Falling interest rates are pushing Israeli savings beyond the banks

Israel’s falling interest rates are giving households a reason to reconsider where they keep their savings. Bank deposits still serve a useful purpose, but their declining returns strengthen the case for putting long-term money to work through mutual funds and exchange-traded funds (ETFs). For savers prepared to invest beyond the next deposit renewal, these products offer access to business growth, investment income and diversification without requiring them to select individual stocks.

The Bank of Israel lowered its benchmark interest rate to 3.25% on September 1. With annual inflation at 1.5% in July, below the midpoint of its 1%-3% target, the central bank has been able to reduce borrowing costs. As a result, the corresponding decline in savings rates is changing the calculation for households that became accustomed to earning reasonable interest simply by leaving money at the bank.

According to Globes, average annual interest on deposits lasting six months to a year fell from 4.13% in July 2025 to 3.59% in July 2026, before September’s cut. Applied to NIS 100,000 ($US 332,000) held for a full year, that difference amounts to NIS 540 ($179) less interest before tax. Existing fixed-rate deposits retain their agreed terms until maturity, but savers renewing them face a less rewarding market.

The decline in returns is beginning to change where households keep their savings. Bank deposits fell by approximately NIS 20 billion ($6.64 billion) over two years, according to figures reported by Globes, reaching NIS 728.5 billion ($241.8 billion) around the beginning of July. At the same time, inflows into traditional actively managed mutual funds increased 68% over the latest annual period, from NIS 20.5 billion ($6.8 billion) to NIS 34.5 billion ($11.45 billion), according to Meitav data cited by the newspaper.

The figures do not trace every withdrawn shekel to a particular investment. Nevertheless, they indicate that more households are considering alternatives to deposits. Israel Attia, chief executive of the Center for Financial Planning, told Globes he was seeing private clients move money into capital-market investments as interest rates fell. The attraction is straightforward: a chance to earn more than the next bank renewal offers.

The stronger argument for investing in the stock market extends beyond the latest rate cut. A deposit earns the interest a bank agrees to pay. A diversified equity fund, on the other hand, provides its investors a share in the earnings and growth of many businesses. Those companies can expand, improve productivity, enter new markets and distribute profits. Over time, participation in that activity offers a source of wealth creation that repeatedly renewing deposits cannot replicate.

Long-term evidence supports that claim. Vanguard found that US equities returned an average of 10.5% a year from 1926, compared with 5.4% for US bonds. The same pattern is visible globally. The UBS Global Investment Returns Yearbook found that worldwide equities produced an annualized return of 5.2% above inflation between 1900 and 2024, compared with 1.7% for bonds and 0.5% for short-term government bills. Even though these figures are historical rather than forecasts, they demonstrate why diversified equities have been a more effective vehicle for building long-term wealth than repeatedly renewing bank deposits.

But the practical obstacle for many households is knowing what to buy. Assessing individual companies requires time, financial knowledge and a willingness to accept that a promising business can still prove a disappointing investment. Mutual funds reduce that burden by pooling investors’ money and allocating it across a portfolio. A broadly diversified fund reduces dependence on any single company and makes professional portfolio management accessible to smaller savers.

ETFs provide another route, particularly when they follow a broad market index. The case for index funds is simple: even professional investors find it extremely difficult to beat the market consistently. Morningstar found that only one in five actively managed US stock funds survived and outperformed comparable passive funds over the 10 years to June 2026. Among funds investing in large, fast-growing US companies, less than 1% of those operating 20 years earlier remained open and beat the average index fund in their category. Rather than trying to identify this tiny group of winners in advance, most investors can use a broad, low-cost index fund or ETF to participate in the market’s growth without depending on a fund manager’s ability to outperform.

The current flow of money, however, does not necessarily mean Israeli savers have embraced passive investing. Much of the recent growth has gone to actively managed funds, while inflows into passive products have weakened. Yet the long-term performance evidence still favors broad, low-cost index funds for investors who do not have a compelling reason to believe they can identify an exceptional manager in advance.

For a household building savings over many years, that accessibility is critical. Investing need not become another job. A suitable combination of broad funds can provide exposure to different industries and countries, while regular contributions allow savings to accumulate alongside income. Reinvested distributions add to the amount invested, giving future returns a larger base on which to build. The process depends more on sustained participation than on finding the next spectacular stock.

The international reach of these funds is already influencing where Israelis invest. An August review from the Tel Aviv Stock Exchange’s research unit, published by Funder, shows funds investing in overseas shares attracted approximately NIS 2.3 billion ($763.5 million) that month. Funds tracking the S&P 500 received approximately NIS 1.5 billion ($498 million). Meanwhile, Israeli equity funds recorded net withdrawals during January-August. Israelis moving money into financial markets are therefore not simply buying local shares. Many are using funds to gain exposure to leading companies and markets abroad.

And investing abroad makes sense, as it also reduces Israeli households’ dependence on the domestic economy. Their salaries, homes and businesses are often already tied to Israel. Global funds allow them to spread part of their financial exposure across other countries and industries.

Not everyone is ready to make that move, however, and many Israelis still prefer more conservative investments. Money-market funds attracted NIS 27.2 billion ($9.03 billion) during the first eight months of 2026, while domestic bond funds received approximately NIS 24.5 billion ($8.13 billion). Both offer an alternative to bank deposits without requiring savers to accept the full risk of the equity market. These conservative funds may also become a staging point for further investment. Once savers have opened investment accounts and become accustomed to holding market-based products, allocating some long-term money to equity funds may become less of a psychological leap. Whether that happens will depend on market conditions and how far interest rates fall.

And falling interest rates can certainly accelerate that process. Money-market funds tend to follow the Bank of Israel’s policy rate, so their returns will decline if the central bank continues cutting. Bank deposit rates are already moving in the same direction.

This, however, does not mean that the NIS 20 billion ($6.64 billion) withdrawn from Israeli household deposits over the past two years will move directly into shares. The figures do not allow such a conclusion, and much of the recent investment has gone into bonds and money-market funds. Nonetheless, the direction is becoming clearer.

The expansion of Israel’s mutual fund industry shows the scale of that movement. By the end of August, active and passive funds managed more than NIS 840 billion ($279 billion), an increase of approximately NIS 88 billion ($29.2 billion)since the end of 2025. Part of that rise came from market gains rather than new investment, but the industry also received net inflows of about NIS 47 billion ($15.6 billion) during the first eight months of the year. Financial markets are absorbing an increasing share of household savings that might previously have remained inside the banking system.

It is worth noting that further interest-rate cuts are not guaranteed. Renewed inflation, higher government spending or another escalation in regional conflict could cause the Bank of Israel to pause. A sharp market decline could also send cautious investors back toward deposits. Yet unless interest rates rise materially again, the attraction of bank savings is unlikely to return to its recent peak.

Israel’s declining deposit balances may therefore mark the beginning of a longer reallocation of household wealth. The first destination has largely been money-market and bond funds, but falling returns in those products could push part of that money further into diversified equity funds and ETFs. The shift will not happen all at once, nor should it. But as banks pay less for deposits, the stock market is becoming harder for Israeli savers to ignore.