After years of preparations and countless delays, the Israeli ETF reform is behind us. The reform, also known as “28th amendment”, has changed the local index product industry and brought to the Israeli investment scene a new product - an exchanged traded index fund, which is often referred to as “ETF.”
In this column, I will describe the full scope of the industry after the reform completion.
As of the start of 2019, the short-term savings market in Israel (which encompasses the entire scope of mutual funds) had an AUM of NIS 306.5 billion, of which NIS 170.8 billion are managed in active mutual funds (56% of the industry) and NIS 22.9 billion are invested in money-market funds (7% of the industry). About NIS 112.8 billion shekels, 37% of the industry, is invested in index tracking products. Out of that enormous amount, NIS 86 billion is invested in exchanged traded funds and NIS 26.8 billion shekels is in index tracking funds.
When looking deeper at the data we found some more important aspects of the local index products industry. For example, NIS 57.7 billion is tracking domestic equity and fixed income indices, while NIS 48 billion is tracking global indices.
When dissecting the industry by geography, we find that the majority of AUM in global indices products Is tracking equity indices in America (mainly in the U.S) - NIS 32.5 billion (68% of the assets that track global indices). European indices, with the German DAX 30 ahead of the pack, are attracting NIS 7 billion and the equity indices in the Asia-Pacific region the Israeli investors allocate NIS 1.7 billion in local index products.
Who manages my ETF now?
In May 2000, Ofek Leumi Financial Instruments, a former subsidiary of Bank Leumi and currently called Psagot ETF’s, launched an innovative product that aimed to provide investors with full replication of an index. TA-25 was chosen to be the first index which will be tracked through a domestic ETN.
As of the end of 2018, the domestic index products industry has grown quickly and currently consists of five large managers offering both ETFs and index tracking funds, and two smaller ones that offer only index tracking funds. Together, the industry manages more than NIS 112 billion, over 938(!) different index products.
When trying to evaluate why it took more than a decade to finally implement Amendment 28, these numbers show the complicity of the reform for all the personal involved: from the dealers and operating teams of the ETN companies, through the local banks, trust companies and Tel Aviv Stock Exchange employees and off course, the guidance of the Israeli Securities Authority (“ISA”), the governing force which led each one of the flag reforms over the past years. The fact that the reform was fully implemented in three months’ time is definitely praiseworthy.
As mentioned, over 938 Israeli passive products track 232 different indices! You would think that the largest product by assets is tracking a domestic index, but the truth is that S&P 500 is the one that gets the most attention. More than NIS 12 billion is invested in Israeli index products tracking the US equity flagship index, more than 10% of all industry AUM.
The Nasdaq 100 index also attracts a huge sum of 6 billion shekels of domestic products. Additional global indices, which attract AUM of one billion shekels and more, are STOXX Europe 600, DAX 30 and MSCI World.
Naturally, the Israeli domestic equity and fixed income indices gain a lot of attention and assets. Currently, there are about NIS 58 billion invested in these products, led by equity indices such as TA-35 and TA-125 and bond indices such as Tel-Bond 20, Tel-Bond 60 and Tel-Bond Shekel.
The Day after the Amendment
The past-reform, Israeli index products industry is a “simpler” one, without any debt instruments that come along with issuer risk, one that resembles the ETF industry of the US and Europe.
The current industry can be divided into two distinct groups by primary end users: institutional investors that are investing primarily through ETFs (because of liquidity issues), and the private money specialists - bank advisors, money managers in separate accounts and in family offices, that use primarily index tracking funds.
Each product type has its own pros and cons, and the decision whether to invest via exchange traded product or through a one-price-fits-all, once-a-day-trading index fund is dependent on the investors needs and preferences.
In addition to the local issued index products, it may be possible that in the near future we will see foreign ETFs join the local industry through the 23th amendment. In my opinion, that would be the greatest opportunity of the Israeli exchange to leverage the recent changes, and those that would come in the future, in order to become a leading global index-products trading platform.
Yaniv Kunis is founder and CEO at Index Research, an Israeli-based index provider specializes in research and development, calculation and maintenance of fixed income and equity indices.
Published by Globes, Israel business news - en.globes.co.il - on January 21, 2019
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