The past year has been brutal for the financial industry in Israel with net outflows of NIS 50 billion in local mutual funds and ETNs, even though the domestic capital market performed reasonably.
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 the Israel Securities Authority’s decision regarding their future (Amendment 21), saw redemptions of almost NIS 15 billion last year, local index tracking funds enjoyed inflows of NIS 4.3 billion.
For these products, it was a continuation of the positive trend which has already lasted for five straight years. Since 2011, tracking fund assets jumped from NIS 3 billion to a peak of nearly NIS 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 double their total net assets (NIS 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 they are now considered a real alternative to the domestic ETNs in the battle for passive investing in Israel.
Almost 1,000 index products
In 2015, 65 tracking funds were launched in Israel compared with a growth of 56 products in the ETN industry. Currently, the Israeli capital market offers 637 ETNs alongside 230 tracking funds compared with 391 and 69 respectively five years ago - growth of 88%. At this current pace, over the next year, we will probably witness the launch of the 1,000th 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 have about 90% of their portfolio allocated to fixed income and the remaining 10% to equities. 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).
The 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: NIS 69 billion, more than half on the industry’s assets. TA-100 had assets of NIS 13.7 billion and was used by 74 different products. On the fixed income side, the Tel-Bond 20 led with net assets of NIS 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 in recent years has led to a decreasing number of players and today the industry is composed of just 4 managers. In contrast, the number of tracking fund managers has grown substantially over time: from four on the first year these products became available (2008), to a record 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 largest amount under management (NIS 33.6 billion) on its ETPs among Israeli financial institutions. Excellence Investment House was ranked second with assets of NIS 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 for these four investment houses offering two types of index products, there are an 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 NIS 1.2 billion to a record of NIS 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, allowing the firm to reach more than NIS 5 billion index product assets during 2015. The other 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 built in recent years. The current regulatory situation that puts 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.
Yaniv Kunis is founder and CEO at Index Research, an Israeli-based index provider specializing in research and development, calculation and maintenance of fixed income and equity indices.
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2016
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