Investing in the frontier of the Middle East hasn’t exactly been a smooth ride. Nations like Turkey and Egypt have been subject to geopolitical strife and mass protests- curtailing their investment appeal. For example, the iShares MSCI Turkey ETF (NYSE:TUR) has been one of the worst funds in terms of performance over the last year or so. Yet, tucked among all of these issues is a little nation that is surging.  

That would be Israel.

Despite its small stature, the developed market is a tech and healthcare powerhouse. A powerhouse that is growing by leaps and bounds. For investors, the often ignored nation could be one of the brightest spots on the map.

The Silicon Valley Of The Middle East

Despite having only around 8 million residents and a land mass the size of New Jersey, Israel has truly emerged as a premier investment destination. The key has been its devotion to high-technology. Israel currently invests more than 5% of GDP back into Research & Development (R&D) initiatives. This on percentage basis is more than most countries. At the same time, private venture capital spending in Israel is also on the top of the world’s list. 

This so-called “Great Tech Miracle” has launched Israel into the forefront of several high technology industries including pharmaceuticals, aerospace, information technology and software. As such, Israel has become the launching place for several prominent multi-national firms, while tech industry stalwarts- like Mountain View, Calif.'s Google (Nasdaq:GOOG) and Santa Clara, Calif.'s Intel (Nasdaq:INTC)- have significant operations in the nation.

At the end of the day, Israel is truly the Silicon Valley of the Middle East.

That title and the innovation that comes with it has helped Israel achieve some pretty hefty economic milestones. Over the past 5 years, Israel has managed to post average GDP growth of 3.58%, while its 10 year average growth rate sits at 4.09%. This compares to just 0.61% and 1.67% for the United States, respectively. As the nation moved away from its early agriculture-based economy to more of a high tech one, its people have flourished. 

However, Israel has another reason to cheer- its growing oil & gas sector.

Once energy poor, Israel is expected to become a natural gas exporter by the end of the decade as some of the biggest gas finds in history begin to produce energy. By using new drilling technology, Israel has been able to tap the mammoth Leviathan and Tamar gas fields. That will supply Israel with enough gas for more than two decades. 

Playing Israel’s Potential

While there are some risks with investing in Israel- the fact that most of its neighbors are bent on its destruction is a big one- the potential is certainly great. And a great way to play that potential is through the iShares MSCI Israel ETF (NYSE:EIS).

EIS tracks 57 different Israeli firms including Petah Tikva, Israel-based Teva Pharmaceutical (Nasdaq:TEVA) and Haifa, Israel-based defense manufacturer Elbit Systems (Nasdaq:ESLT). Roughly 39% of EIS’s portfolio is either healthcare or technology related industries. That has helped the ETF rack-up a nearly 9% return so far this year. For those looking for an even broader option, the new Market Vectors Israel ETF (Nasdaq:ISRA) could be a great pick. ISRA expands its total holdings to 103 stocks. 

However, with more 100 Israeli companies trading on U.S. exchanges, adding individual rising stars is quite easy.

While Teva remains the nation’s go-to healthcare pick, the number of biotech firms located in Israel is staggering. Tel Aviv, Israel-based Compugen (Nasdaq:CGEN) has continued to plow heavily into new cancer therapies, while Jerusalem's Oramed Pharmaceuticals (Nasdaq:ORMP) is currently working on inhalable insulin. And like Teva, Haifa, Israel-based Taro Pharmaceutical (Nasdaq:TARO) has seen its star rise with regards to generic drugs. All three represent high growth picks in Israel’s biotech space. 

Israel is also a leader in cyber-security. As recent data breaches in the retail sector show, network security is going to be a key issue going forward. Check Point Software (Nasdaq:CHKP), based in Tel Aviv, basically invented the software used by most online shopping websites. The recent breaches have sent demand for CHKP’s products upwards. It also sent its shares to a new 13-year high. Leveraging big data, NICE Systems (Nasdaq:NICE) uses its software to detect cybercrimes before they happen.

The Bottom Line

While it’s often overlooked, Israel could be one of the best destinations for your portfolio dollar. Its high-tech economy is driving GDP and stock gains. For long term investors, the time to add the nation is now. The previous picks- along with Sdot Yam, Israel counter-top manufacturer Caesarstone (Nasdaq:CSTE)- make ideal selections to play the nation.


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