IBI’s Decision Triggers Nearly 4 Billion Shekel Outflow From Israel’s Largest Bank ETF

Since the start of the year, the Tel Aviv Banks Index, which tracks eight bank stocks on the Tel Aviv Stock Exchange, has posted a negative return of 4.2%, underperforming the broader TA-125 Index by about 16%. However, the significant outflow of nearly 4 billion shekels from IBI’s largest Israeli bank ETF was not due to the index’s poor performance but rather a management decision by IBI Investment House. The "IBI Bank Index ETF," which had assets of approximately 16 billion shekels in April, saw these outflows after IBI decided to stop subsidizing trustee fees for institutional investors at the beginning of the year. These trustee fees amount to 0.01% of the fund’s assets, costing IBI around 1.6 million shekels annually at its peak.

For years, IBI absorbed these fees expecting to eventually charge institutional clients management fees on Israeli ETFs. Institutional investors, the main clients of ETFs, typically do not bear the official 0.65% management fee due to regulatory quarterly offsets designed to prevent conflicts of interest between fund producers and institutional investors. Unlike Israeli ETFs, foreign ETFs allow institutions to pass management fees onto their clients. This discrepancy led last year to a petition by the Mutual Funds Association and the Investment Houses Association against the Capital Market Authority, demanding equal fee charging rights for Israeli ETFs. The petition was withdrawn after it became clear the court would not intervene.

Following this regulatory impasse, IBI ceased covering trustee fees, prompting institutional investors to redeem shares after the first quarter when they realized fee reimbursements had stopped. This led to the unusual 4 billion shekel redemption volume, reducing the ETF’s assets to about 10.5 billion shekels, with an additional 1.5 billion shekel decline due to the index’s 11% drop.

Institutional investors prefer ETFs for easier compliance with Bank of Israel’s 7.5% bank stock holding limit. Market analysts believe these investors have shifted from direct bank stock holdings to managing exposure through derivatives and options. This shift could indirectly boost trading volumes in bank stock options on the Tel Aviv Stock Exchange, aligning with the exchange’s recent efforts to increase derivatives market activity.