Money is leaving Israel: Sponsored by institutional investors, overseas stock funds have reached a peak

The two main categories in the mutual fund market — Israel and overseas — reached a rare equality in August 2026. As of the beginning of September, the volume of assets under management in stock funds in Israel and in stock funds overseas stands at 167 billion shekels in each of the categories. Each of them constitutes 19.7% of the mutual fund industry, which manages almost 850 billion shekels.

The equality is particularly striking given the starting point of the year. At the beginning of 2026, the stock category in Israel was almost 10 billion shekels larger than the overseas stock category. Within eight months, this gap was erased. That is, whether due to higher returns in overseas markets or due to the entry of new money into funds specializing in them, the center of gravity of Israeli investors has moved outward in recent months.

The mutual fund industry is one of the main savings and investment channels for the Israeli public for the short and medium term, and therefore changes in it provide a relatively current snapshot of investor preferences. Closing the gap between the two largest stock categories marks a significant change: after a period when the Tel Aviv Stock Exchange enjoyed a clear advantage in the returns it generated for investors' money, overseas stocks managed to close the gap.

Now the interesting question is what is behind the turnaround: market performance, new inflows, or a combination of both. The equality between stock funds in Israel and stock funds overseas is not the result of a single month, but a peak point in a process that has been going on for several years and is gradually changing the way the Israeli public distributes its money.

If in the past the local capital market was the default choice for the Israeli investor, today exposure to overseas has become a central component of the portfolio, and sometimes even more dominant. The August data show that the closing of the gap between the two categories is not due only to differences in returns, but to an actual movement of money from Israel to overseas. According to the Meitav review, during the month, stock funds in Israel saw redemptions of about 1 billion shekels, while stock funds overseas raised 2.4 billion shekels. That is, in just one month, a gap of 3.4 billion shekels opened up in the movement of funds in favor of overseas.

The trend is particularly prominent in the passive industry: index funds and ETFs specializing in overseas stocks raised 2.1 billion shekels, while in Israeli stocks there were redemptions of 800 million shekels, mainly in ETFs.

Ben Mitminger, co-CEO of the Mor fund company, points to the change that explains the movement of funds outward. According to him: "In the short term, we see a trend that began since the end of the war with Iran, which did not fulfill the ambitions in the local market for regime change, and which hurt sentiment in Israel despite a healthier trend of interest rate cuts compared to the US. On the other hand, it is hard not to be impressed by the strength of technology companies overseas, which point to a strong trend of profit growth, despite the geopolitical dangers and the fact that the price of a barrel of oil is trading at 90-100 dollars."

Mitminger adds that "in the long term, institutional money leads to the strengthening of the overseas stock category in Israel." He emphasizes that while the traditional fund market is growing at a relatively moderate pace, long-term savings continue to expand rapidly. "The big story is the growth in the worlds of provident and pension funds, which is growing in the 12% range per year, compared to the growth in traditional funds which ranges between 4% and 5% per year. The tendency in institutional worlds is towards overseas, and this is because of the size of the Israeli market which cannot contain the large amount of money managed by institutional investors. The more the provident and pension market grows, the more they rely on passive funds, index products, and overseas."

Lior Kagan, CEO of Meitav's mutual funds, points out that this trend does not belong only to institutional investors. According to him, "the general public has also adopted the idea of international diversification more, and this is clearly evident in the movement of funds in the funds." Kagan describes this change as a process of consciousness shift: "If we examine the market a decade back, most of the money was invested in Israel based on home bias, including Israel. Slowly, people here in the market understood that the world of savings has become more global, that it is correct to diversify to the world." According to him, local political processes in Israel and technological uncertainty have accelerated the trend of investment diversification. "In Israel, they invest according to geopolitical and political processes and less on an economic basis."

Out of 2.4 billion shekels that flowed in August to overseas stocks, 2.1 billion shekels came through the passive industry. That is, about 88% of the recruitment to the category was passive. Kagan agrees that regarding stock investment overseas, there is a significant preference of retail and institutional savers for investing through ETFs. According to him, "an investment manager has a greater advantage in the country. Overseas it is much harder, a big world, a big ocean, you are fighting with sharks and it is very difficult to win in such a situation."

However, the current equality is not necessarily the end of the story, but it may signal a larger move. Kagan believes that the market has reached a point where it is harder to determine what the next direction it is going in will be. According to him, "we are at a crossroads, investment managers who look ahead have a much harder time making a decision. In other words, after years when the direction was relatively clear, the market is now at a more balanced point. Improvement in the local situation may return money to Israel, while continued uncertainty or superiority in the performance of overseas markets may push money even further overseas."

Since the dollar has weakened against the shekel by 6% since the beginning of the year, the movement of currencies makes investing overseas less profitable, and yet, as mentioned, the preference now is for investment in overseas funds. According to Mitminger, "at the beginning of the year, most of the inflows to overseas stock funds were directed to currency-hedged funds, when sentiment pointed to a large entry of foreign investors into Israel, which led to a weakening of about 10% in the dollar against the shekel. From the moment of the agreement with Iran, sentiment changed, the dollar strengthened slightly. Add to this the interest rate gaps that opened up and this explains the return to inflows in currency-exposed funds."

The largest category belongs to money market funds, which manage 212.5 billion shekels, which is a quarter of the assets of the entire industry. Money market funds are a substitute for bank deposits (PAKAM) since they do not carry risk, and they are supposed to yield the Bank of Israel's returns. Money market funds are preferable to bank deposits, since they are liquid daily without exit penalties. Despite this, the continued interest rate reduction in Israel, by 1.5% in the last two years to 3.25%, reduces the feasibility of investing in money market funds — a move that may end in an increase in the pace of inflows into stock funds.