Israeli Money Market Funds Adjust to New 3.25% Interest Rate Environment
Bank of Israel's rate cut to 3.25% shapes money market fund yields, averaging 0.26% in September. An analysis compares fund performance, management fees, and tax advantages versus bank deposits.
September marked the first full month following the Bank of Israel's interest rate cut to 3.25%, a shift clearly reflected in money market funds. Their average monthly yield stood at approximately 0.26%, translating to an annualized rate of about 3.25%, perfectly aligned with the prevailing interest rate environment. Over the past 12 months, these funds delivered an average return of roughly 3.9%, a figure that factors in a prior period of higher rates and is therefore less relevant for future projections.
Money market funds invest in short-term government paper, short bank deposits, and highly rated corporate bonds with an average duration of up to 90 days. Capital placed in these funds remains liquid on every trading day, and their yields adjust almost immediately to changes in actual interest rates. When rates decline, fund yields drop accordingly within weeks; when they rise, the fund benefits immediately without locking investor capital for extended periods.
Performance Leaders in September and Annually
During September, fund returns clustered within a very narrow range of 0.24% to 0.28%. Leading the monthly performance were IBI Kashrut Shekel Money Market, Yelin Lapid Kashrut Money Market, Meitav Liquid Management Money Market, More Liquid Management Money Market, and Meitav Jumbo Money Market.
Over the trailing 12-month period, More Liquid Management Money Market took the top spot with a 4.03% return, closely followed by Meitav Liquid Management Money Market at 4.02% and Meitav Kashrut Shekel Money Market at 4.0%. At the lower end of the spectrum were funds that avoid corporate bonds entirely, such as Altshuler Shaham Non-Corporate Money Market, which returned 3.67% by sacrificing a minor fraction of yield in exchange for even lower risk profiles.
Selecting the Right Money Market Fund
Because all money market funds invest in essentially identical short-term assets, performance differentials are driven largely by technical parameters. The first critical factor is management fees, which typically range from zero to approximately 0.25% annually. When yields are nearly identical, every tenth of a percent significantly impacts net returns.
When yields are nearly identical, every tenth of a percent significantly impacts net returns, making management fees a decisive selection criterion for investors.
Among the lowest-cost options are Kesam Active Kashrut Money Market at 0.025%, alongside More Liquid Management and Analyst Kashrut Shekel Money Market at 0.04%. At the opposite end, certain funds charge management fees reaching 0.24%.
The second parameter is the entry fee, an upfront charge levied by a small subset of funds. Barak Money Market, for example, charges zero management fees but imposes a 0.1% entry fee. Investors planning to hold funds long-term benefit immensely from zero management fees, whereas those intending to redeem capital within a few months may pay more in entry fees than they save on ongoing costs.
Money Market Funds Versus Bank Deposits
The fundamental distinction between money market funds and traditional bank deposits lies in taxation. Bank deposits incur a 15% nominal tax on profits. Money market funds apply a 25% tax rate, but strictly on real profits—the gains remaining after adjusting for inflation.
Assuming an annual inflation rate of 2%, a bank deposit yielding 3% results in a net return of approximately 2.55%. Conversely, a money market fund generating a 3.2% return produces a real profit of 1.2%, on which a 0.3% tax is levied, bringing the net return to roughly 2.9%. The tax advantage of money market funds expands during periods of higher inflation and narrows when inflation subsides.
Furthermore, money market funds offer superior flexibility. A one-year bank deposit locks in a fixed interest rate for the entire duration, whereas money market funds continuously adjust to macroeconomic shifts. In an environment where global yields are rising and domestic forecasts for further rate cuts moderate, this flexibility provides a distinct defensive advantage.
