Executive Summary
Investors in most countries exhibit a home bias, but it is particularly acute in Israel. On average, Israeli investors allocate a higher amount to domestic equities than their developed market peers in the U.K, Europe and Canada, and thus may not be fully accessing the potential benefits of global diversification. This paper provides ample opportunities to consider the historical benefits of international diversification, including with U.S. equity indices.
In this paper, we:
- Compare and contrast U.S. equity indices (S&P 500®, S&P MidCap 400® and S&P SmallCap 600®) with Israeli equity indices (TA-35 Index and TA-125 Index);
- Show that any hypothetical combination of U.S. equity indices with Israeli equity indices would have outperformed the Israeli market in isolation since December 1994;
- Explore diversification via sector exposures and geographic revenues; and
- Explain the primary reason for the growth of passive investing: most active managers have underperformed their benchmarks over most time periods.
Long-Term Performance of U.S. and Israeli Equities
In this paper, we are using the prevalent local equity benchmarks for Israel, which are produced by the Tel Aviv Stock Exchange (TASE). For a large-cap comparison to the S&P 500, we will use the TA-35 Index, which is Israel’s flagship index and tracks the 35 largest companies listed on the TASE. In instances where we are looking at the Israeli equity market more broadly, the TA-125 Index will be used.
Exhibit 1a and Exhibit 1b highlight that the S&P 500 significantly outperformed the Israeli market, as represented either by the blue-chip TA-35 Index or the broad market TA-125 Index, by 2% annualized since Dec. 31, 1994. The outperformance of the S&P MidCap 400 and S&P SmallCap 600 was even more impressive, with the two beating the U.S. large-cap benchmark by 2% and 1%, respectively, over the last 28 years. The S&P 500, S&P 400® and S&P 600® all outperformed the Israel indices on a risk-adjusted basis as well.
