Index Funds & ETFs

What is an ETF, what is an index fund, the differences between them, fees, and how to choose the right one for your portfolio.

Exchange-traded funds (ETFs) and index-tracking mutual funds have transformed investing for everyday Israelis. These funds let you own a tiny slice of hundreds or thousands of companies through a single purchase, delivering instant diversification at a fraction of the cost of active management.

What Is an ETF?

An ETF is a fund that trades on a stock exchange just like a regular stock. It holds a basket of assets — stocks, bonds, or commodities — and its price moves throughout the trading day. In Israel you can buy ETFs listed on the Tel Aviv Stock Exchange (TASE) or access US-listed ETFs through your broker.

Israeli Index Funds vs. Foreign ETFs

Israeli index-tracking mutual funds (Kranot Mechakot) are denominated in shekels, regulated by the Israel Securities Authority, and easy to buy through any local brokerage. Foreign ETFs like VOO, VTI, or VXUS offer broader global exposure but involve currency risk and sometimes different tax treatment.

Key Factors When Choosing

Look at the expense ratio (management fee), tracking error (how closely the fund matches its index), fund size and liquidity, and the index it follows. In Israel, expense ratios for passive index funds have dropped significantly in recent years, with some now below 0.1%.

Building a Portfolio With ETFs

A simple approach is to combine a US equity ETF, an Israeli equity fund, and a bond component. Adjust the allocation based on your age and risk tolerance. Younger investors might go 80% equities and 20% bonds, while those nearing retirement might reverse that ratio.

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The information on this page is for educational purposes. Please consult a professional before making financial decisions.

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Frequently asked

+−What is the difference between an Israeli index fund and a foreign ETF?

Israeli index funds (Kranot Mechakot) are denominated in shekels and regulated locally. Foreign ETFs like VOO offer broader global exposure but involve currency risk and sometimes different tax treatment.

+−What should I look for when choosing an ETF?

Focus on the expense ratio (management fee), tracking error, fund size and liquidity, and the index it follows. Israeli passive fund expense ratios have dropped significantly, with some now below 0.1%.

+−Can I buy US-listed ETFs from Israel?

Yes, most Israeli brokerages allow you to buy US-listed ETFs like VOO, VTI, or VXUS. Be aware of currency conversion fees, US dividend withholding tax, and the need to file IRS forms in some cases.

+−What is tracking error in an index fund?

Tracking error measures how closely a fund follows its target index. A lower tracking error means the fund more accurately replicates index performance. Check this metric when comparing similar Israeli index funds.

+−Are Israeli ETFs traded on the Tel Aviv Stock Exchange?

Yes, Israeli index-tracking funds and ETFs trade on the TASE during regular market hours. They offer the convenience of NIS-denominated investing without the need for currency conversion.

+−What is the tax treatment of ETF dividends in Israel?

Dividends from Israeli ETFs are taxed at 25% for individuals. US-listed ETFs face a 25% US withholding tax on dividends, and you may need to claim a foreign tax credit on your Israeli return.

+−How do I choose between accumulating and distributing ETFs?

Accumulating ETFs reinvest dividends automatically, which is more tax-efficient in Israel since you defer the tax event. Distributing ETFs pay out dividends, triggering immediate taxation.