Israeli Retail Investors Urged to Diversify Beyond US Stocks with Global Indices

Israeli retail investors have primarily focused their equity investments on either the Tel Aviv Stock Exchange or the US market in recent years. This trend is reflected in common knowledge of indices like the S&P 500 and Nasdaq among young investors, who often follow these on social media and news outlets. Between 2023 and 2024, local capital flowed heavily into Wall Street amid concerns over Israel's judicial reforms, but has recently been returning to the Tel Aviv market following strong returns there.

Nadav Sachayek, head of research and business development at Meitav Mutual Funds, notes that about 80% of new passive investment money annually goes into the S&P 500, though this may drop to 60% this year due to expected weaker performance. The US market has outperformed global peers for decades, driven largely by tech stocks, making it the "new gold standard" for many investors. However, institutional investors typically benchmark against global equity indices to achieve broader diversification beyond the US.

Sachayek explains that the S&P 500 only includes US-based companies with four consecutive quarters of positive earnings, excluding major global players like Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, SK Hynix, and ASML. Dror Berger, investment manager at Altshuler Shaham, warns that retail investors often chase past trends, risking buying high and selling low. He and others recommend exposure to global indices such as the MSCI World, which includes nearly 1,300 stocks from 23 developed countries with a 74% US weighting, or the MSCI ACWI, which adds emerging markets and lowers US exposure to 64%.

Berger highlights that the MSCI indices offer slightly cheaper valuations (forward P/E of 18.5 versus 19.5 for the S&P 500) and provide currency diversification, which is important given the recent 8% decline of the US dollar against a basket of currencies. Sector allocations also differ, with the global index having lower tech exposure (49% versus 57% in the S&P 500) and higher weights in financials and industrials.

While the US accounts for about 30% of global GDP, there is no guarantee it will maintain market dominance indefinitely. Investing in global indices allows market forces to adjust allocations naturally and acts as insurance against shifts in economic leadership. Sachayek points out that about 40% of S&P 500 companies' revenues come from outside the US, providing some international cash flow diversification. Yet, many large global companies outside the US, such as Louis Vuitton, ASML, Novo Nordisk, and TSMC, have monopolistic traits and often trade at more attractive valuations.

Berger notes current skepticism around US tech giants, citing recent earnings reports where markets focused on negative aspects like capital expenditures and cash flow despite strong revenue growth, as seen with Google. This environment may increase the appeal of global diversification for Israeli investors seeking to balance risk and return.