Israeli institutions join global flow to ETFs

Last year saw yet further meteoric growth in index products. Hundreds of billions of dollars flowed into exchange traded funds (ETF) worldwide, with investors in Israel also playing their part in the global shift.

The periodic reports of financial institutions (excluding mutual funds and nostro money) on their investments in Israel and abroad indicate that their total investment in ETF worldwide rose over the course of 2017 by over NIS 4 billion, reaching NIS 82.9 billion at the end of the year.

The reasons for the growth in investment in index products are many, but this article will focus on an analysis of the holdings of institutions, in order to identify interesting trends, both for the private investor and for the institutional investors. For this purpose, I will focus on the exchange traded fund managers who have gained a following among Israeli investors, on the investment indices that have won investors' trust, and on the local institutions that have chosen to assign substantial weight to exchange traded funds in the funds managed by them.

Amundi on the rise

The list of exchange traded fund managers who are active in Israel can be divided into three main groups. The first group consists of several mega-entities, each of which manages at least NIS 7 billion for Israeli institutions. This group is headed by BlackRock (known for the “iShares” brand), followed by State Street (owner of the SPDR brand), Deutsche Bank, Vanguard, Power-Shares (which recently purchased Source) and the Amundi Group. These six entities are responsible for NIS 74 billion - almost 90% of the total assets invested in exchange traded funds by the local institutions.

The second group consists of exchange traded fund managers that manage between NIS 500 million and NIS 2 billion, and features such managers as WisdomTree, Société Générale and BNP Paribas. As of the end of 2017, this group was responsible for the management of NIS 7.3 billion - approximately 9% of the assets invested in exchange traded funds.

Beyond the major entities active in the local market, 18 additional ETF managers were allocated assets by Israeli institutions. Most of them offer niche solutions for portfolios or products for a unique strategy not being offered by the mainstream.

In 2017, the highest growth in assets managed in Israel was recorded by French-based ETF provider Amundi. At the end of 2016, investment in Amundi by institutions in Israel totaled NIS 4.8 billion shekels. By the end of 2017, the amount had skyrocketed to nearly NIS 8 billion - impressive growth of over NIS 3 billion.

More emerging markets, less US

Review of the main indices in which the Israeli institutions invest through exchange traded funds indicates that several changes took place in the allocation of their assets over the course of last year. Unsurprisingly, the most commonplace product with the institutional entities is the S&P 500 index, with exposure of NIS 10.3 billion through exchange traded funds.

In fact, the exposure to the US equity benchmark index is higher, as Israel institutional investors also hold options and futures contracts on the index and a total of approximately NIS 4 billion in domestic exchange traded notes that follow it. At the end of 2016, however, investment in exchange traded funds tracking the S&P 500 totaled approximately NIS 15 billion.

The sharp decrease in investment in ETFs can be explained by the transition to the use of derivatives on the indices, such as futures contracts and swap transactions, as well as by the diversion of investments from the US to other markets.

Contrary to the trend in the US, over the course of 2017 the institutions increased their exposure to the emerging markets index - MSCI Emerging Markets. At the end of 2016, investment in this index through exchange traded funds amounted to NIS 3.7 billion. By the end of 2017, the holding in the institutions' portfolios increased to NIS 7 billion. Some of the increase in the exposure to the emerging markets was the result of appreciation over the year, but a considerable part stemmed from money invested in them.

Additional indices which received a significant injection from Israeli institutions last year were the MSCI Europe and MSCI USA indices, to which the exposure through exchange traded funds increased by over a billion shekels each. The bulk of the increase was the result of the increase of holding by a single dominant entity - the old pension funds managed by Amitim.

On the other hand, another MSCI index, for the market in Japan, underwent a material drop in the total of assets held by local institutions - a decrease of approximately NIS 3 billion to a total of NIS 1.3 billion at the end of 2017.

Active in passive products

The institutional investors in Israel vary greatly in their approach to investment through index products. Thus, for example, Altshuler Shaham has always held very low exposure to index products in general, not just in exchange traded funds. Conversely, other managers such as Amitim and Psagot prefer passive exposure to the global markets through index products.

An entity which stands out for its use of such products as part of its investments abroad is the pension fund of the Israel Electric Corporation, which is today managed at Halman Aldubi. Approximately 96% of this fund's investments in overseas shares are made using index products (mainly local currency-neutral exchange traded certificates), which compares with a weighted exposure of 58% among all the institutional investors.

Among the entities serving all savers in Israel, IBI's provident funds and advanced training funds and Halman Aldubi's pension funds are prominent, with exposure of over 90% to overseas shares through exchange traded funds and exchange traded certificates.

The writer is the founder and CEO of Index Research and Development Ltd., which specializes in research and development and the calculation and preparation of securities indices for a variety of investment needs. The writer has a personal interest in the above, and it should also be clarified that some of the abovementioned products are managed by the company's clients. The above does not constitute investment consulting/marketing and/or tax consulting which takes into account the personal data and needs of any person and/or does not substitute for the reader's discretion, and the abovesaid does not constitute advice and/or a recommendation to purchase or sell any security or financial product whatsoever.

ETF managers with highest investment by Israeli financial institutions

Source: Reports of the institutions, processing by Index Research. Data correct as of the end of 2017.

Published by Globes [online], Israel business news - www.globes-online.com - on April 30, 2018

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