The truth about the Israeli stock market

Last Updated on January 21, 2024

The information contained in this article is for general educational purposes and should never be viewed as specific investment, tax, or legal advice.

I often hear from Olim and potential Olim who are very keen on quickly moving their investments out of US and into the “Israeli markets”. There is a strong and admirable desire amongst many Olim to be a part of the miracle that is the “start-up nation”. Additionally, many understandably want their investments to be more aligned with the currency and economy that they will one day be retiring in. Some are also fearful of the economic future of the United States.

So, here is the big question. Should I liquidate some or all of my existing investments and move them to Israel? If I am just starting my investing journey while living in Israel, should I be investing via the Tel Aviv Stock Exchange (TASE) or through the US/international markets?

The goal of most everyday long-term investors is to keep costs low while building a diversified portfolio that has a high likelihood of strong positive returns over a decade or more. In that context, this article will help you take a peek under the hood to try and better understand factors to consider when comparing the Israeli stock market to other potential or existing investments.

Breaking down the Israeli market

Many people looking to invest in Israel are looking to capture the returns of the Israeli economy, keep their assets in shekels, and own a piece of the world famous Israeli high-tech sector. But how much of this are you really getting when you buy stocks on the Tel Aviv stock exchange (TASE)? Let’s unpack this piece by piece:

Check the Nasdaq first

One of the common myths about the Israeli markets is that if you want to buy Israeli company stocks you need to go to the Tel Aviv Stock exchange. In fact, the overwhelming majority of Israeli companies are listed overseas on the Nasdaq and some on the NYSE (New York Stock Exchange). Close to 40% of stocks listed in Tel Aviv’s most popular indexes, the TA-35 and the TA-125, are actually dually listed companies. That’s right… the markets that you might be considering pulling your money out of is actually where the most of the “start-up nation” already is.

In a staggering stat for a country of its size, Israel ranks 3rd for the most companies listed on the Nasdaq trailing only the two global superpowers, China and the United States. In 2021, 85 Israeli companies on Wall Street combined to reach the historic $300 billion market cap landmark. If you wanted to take your successful Israel company public, would you list in Israel or try attract far more investment capital by using the largest market in the world?

In addition to the Israeli companies trading in the US, global multinational corporations have a massive stake in in Israel’s economy. Israel is home to hundreds of active multinational corporations, employing thousands of Israeli workers. More than 80 out of the 500 largest companies in the world have set up shop in Israel with over 400 R&D centers in Israel owned by multinational companies. Some of the largest acquisition of Israeli tech startups have come from these very same global powerhouses. Think companies like Intel, IBM, Google, Facebook Microsoft. The companies that you already own in any S&P 500 index fund also own and continue to acquire more Israeli technology.

The last decade plus has seen incredible returns for technology heavy markets and Israel’s economy continues to be dominated by technology and high-tech exports. But, you haven’t seen those same market returns on the Tel Aviv stock exchange. The TASE (blue line below) is really just a very small piece of the picture relative to the Nasdaq Composite Index (orange line below) or the global markets:

So what’s in the TASE?

As we have seen, the reality is that the Israeli stock exchange represents a relatively small portion of Israeli equity and doesn’t actually capture the growth of some of the main drivers of the Israeli economy. There are also many foreign companies listed on the TASE that are not Israeli companies at all but just made it on due to their successful acquisition of an Israeli company. A recent breakdown of the sector makeup of the TASE looks like this:

In reality, if you removed many of the dually listed and foreign companies from the sector map above, the result would show an extremely heavy weighting towards the finance sector. Banks aren’t what most investors are looking for when they talk about owning their fair share of Israeli high-tech.

Calling the TASE tiny is pretty generous

The Israeli stock market is really really small. Take a look at the widely quoted global equity MSCI ACWI Investable Market Index which covers close to 99% of the global investable equity markets. Israel makes up around 0.25% of the market cap of this index. For comparison, the US markets represents about 57-60% of the Index.

Putting a significant amount of your investments in the Israeli markets is likely a decision that significantly increases your risk without the comparable rise in expected return. Arguably, even buying a broad index fund that holds many Israeli stocks such as one that tracks the TA-125 would not be a very diversified investment on its own. Residents of small countries looking to build a prudent financial plan generally put a greater emphasis on holding a globally diversified portfolio rather than perfectly matching the currencies of their assets and liabilities.

PFICs PFICs PFICs

Many regular readers of this blog probably already know that Americans in Israel have unique tax pitfalls to navigate when choosing what to invest in. Because of the PFIC issue, buying mutuals funds and ETFs in Israel can subject an American to high taxes and costly reporting requirements on that investment. Therefore, moving your funds over to invest in Israel can make your life harder, not easier.

The US markets offer you easy access to the lowest-cost index funds in the world where you can easily avoid these US tax traps. Purchasing individual stocks and bonds on the TASE (rather then funds) can help you avoid the PFIC problem, but doing so can be a very tedious process that many investors will not find appealing.

If you are not-American, you can get access to mutual funds and ETFs that trade on the TASE in shekels but actually hold stocks from all over the world. This can give your the ability to build a globally diversified portfolio while still taking advantage of the convenience and potential tax advantages of investing via the TASE. In other words, while you will be buying via the TASE, non-Americans can take advantage ETFs that trade in shekels so you don’t have to limit your portfolio to the tiny Israeli market.

Why not just use an ETF?

For those still looking to get exposure to “Israeli” stocks, you can do so fairly easily via US based exchange traded funds. This avoids the PFIC issue while often resulting in similar exposure to an index tracking the TASE. For example, compare the holdings below from the iShares MSCI Israel ETF (which you can easily buy in your US brokerage account) to and index fund tracking the TASE-125 index:

In addition to the broader market Ishares EIS ETF and VanEck ISRA ETF, there are additional ETFs that trade in the US that specifically focus on Israeli high-tech such as ITEQ and IZRL (these are examples and not recommendations). Keep in mind that even allocating 1% of your investment portfolio to an ETF like EIS is overweighting Israel in your portfolio relative to the global benchmark. Make sure you understand the potential costs and risks of these highly concentrated funds before allocating any significant percentage of your portfolio to these ETFs.

What about an ETF that tracks the Israeli bond market? Unfortunately there aren’t any US domiciled funds that hold Israeli shekel bonds, likely due to very low demand for such a product. See our full article “How American olim should invest in bonds” for more on this subject.

What about exchange rate risk?

If I use dollars to purchase a US ETF that holds Israeli stocks instead of using shekels to buy a similar Israeli ETF, doesn’t that just increase my exposure to exchange rate risk? No, this is another common misconception. All things equal, an Israeli ETF and US ETF with identical holdings would have identical currency exposure and returns, regardless of the currency the fund was purchased in and regardless of the currency displayed in your account. In addition, most non-financial Israeli public companies actually derive the majority of their earnings¹ in currencies other than the shekel.

This is both a confusing a challenging issue for many Olim – see our full article “How to manage your exchange rate risk” for a deeper understanding of this topic.

Best practices

As we have discussed in this article, the Israeli stock market and the “start-up nation” are two entirely different things. Choosing to move money to the TASE shouldn’t be based on a simplistic argument like “If you live in Israel, your money should be in Israel”. Make sure you have considered this carefully before letting any of your investments “make aliyah” with you.

Here are some tips to review before making any decisions:

Understand the tax consequences first

Before moving any investments out of the US/International markets make sure you understand the tax consequences. In many cases bringing funds to Israel by prematurely realizing taxable gains or pulling money out of retirement accounts early is a bad financial decision. If you feel pressured by any professional in Israel to quickly bring your money here for them to manage, get a second opinion before proceeding.

Examine how much you already have invested in Israel

Consider the existing weight of any investments you already own here before deciding on additional Israeli based investments. Some places that may be relevant to include in your analysis:

• Pension & Keren Hishtalmut holdings
• Real estate
• Stock options from the Israeli company you work for

Consider keeping the bulk of your other investments in the US market

Many American Olim will conclude that the best place to build and maintain a low-cost globally diversified investment portfolio is via the US markets. For those looking for increased exposure to the Israel economy, Israeli companies listed on US exchanges as well as US domiciled ETFs can provide for easy access without having to transfer money to Israel.

For additional support, be sure to check out our guided investment program.