Leumi’s S&P 500-linked deposit challenges mutual funds

After a series of limited trials, Bank Leumi has launched a publicity campaign for a new product that offers customers a liquid deposit based on the performance of the S&P 500 Index. The move could lead to a fight between mutual fund managers and the banks, which up to now have refrained from entering into an investment channel that is popular with Israelis and is growing rapidly.

Last year, some banks, including Leumi, offered a structured two-year deposit based on the index, whereby savers could not lose the amount deposited, but also did not receive the full return on the index. With the new deposit, by contrast, Leumi is offering the possibility of withdrawing the money daily, and full exposure to the index.

From a taxation point of view, the deposit is the same as the mutual funds. It will be taxed at 25% on the real gain when it is withdrawn, rather than at 15% on the nominal gain as in the case of a regular bank deposit. The new product is available to customers of the bank who are entitled to investment advice (that is, customers with a securities account worth over NIS 100,000). The minimum amount for investment is $5,000.

The deposit is a US dollar-denominated deposit that guarantees a return identical to the return on the S&P 500 Index. Unlike in the case of the mutual funds, because it is a deposit, the bank will not charge commissions or management fees, which generally reduce the return. Customers will thus gain, or lose, from the performance of the index in full, but they will also be 100% exposed to fluctuations in the shekel-dollar exchange rate. In the past year, Israeli investors in funds tracking the S&P 500 and in other instruments fully exposed to currency exchange rates have seen their returns eroded because of the appreciation of the shekel.

The mutual funds are concerned at the prospect of losing income from management fees on one of the most popular investment products in Israel of recent years. According to Israel Securities Authority figures, funds tracking the S&P 500 total NIS 78 billion, representing about a quarter of the passive investment industry in Israel (ETFs and tracking funds). Three years ago, these funds managed just NIS 11.5 billion.

The mutual fund managers claim that the structure of the deposit turns it into “a mutual fund in disguise.” In a letter to the Israel Securities Authority, the Association of Mutual Fund Managers states that “The move fundamentally harms competition between the various money market products in Israel,” and that it is liable to be damaging to investors in it because “they do not enjoy the protections enjoyed by investors in mutual funds through the various rules that apply to the funds.”

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The background to the claims of the fund managers is the restriction enacted by law two decades ago on the basis of the recommendations of the Bachar committee forbidding the banks from managing mutual funds. Leumi’s current move does indeed to some extent overstep the lines drawn by the law. The matter now rests with the Israel Securities Authority and the Bank of Israel Banking Supervision Department, which will have to decide whether Leumi’s new product is a structured deposit, which the banks are allowed to offer, or whether it goes beyond the limitations designed to create competition in the market.

If the regulators decide not to intervene, it can be assumed that other banks will follow Leumi’s example, as the product holds out the prospect of considerable gains. The fact that the banks are not subject to the restrictions imposed on the fund managers will enable them to invest only a small fraction of the amounts deposited in contracts on the S&P 500, while most of the money will be deposited with foreign banks or invested in fixed-rate instruments (bonds, short term loans and so on), as is the case today with the mutual fund managers. The latter, however, are obliged to pass on the gains from investment in these other instruments to their savers, whereas the banks will keep these gains for themselves. There will also be additional revenue from currency conversions that the banks will carry out for depositors, since the deposit is in dollars.

The Israel Securities Authority declined to comment.

Published by Globes, Israel business news – en.globes.co.il – on September 11, 2025.

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