In recent years Israel’s investing landscape has changed dramatically. A much larger percentage of our pension funds and the local mutual fund industry, are invested in stocks abroad, with a large focus on the S&P index. As many have asked if the hype is justified, I thought it would be beneficial to share some background and figures, so that you can make an educated decision as to if and how it should be part of your investment portfolio. While its star performance over the last decade creates fertile ground for marketers looking to lure investors into their investment funds, let’s look a little more deeply into the index to see if it’s the right direction for you to consider.
Background
The Standard and Poor’s 500, or for short the S&P 500, was launched in 1957 by the credit rating agency Standard and Poor. It features 500 of the leading US publicly traded companies and is considered one of the best gauges of the US equities market. Since the S&P 500 is an index, investments can only be made via the many funds that use it as a benchmark and track its performance. In Israel, more and more investment houses have introduced funds to track its performance and have successfully marketed these products to Israeli society through our pension funds and general investment vehicles available in Israel. The past 3 years have seen 8% of Israeli public savings, more than 134 billion shekels, invested in the S&P 500. Prior to then, barely 1%, ie 6 billion shekels was invested there. The pension funds are the main contributors, with approximately 9% invested in S&P tracking funds. 8% of kranot hishtalmut and 7% of kupot gemel (including gemel le’hashka’ah) invested in the S&P 500.
Performance
The S&P 500, like other market indexes, has had significant periods of growth and dips. If we focus on its performance since the beginning of the 2000s, it suffered losses during the period of 2000-2002, when the dot-com bubble burst, then grew steadily from 2003-2007. The financial crisis of 2008 caused a sharp drop of approximately 37% that year. That fall however, was followed by a bull market that led to a cumulative rise of over 300% by 2019. Covid caused a brief drop in 2020, however, the market recovered quickly and in 2021 its returns were almost 29%. In 2022 concerns about inflation and interest rates caused another drop of 18%, but by 2023 it had recovered again, and has been showing consistent and strong increases into 2024. Over the last 20 years, it has averaged over 10.5% annual growth, while its historical annualized average return since inception in 1957 has been closer to 10.25%. Pretty impressive.
Advantages of investing in the S&P 500
- The S&P 500 which includes 500 large cap (market capitalized) companies across different sectors, offers broad exposure to the US market, while reducing the impact of any single sector.
- For many Israeli institutions (and their investors), the S&P 500 is seen as a way to offset local risks, such as market fluctuations linked to political and regional instability, and benefit from a very liquid and diversified index.
- While past performance does not promise future gains, its historical average annual returns of more than 10% make it an attractive option for potential long-term growth.
- Investing in S&P funds are generally cheap with low management funds and easy to locate, both in Israel, internationally (for those not wanting to invest directly in the USA market because of inheritance issues for non-US citizens) and directly in the USA.
Disadvantages of investing in the S&P 500
- Whereas it has generally performed well over the long term, it has not been immune to market downturns, like most stock indexes, and has seen drawdowns for multiple years (the largest being over 6 years starting in August 2000) and for more than 50% of its value since 2000.
- Although it includes 500 large cap companies, the index is heavily weighted towards the tech sector, which increases the risk should that sector underperform. Currently, the top 7 companies, which are referred to as the “Magnificent Seven” (which include Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla), account for nearly one third of the S&P 500’s total market capitalization and over 50% of the index’s gain this year. Higher concentration has historically led to lower returns when a reversion to the mean occurs, so their underperformance could negatively impact the entire index if the tides change.
- The S&P 500 generally reflects US economic conditions, so low inflation, steady growth, and favorable fiscal policies lead to its strong returns. However, rising interest rates and inflation, as seen in 2022, curb its growth, causing its performance to be closer to global averages.
- Most S&P funds are naturally denominated in US dollars, which gives you exposure to a currency that you are not using on a day-to-day basis, here in Israel. If the dollar were to weaken significantly, performance in NIS terms would suffer. Especially as you approach retirement, too much exposure to foreign currency in your portfolio could be problematic.
- Research has shown that between the years 1988 and 2017 (30 years) over 5, 10, 15, and 20 year periods of time, the Tel Aviv 125 index has outperformed the S&P 500 in shekel terms. With the Tel Aviv market underperforming the US markets over the last number of years, local valuations are much cheaper in the local market. Consider carefully whether running after past performance instead of future returns is justified in this case.
So what is the conclusion?
The S&P 500 has become an increasingly popular index for Israeli institutions, especially as domestic returns have been lower than the US benchmarks over the past number of years. An increasing number of Israeli institutions have been attracted by the relative security and growth potential in the US market, with increased exposure to dollar-denominated assets, causing them to move a percentage of their assets away from shekel denominated investments.
With the caveat, as always, that historical returns are not a guarantee of future performance, the S&P 500 is generally viewed as a good long-term, stable, investment index. However, its unbalanced weighting towards the tech sector also lays it open to disproportionate impact should that sector be adversely affected. Any investment in an index such as the S&P 500 needs to be assessed within the framework of your entire portfolio, to make sure that you are sufficiently diversified and not too exposed to foreign currencies in your portfolio. It’s also difficult to know exactly how much your Israeli ‘forced’ savings of pension plans, kupat gemel, keren hishtalmut etc are already invested in the S&P 500, unless you are invested directly in a 100% index tracking fund. Unquestionably most local investment houses have moved more money abroad into foreign stock exposure, so your exposure could be larger than you really believe. Never underestimate the possible impact of currency fluctuations on your portfolio, so consider an S&P fund that is hedged into Israeli NIS to avoid those fluctuations (although there is a cost for that hedge with higher management fees).
As with all elements of your investment portfolio, ensure that your portfolio is structured in keeping with your short-, medium- and long-term goals. Stock investing, even in a diversified index like the S&P, is most effective if your investment horizon is long term (eg. 5-10 years) at least and needs to be balanced with exposure to the local market and currency. If you don’t feel qualified, or don’t have the time to assess your portfolio, consult a professional for guidance.
With continued prayers for the safe return of all of our hostages, the safety of our soldiers in all their missions, and the security of our nation.