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The battle of Passive Investing in Israel

How did index tracking funds became a dominant force in the Israeli ETP industry and a real alternative to the local ETNs?

Past year was brutal for the financial industry in Israel with net outflows of ILS 50 billion in local mutual funds and ETNs, even though the domestic capital market had a decent performance.

Despite the disappointment with last year’s results, one product segment had a great year in 2015 – index tracking funds. While the ETNs, which await to the Israeli securities authority’s verdict regarding their future (Amendment 21), saw redemptions of almost of ILS 15 billion last year, the local index tracking funds enjoyed inflows of ILS 4.3 billion.

For these products, it was a continuation of the positive trend which already lasts for five years in a row. Since 2011 tracking fund assets jumped from ILS 3 billion to a peak of nearly ILS 30 billion at the end of 2015 – a phenomenal growth of almost 900%!

During the same period Israeli ETNs had a modest growth of less than 2 times in their total net assets (ILS 103.5 billion), which largely stemmed from market appreciation rather than inflows.

In fact, in the past two years index tracking funds have become a dominant force in the Israeli ETP industry and now they are considered a real alternative to the local ETNs on the battle of passive investing in Israel.

Almost 1,000 index products

During the course of 2015, 65 tracking funds have been launched in Israel versus a growth of 56 products in the ETN industry. Currently, the Israeli capital market offers 637 ETNs alongside 230 tracking funds compared to 391 and 69 accordingly five years ago – a total growth of 88%. In this current pace, next year we will probably witness the launch the 1,000 Israeli index product.

The fact is the domestic ETP’s asset class distribution is in contrast to the traditional asset allocation of typical Israeli investors which about 90% of their portfolio allocated to fixed income and the rest 10% to equites. At the end of December, the Israeli capital market offered 456 ETPs on equity indices and 292 products tracking pure fixed income indices.

Controlled by 2 providers

Passive investing in Israel is controlled by two major index providers: Tel-Aviv Stock Exchange (“TASE”) and S&P Dow Jones Indices (“SPDJI”).

TASE has 465 ETPs using its indices, 343 of them are tracking a particular index and the rest are used as part of an index basket product. At the end of December, TASE’s indices gathered an enormous amount of ETPs assets: ILS 69 billion, more than half on the industry’s assets. TA-100 had assets of ILS 13.7 billion and was used by 74 different products. On the fixed income side, Tel-Bond 20 led with net assets of ILS 6.5 billion.

SPDJI has 183 ETPs using its indices (third of them are index basket products), with a total assets of ILS 20.7 billion. Naturally, S&P 500 leads by the number of products using the index (61) and also by the total net assets invested in the ETPs linked to the index (ILS 11.6 billion).

14 Israeli ETP Managers

The evolution of the Israeli ETN industry over the recent years has led to a decreasing number of players and today the industry is composed of 4 managers only. In contrast, the number of tracking fund managers has grown substantially in the course of time: from four on the first year these products became available (2008) to a record of ten managers today.

These 14 Israeli ETP managers are controlled by ten investment houses, four of them are offering both ETNs and index tracking funds.

At the end of December, Meitav DS Investment House, which controls the largest ETN issuer in Israel – “Tachlit Trackers”, had the most AUM (ILS 33.6 billion) on its ETPs among Israeli financial institutions. Excellence Investment House was ranked second with assets of 32.8 billion on its index linked products, spread among 215 different products. Next up by ETP’s asset size are Psagot and Harel, which most of their index product assets held in ETNs.

Except of those four investment houses offering two types of index products, there are additional six Israeli institutions that offer only tracking funds. This segment is controlled by Migdal and its “MTF” brand, which saw an enormous increase of AUM in the last five years – from 1.2 billion to a record of ILS 13 billion at the end of 2015. The second largest index tracking funds manager is IBI, which saw the largest net inflows in the ETP industry last year, allowed the firm to reach more than ILS 5 billion index product assets during 2015. The rest four ETP managers in Israel: Menora, Altshuler, Tamir Fishman and Ayalon have entered this industry in the past two years and still haven’t accumulated a significant mass of index product assets.

Looking ahead, the tracking funds in Israel are expected to benefit in the near future from the momentum they have in recent years. The current regulatory situation that puts the local ETNs on hold contributes to the increasing supply of tracking funds, including their expansion into equity and fixed income indices outside Israel. In addition, nowadays more and more investment managers and financial advisors are investing directly in index products rather than through the ETN issuer’s deals rooms, a trend that strengthens the tracking funds at the expense of the local ETNs.

Published on January 24, 2016. The publication presented above does not constitute a solicitation, offer, opinion or recommendation by Index Research to buy or sell securities. Nothing contained on the publication above should be construed as investment, tax, accounting or legal advice.