BlackRock Funds Raise Israeli Ire

U.S. giant launches 15 ETFs on the Tel Aviv Stock Exchange that investors can buy in shekels

Chairman and CEO of BlackRock, Larry Fink in Paris, July 10, 2019.
AFP

BlackRock is offering Tel Aviv Stock Exchange investors of its 15 exchange-traded funds, but local rivals say the giant U.S. investment firm isn't competing fairly with their own ETFs.

BlackRock registered the 15 funds with the TASE on Sunday after it won approval from the Israel Securities Authority.

Israel’s Altshuler Shaham Investment House will sell the ETFs locally. The Dutch firm Flow Traders will act as market maker.

ETFs are funds that invest in basket stocks or other securities to mimic an established market index.

Unlike mutual funds, ETF managers don’t play the market but stick to the index components, such as all the stocks in the S&P 500. As a result, costs and fees are lower.

They have become very popular on the TASE, which today counts more than 650 of them, offered mainly by local investment houses but in a few cases by foreign managers such as Franklin Templeton Investments.

The BlackRock ETFs, however, are different from the foreign-sponsored ETFs that have been listed on the TASE until now because investors can buy into them with shekels rather than dollars or euros.

That will put them in head-to-head competition with locally managed ETFs, said Uzi Yitzhak, who is head of Israel operations for Franklin Templeton, a global investment manager based in California.

“Everywhere in the world where we’ve come in as an investment manager, the key to success is if people can buy your funds in local currency,” Yitzhak said.

“Very attractive mutual funds that have registered in Israel, as well as other international players, have sold almost nothing so far because they are traded in dollars.”

For the end user, that is, a local investor, the elements of foreign currency, exchange rates and fees, make the process of investing more expensive and more complicated.

Foreign funds have been allowed to operate in Israel since 2016, but in order to prevent them from riding roughshod over the local fund management industry, legislation was passed that bars foreign managers from denominating their local funds in shekels.

BlackRock got around that problem by dual listing the 15 ETFs in Israel and Ireland. That not only allows Israelis to buy the ETFS in shekels but also, according to the Israel Mutual Funds Association, gives BlackRock a big tax that advantage Israeli managers don’t have.

The association, which had led the fight against BlackRock’s plans, said that will enable BlackRock’s ETFs to show a better return than the same ETFs offered by Israeli investment houses.

“The competition right now isn’t fair because BlackRock enjoys tax benefits that Israeli funds don’t, including an exemption from Israel Securities Authority fees,” said an industry executive who spoke on condition of anonymity.

For local managers, it’s particular worrying because many, although not all, of the BlackRock ETFs are identical to local offerings. Among those are ETFs that follow the S&P 500, the Nasdaq 100 as well as sectoral funds that track S&P 500 companies in the financial services, health and technology industries.

To make matters more worrying the BlackRock ETFs charge low fees, ranging from 0.07% for the S&P 500 ETF and 0.6% for one that tracks the MSCI ACWI (all Country World Index). By way of comparison, Harel, Kesem and Meitav Dash charge 0.5% for their S&P 500 ETF. Psagot charges 0.6%.

On the other hand, in recent months Israeli managers have launched a clutch of no-fee ETFs.

A fund manager, who asked not to be named, said BlackRock would harm the local fund industry and deprive the Israeli government of tax revenue. He said that with more than 650 ETFs already available locally, BlackRock was not adding much to the options available to local investors.

Yitzhak said the warnings were overwrought. He said local fund managers had regulations that protected them and that foreign mangers like Franklin Templeton faced restrictions, for example they are banned from offering ETFs based on Israeli indexes.

“But it’s quite possible that as a result of the competition, the Israeli players will have to change their mix, in terms of either their price or their professionalism,” he added.