10 Billion Shekel Outflow: IBI ETF Shakes Up Passive Investment Industry

The story of July in the mutual fund industry is a continuation of the previous month's trend: a massive outflow of funds from the 'Israel Bank Index' ETF managed by the IBI investment house. Last month, over 4.5 billion shekels were withdrawn from this fund, bringing the two-month total to nearly 8 billion shekels.

The source of the outflow is a proactive move by the investment house, which recently announced a transition from a policy of absorbing 'trustee fees' to charging 0.008%. While this sounds like a negligible amount, for the investment house, failing to charge it represents a loss of 1.2–1.5 million shekels per year. Thus, IBI has joined other mutual fund management bodies, such as Kesem (Phoenix), Tachlit (Meitav), and Harel, which began charging trustee fees two years ago, leading to similar outflows at the time.

IBI 'inherited' the bank index fund as part of its acquisition of mutual funds previously managed by the Psagot investment house a year and a half ago. Because these were the fund's original terms, the company had to wait before it could demand this cost from its institutional investors. Following the outflows, the fund manages 7.2 billion shekels in assets. According to a senior industry official, 'the trend of fund outflows is expected to continue in August, as institutional bodies do not redeem in one day but in stages.' Estimates suggest the fund's total outflows will exceed 10 billion shekels by the end of August.

Institutional bodies prefer to roll costs onto the consumer

The reason institutional bodies hold positions in this index fund stems from the Bank of Israel's prohibition on institutions holding more than 7.5% in bank shares directly. Institutional bodies, which receive billions of new shekels monthly, seek ways to increase their financial holdings through bypass routes—such as purchasing ETFs like IBI's to increase effective exposure to bank shares.

However, the Capital Market Authority prohibits institutions from rolling direct mutual fund expenses (management and trustee fees) onto the public for central indices like the TA-35 or the bank index. From the Authority's perspective, Israeli savers should not pay for the fact that institutions choose to buy ETFs instead of shares directly.

IBI's management company decided to stop absorbing these losses and began charging investors a trustee fee. In response, institutional bodies are withdrawing funds, unwilling to pay from their own pockets, and are shifting their bank share exposure to financial derivative and swap transactions. These transactions are considered significantly more expensive—half a percent versus less than 0.1%. This is 50 times more, or tens of millions of shekels annually, but it is permitted to roll these costs onto the public.

Despite interest rate drops: the public is flocking to money market funds

Meanwhile, the mutual fund industry is breaking records, with total assets reaching 833 billion shekels at the end of July, according to a review by Naor Cohen, manager of consultant relations at Meitav Investment House.

Money market funds are particularly notable, as they compete with bank deposits and provide returns close to the Bank of Israel's interest rate. In July, money market funds raised about 3.8 billion shekels, with over 208.5 billion shekels currently under management—25% of all industry assets.

According to Eyal Haim, VP of Marketing at Ayalon Mutual Funds, these inflows are significant given that returns are decreasing following recent interest rate cuts (currently 3.5% compared to 4.5% a year ago, with further drops expected). Haim notes, 'There are outflows from money market funds as well, so the gross inflow is much higher. This reflects financial education and the entry of new customers into these funds.'

Simultaneously, in July, the public injected 2.3 billion shekels (net) into active mutual funds, with 1.4 billion flowing into general bond funds and 675 million into government bonds. Foreign stocks received 200 million shekels, and hedge funds within mutual funds raised 100 million shekels.

In the passive industry, 1.3 billion shekels (net) flowed into tracking funds in July. Of this, 620 million shekels went to Israeli bonds (corporate and convertible), 490 million to foreign stocks, and 160 million to Israeli stocks. ETFs recorded 4.24 billion shekels in net outflows, while 715 million shekels flowed into foreign stock categories amid the IBI fund redemptions.

Year-to-date, the entire industry has raised over 44 billion shekels (net), with 21 billion going to traditional active funds and 27 billion to money market funds. Tracking funds raised 9 billion shekels, while ETFs saw 12.7 billion shekels in redemptions, primarily due to the IBI move.