IBI's Bank Index ETF Triggers Massive 10 Billion Shekel Outflows in Passive Fund Industry
In July, the Israeli passive fund industry experienced significant outflows, primarily from IBI Investment House's Exchange Traded Fund (ETF) "Israel Banks Index." Over 4.5 billion shekels were withdrawn from this fund in July alone, totaling nearly 8 billion shekels across two months. The outflows are expected to exceed 10 billion shekels by the end of August, as investors, mainly institutional, continue to redeem their holdings in stages.
The root cause is IBI's recent decision to start charging a trustee fee of 0.008% on the fund, a move that contrasts with its previous policy of absorbing these costs. Although the fee appears minimal, it represents a loss of 1.2 to 1.5 million shekels annually for IBI if not collected. This change aligns IBI with other fund managers like Phoenix's Kesem, Meitav's Tachlit, and Harel, who began charging trustee fees on some funds two years ago, which also led to redemptions.
Institutional investors hold the ETF due to Bank of Israel regulations limiting direct holdings in bank stocks to 7.5%. They use ETFs like IBI's to increase exposure indirectly. However, the Capital Market Authority prohibits passing trustee and management fees onto retail investors for major indices such as the TA-35 or the banks index. IBI's fee imposition, perceived as contrary to these rules, prompted institutions to withdraw funds rather than pay from their own resources. They are shifting exposure to more expensive derivative instruments like swaps, which can cost up to 0.5%, significantly higher than the ETF fees.
Despite these outflows in passive funds, the overall mutual fund industry in Israel reached record assets of 833 billion shekels by the end of July. Money market funds, which compete with bank deposits and offer yields close to the Bank of Israel's interest rate, saw net inflows of about 3.8 billion shekels in July, totaling over 208.5 billion shekels under management. Active mutual funds also attracted 2.3 billion shekels net in July, with significant investments flowing into general bond funds and government bonds.
In contrast, passive index funds (excluding ETFs) raised 1.3 billion shekels net in July, with inflows mainly into domestic bonds and foreign equities. However, ETFs experienced net redemptions of 4.24 billion shekels, largely due to the IBI bank index fund. Since the start of the year, the industry has seen net inflows of over 44 billion shekels, with 21 billion going to traditional active funds and 27 billion to money market funds, while passive index funds raised 9 billion shekels and ETFs lost 12.7 billion shekels, mostly from IBI's fund.
This development highlights tensions between regulatory policies, institutional investor strategies, and fund management practices in Israel's growing mutual fund market.
