MSFT - Analyst Report) operate many R&D centers in the country. It is for these reasons Israel’s booming technology sector has earned nicknames such as ‘Startup Nation’ and ‘Silicon Wadi’.

Israel’s economy is expected to grow 2.5% in 2015, per Central Bureau of Statistics. This is lower than economists’ consensus of 3.3% growth owing to geopolitical tensions that may hamper consumer spending in the country, one of the key elements for its growth.
 
However, growth is expected to cross the 3% mark in 2016 and beyond driven by huge inflow of FDI and other factors such as tax cuts, per Fitch Ratings. This has caused the rating agency to affirm its long-term foreign and local currency ratings for the country at A and A-plus, respectively, with a Stable outlook.
 
Another rating agency, Moody’s Analytics, has also kept its government bond rating for the country unchanged at A1 due to its lower debt-to-GDP ratio compared to the pre-financial crisis era and below-target budget deficit for 2015.
 
Given Israel’s growth potential, it would be worthwhile to look at two ETFs focused on this country and examine their key differences (see all Africa-Middle East Equity ETFs here).
 
iShares MSCI Israel Capped (EIS - ETF report)

This ETF tracks the MSCI Israel Capped Investable Market Index, measuring the performance of 51 stocks traded primarily on the Tel Aviv Stock Exchange. It gives highest preference to the financial sector (38.1%), followed by healthcare and information technology with 22.55% and 9.04% allocations, respectively. EIS gives double-digit exposure only to Israeli drug giant Teva Pharmaceutical (TEVA).

The fund has attracted around $147 million in its asset base (as of November 13, 2015) and trades in an average volume of roughly 89,000 shares per day. It charges 62 bps in investor fees per year and has returned 5.9% in the year-to-date timeframe. It has a dividend yield of 2.48% and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Israel ETFs Surge on Teva Megamerger Deal).
 
BlueStar TA-BIGITech Israel Tech ETF (ITEQ - ETF report)
 
This is a new kid on the Israel ETF block, launched by ITEQ ETF Partners – an affiliate of BlueStar Global Investors – only a few days back. The fund tracks the TASE-BlueStar Israel Global Technology Index focusing on 65 companies operating in the country’s technology sector. These companies are headquartered in Israel and some of them are also listed on international exchanges such as Nasdaq, NYSE, London and Singapore, apart from Tel Aviv.
 
The companies are primarily engaged in cybersecurity, big data, computing and networking equipment, autonomous driver assistance and safety, clean energy, biotechnology and medical devices businesses. The fund is heavily concentrated in its top three holdings including Check Point Software, Amdocs and Mobileye, accounting for 32.7% of the assets. It charges 75 bps in annual fees.
 
Despite being there for a long time (since 2008), EIS has not been able to attract investors’ funds considerably as evident from its negligible AUM and light volume, which can be largely blamed on rising geopolitical tensions in the country. Although the fund is a good play for the broader Israel economy due to its exposure to various sectors, we expect the niche technology sector ETF, ITEQ, to be a good bet for investors seeking to exploit the high-tech sector growth and tap the benefit from ever-increasing R&D activities in the country. This might undermine the fact that ITEQ is costlier than EIS (read: Inside The Surging Israel ETFs).