By Steven Schoenfeld, Founder, BlueStar Indexes.
Steven Schoenfeld, Founder, BlueStar Indexes.
The biggest transition of a capital market is taking place right now, in Israel. The country has begun a massive – and unprecedented – asset management transition from ETNs to ETFs as the centerpiece of a major regulatory reform process. Nothing like this has ever been implemented within an index fund/ETP marketplace. In my opinion, the best analogy for the complexity would be a similarity to the workload that global asset managers had to undertake in 1998 with the introduction of the euro.
Israel is a huge indexing market – by the end of this year, the domestic Israeli market will have more than 1,000 different index products (ETFs and index mutual funds) encompassing funds for most global asset categories spanning equities, fixed income, commodities and currencies.
The current size of the ETN market is approximately NIS 100 billion, or about $28bn, which ranks in the Top 10 of global ETP markets. Similar to the US market, the local fund industry is dominated by just a few managers; more specifically, four issuers manage more than 700 ETNs. In addition, the industry offers “Index tracking funds” which are distributed in similar channels.
There are approximately 350 index funds tracking local/domestic indexes and global equity indexes. These products manage more than NIS 30bn ($8.5bn), managed by seven mutual fund managers (four of which are affiliated to entities that also offers ETNs (See Table 1, below, for a comparison of the Israeli and US indexing marketplace).
When combining the two current index products in the market into a joint industry under the new structure (tracking funds plus soon-to-be ETFs), there will likely be five dominant firms/sponsors with total assets of more than NIS15bn each.
BlueStar licenses our indexes for 13 Israeli-registered index products (ETNs and index funds), with five additional funds winding their way through the Israel regulatory approval process. The assets tracking our indexes has grown substantially since last year, and is now approximately NIS 1.1bn (more than $300 million).
Table 1. Comparison between index products in Israel and the US
Source: BlueStar Indexes.
Major indexing market share relative to traditional active
Another sign of the advanced position of indexing in Israel is the relative market share with traditional active managers. The future merger of Israeli ETNs with index tracking funds will create a single focused sub-industry with more than NIS 120bn ($34bn) in assets and a 39% market share in the retail investment/short-term savings sector in Israel. By comparison, active mutual funds are currently managing approximately NIS 190bn ($53bn), representing 61% of this industry.
A dynamic industry structure
On the cusp of the implementation of this reform, BlueStar expects consolidation of duplicate products by issuers, and anticipates that the total number of index products in Israel are likely to be around 1,000 as the reform concludes. BlueStar then expects a highly competitive marketplace to develop with a premium placed on innovative product development, best practices in index design/construction, and the adoption of cutting-edge product concepts that have been introduced in the US and Europe. Despite Israel’s relatively small size, in many ways, Israel is ahead of many European ETF markets, as well as most in Asia and Latin America.
A bright future
As the regulatory reform process is completed in late-December, the Israeli indexing marketplace will emerge stronger, more competitive and more innovative. BlueStar believes that some of the best ideas in ETFs and index funds will emerge from the Israeli marketplace in the next few years, and this development certainly bears watching.
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)