Welcome The New Silicon Valley (EIS)
Most people will tell you that America is still the world's best technology innovator.
Unfortunately, that's no longer the case because the world is in the midst of significant change in technology innovation.
The U.S. is no longer the world's high-tech innovation hub. Rather, emerging markets are now the dominate force as the technological innovators of the world.
According to the Boston Consulting Group, a global management consulting firm, the official power shift came in 2009 when Chinese telecom solutions provider Huawei led the world in patent applications. Coming in second and third were India and China.
For the first time ever, the U.S. was absent from the top ten list.
It is no surprise that the shift in power was primarily born from cheap labor costs and commodities production. For instance, due to outsourcing from developed nations India now provides the globe with more tech-based services employees than any other nation in the world.
However, not all emerging markets are created equal, especially when it comes to the high-technology industry.
Emerging markets typically begin providing low value services, and then move up the value chain to produce more high value services and goods. Several emerging economies have moved past the low-cost production model and into the high-tech modernism model that dominates developed nations. The most frequently discussed these days are in Asia.
For example, the country of Taiwan is emerging as a smartphone leader and South Korean producers continue to enjoy demand for their energy efficient LCD, LED and OLED monitors. Both nations are on the Organization for Economic Cooperation and Development's (OECD) watchlist for possible promotion to "developed" status.
But today I'm not talking about Asia - I'd rather talk about a nation that's already made the leap from developing, to developed economy. It's a country you might not think about as a technology powerhouse - but that's what makes it such an exciting market to invest in.
I'm talking about Israel - a tiny nation that was recently taken off the OECD's watch-list and officially added as a developed nation.
Often referred to as the "Middle Eastern Jewel" or the "New Silicon Valley", Israel now stands above all other nations when it comes to the high-tech industry.
I can easily state with conviction that technology has been the growth engine for the country.
Despite having only 7.4 million citizens and a land mass the size of Massachusetts, Israel has emerged as the premier investment destination for the tech savvy. A thriving venture capital market, generous allocations of government resources and an economic environment that promotes entrepreneurial spirit all allowed Israel's high-tech industry to move from its agricultural origins to a prosperous tech-centric economy.
Israel also boasts a highly educated workforce with more engineers per capita than any other nation in the world.
Centered around the port city of Haifa, the nation has 3,000 start-up companies specializing in the high-tech industry. These companies operate in sectors like semiconductors, pharmaceuticals, aerospace, information technology and software - the list goes on.
One word of caution for investors - while the technology industry in Israel has investment merit, it is important to acknowledge the inherent risks in the Jewish state. The political tensions are well-documented in the Gaza Strip. There is no reason to suspect that the Jewish-Islamic pressures will cease. Ongoing conflicts in the Gaza will likely continue, just as they have since the nation began.
However, in many ways the spawning grounds for the booming high-tech industry in Israel have come out of the ongoing violence that plagues the nation. Tech companies have capitalized on the Jewish state's need for military innovation. Israel's military has served as the base for entrepreneurial and technological innovation. This is evident when you look at Israel's R&D spending. The Jewish state ranks number one in the world in R&D expenditures at 4.9 percent of GDP, two percent above the United States.
Despite the ongoing risks, stocks in Israel's under-the-radar tech sector offer an extremely profitable nvestment opportunity. The easiest way to add exposure to Israel and its burgeoning high-tech industry is through the iShares MSCI Israel Index (NYSE: EIS). The ETF follows 83 different Israeli companies with a 40 percent exposure to the high-tech sector. It has a nominal expense ratio of 0.61 percent.
The EIS is a good option for those seeking broad base exposure to Israel's technology driven economy. But my preference is to invest in the best of the best - individual small and micro-cap stocks that have significant potential for huge outperformance.
The good news is that buying individual Israeli small caps is just as easy as buying the EIS - 61 Israel based public companies trade on the Nasdaq stock exchange, 56 of which are considered small caps. For a list of these companies, click here.
The bad news is it takes time to sift through all of these to find the best. But I encourage you to set aside some time to do that, the potential rewards are well worth it.
For instance, last August Small Cap Investor PRO analyst Tyler Laundon turned subscribers onto a small tech company that was flying well under the radar. He crunched the numbers, and projected that the few analysts who were covering the stock didn't have the right projections for revenues and profits - they were too low.
We alerted subscribers to the opportunity, and right now we're sitting on a gain of 220 percent with this stock, in 8 months. Subscribers have a gain of 30 percent on a second Israeli small cap tech stock, and we just added a third Israeli company to our portfolio.
I expect the mainstream media will eventually catch up with what's going on in Israel, but until then, we're happily ahead of the crowd.
Further Reading for Tech Investors: If you'd like help sifting through Israeli small cap stocks, visit our website to learn more about why small cap stocks are such strong performers. Once you take a trial subscription, you'll be able to access all of our research on Israeli technology companies and receive guidance on when is the best time to buy shares.
