BlueStar Indexes, the US based financial firm which specialises in developing and commercialising indexes and exchange traded funds (ETFs) with a focus on the Israeli capital markets, has been particularly active in recent weeks.

On September 13, BlueStar announced the launch of the Israel Exposure Tilt Strategy, the first-ever investment strategy designed to overweight public companies that have a strong connection to the Israeli economy and its innovation ecosystem, while at the beginning of September two of the company's smart beta indexes - BlueStar Israel Global Strategic Value Index (BIGI-SV) and BlueStar Israel Global Strategic Dividend Index (BIGI-SD) - went live.

Smart beta is not a "be all, end all" solution

SRP caught up with Steven Schoenfeld (pictured), founder and chief investment officer, BlueStar, who gave us the lowdown about the new indexes, the performance of mutual funds, exchange-traded notes (ETNs) and exchange-traded funds (ETFs) linked to BlueStar indexes, and the shift in Israel, which is on the verge of changing, from a market dominated by ETNs, to an ETF market.

The new smart beta indexes were specifically build for a client in Israel that plans to launch index-tracking products on them, according to Schoenfeld. "We think these indexes will also be very interesting for structured products, and it marks our formal entry into the smart beta space," said Schoenfeld. "We took the concepts of value and dividend tilting and we applied the best practices of what we consider smart beta construction. We tilt toward value, we tilt toward dividend, but we also factor in market capitalization, concentration and diversification."

Smart beta is not a "be all, end all" solution, according to Schoenfeld. "It is not a panacea, nor will it always outperform, but the historical performance of these two indexes is quite interesting, very distinct, and both are broad total market coverage indexes for Israel so we think they are going to be very well received."

One of BlueStar's flagship indexes, the TA-BIGITech, a benchmark for Israeli high-tech companies trading globally, is tracked by two products in Israel, one mutual fund and one ETN, both from KSM, as well as the ITEQ ETF which tracks the index in the US, and, according to Schoenfeld, both the US-listed ETF and the Israeli index products have gathered significant assets in 2017 to-date. "ITEQ ETF, whose listing has recently shifted to NYSE (from Nasdaq), has grown from about $5.5m at the end of last year, to its current AUM of more than $27 million. Trading volume is strong and growing and it is getting approved on more major brokerage platforms and there is a lot more interest in the fund," said Schoenfeld. "Simlarly, the Israeli-registered products' AUM has soared - from less than $5 million at end-2016 to more than $35 million in early-October."

BlueStar has signed a co-branding initiative with Jefferies, the global investment bank, who are distributing the company's research to their clients, according to Schoenfeld. "A lot of this research is around Israeli tech sectors and technology companies. We think the visibility for our TA-BIGITech index and for the ITEQ ETF is going to keep growing," he said. "Our Israeli licensee has seen a lot of demand for their TA-BIGITech products. We are developing a few new twists on the index for them and they hope to launch additional funds. They are incredibly optimistic about this product, also from a performance perspective." According to Schoenfeld, the TA 125 is up just a few percentage points for the year, "somewhere around zero", while the BlueStar tech index is up "more than 25%" in 2017 to-date.

Schoenfeld admits he would be very interested in launching a TA-BIGITech tracking product in Europe. "We have talked to some potential partners in the UK and in Germany and we are looking for prospective partners to introduce Israeli tech, and thus be pioneers to bring Israel tech index products to Europe," said Schoenfeld. "Israel's ties to Europe are very strong. It is not just in sport and Eurovision, there is a lot of economic ties, research ties, and we think the product could have a lot of potential."

Apart from the products linked to the TA-BIGITech index, BlueStar now has its first product in Israel tracking the company's broader index which is called BIGI (BlueStar Israel Global Index). "Think of that as broad Israel," said Schoenfeld. "We have a US listed ETF, the ticker is ISRA (VanEck Israel ETF), traded on the New York Stock Exchange, it is part of the VanEck Vectors family and it has assets of $43m, and then in Israel we have three products that track BIGI," he said. "Psagot, which is Israel's largest investment house, has two ETNs on the index, one is hedged against the dollar and one is unhedged, and IBI, an Israeli brokerage and investment firm, they have an indexed mutual fund on BIGI."

For a number of years now there has been talk in Israel about a change in the securities law by the Israel Securities Authority (ISA) which would enable ETFs to be listed and traded on the Tel Aviv Stock Exchange (TASE), and, according to Schoenfeld, the shift is finally happening. "The legislation has passed all the stages in the Israeli parliament," he said. "More importantly, the firms, after resisting for many years because they wanted to preserve their existing structure, have finally have accepted the new structure and they are now deeply, intensely preparing for it. Most industry participants consider the current April date for the transition to be a firm one."

BlueStar currently has five products with three firms and are very close to having several additional products with two additional firms, according to Schoenfeld. "So by November we will have products licensed with five of the six major firms in this space and every one of them is intensely preparing for the changes.

"Right now in Israel you have index mutual funds which are similar to what we have in the US and Europe, and you have huge number of exchange-traded notes," said Schoenfeld. "The ETNs are effectively going to disappear sometime in the second quarter of next year. The entire industry is going to be shifting simultaneously to a model where the legal structure is that of an index mutual fund, and ETF will be very similar. The two firms that have index mutual funds but don't have ETFs will likely enter, and the four firms that dominate in ETNs are becoming ETF firms," said Schoenfeld.

"This is going to happen, and it is going to be a big revolution in Israel," said Schoenfeld. "We think it is going to dramatically increase the size of the market and improve the market. It is going to change the competitive dynamics. We know that there is going to be interest in new indexes, even those which don't have licenses yet, because the companies are going to compete, based more on innovation and product differentiation then on brute market force," he said.

Schoenfeld thinks this is good news for many reasons. "It is going to free up capital. A lot of these firms had a lot of capital tied up in the back stock vehicles for the ETNs and we think they are going to invest that in innovation," he said. "Some of these firms are talking about expanding to Europe, or even the US, and I would predict that by the end of this decade you will have at least one, maybe two Israeli ETF index shops that is pursuing some kind of global strategy."

Click the link to view the latest fact sheet for the BIGI-SV and BIGI-SD indexes.