Passive Investing in an Israeli Context
Index fund investing - buying low-cost funds that track a market index rather than trying to beat it - is well established globally and equally valid in Israel. The practical questions for olim are: which categories of product are available here and abroad, how each is taxed, and do currency considerations change the calculation?
Israeli ETFs on TASE
The Tel Aviv Stock Exchange (TASE) lists hundreds of ETFs and exchange-traded notes (ETNs) covering a wide range of indices. The main categories available:
- Israeli equity: TA-35 (top 35 companies), TA-125, sector-specific indices
- International equity: US S&P 500, Nasdaq 100, MSCI World, European indices, emerging markets - all tracked by TASE-listed products in NIS or as hedged products
- Government and corporate bonds: Israeli shekel-denominated bonds tracking various duration and credit quality indices
- Commodities: Gold, oil, and other commodity indices available as certificates
A structural point still trips people up here. Israeli trackers used to be exchange-traded notes (teudot sal), a debt instrument rather than a fund. Amendment 28 to the Joint Investment Trust Law ended that: the Securities Authority instructed fund managers to file transition prospectuses converting each exchange-traded note into a fund and each index-tracking fund into an ETF (keren sal), and TASE lists these products as kranot sal today. For an Israeli investor the tax outcome is unchanged, since capital gains on marketable securities are taxed at 25% for an individual. For a US person the change matters a great deal, because a foreign fund is exactly what the PFIC rules are written about.
How much do Israeli ETFs cost?
Management fees (דמי ניהול (Dmei Nihul)) vary widely between products, and two funds tracking the same index can price very differently. Do not work from a remembered range: the fund's own prospectus and its TASE product page state the actual management fee, and that is the number to compare.
Trading commissions through an Israeli brokerage apply on each buy and sell transaction, are negotiable, and vary by broker. For a buy-and-hold investor they matter far less than the annual management fee, which compounds every year you hold.
There is one additional cost to consider: currency exchange. If you earn in NIS and invest in a NIS-denominated ETF tracking a USD index, you are not exposed to exchange rate risk within the product itself. If you invest in USD-denominated US securities from an NIS salary, you need to convert currency with each purchase, incurring a small spread.
Can you buy US-listed ETFs from Israel?
Many Israeli investors choose to hold US-domiciled, SEC-registered index ETFs listed on US exchanges rather than or in addition to TASE-listed products. This is possible through most Israeli brokerages that offer access to US markets.
The tax treatment for Israeli residents holding US-listed ETFs is the same as for Israeli products: gains on marketable securities are taxed at 25% for an individual. Dividends from US-listed ETFs are subject to US withholding, then reported in Israel with credit for the tax withheld abroad. Note the treaty rate that actually applies. Article 12 of the US-Israel Convention caps source-state withholding on dividends at 25% of the gross dividend; the reduced 12.5% and 15% rates in the treaty and its protocol are written for a qualifying corporate recipient, not for an individual investor.
Israeli Mutual Funds (Kranot Nemanot)
Beyond ETFs, Israel has a large mutual fund (keren nemanot) industry. Israeli mutual funds are actively managed in most cases and charge higher fees than index ETFs - typically 0.5- 1.5% annually. For most long-term investors, the evidence strongly favors index products over active management. The exception may be specific bond or alternative funds where active management adds genuine value.
American olim should note that Israeli mutual funds are foreign funds for US purposes, and so are the TASE-listed kranot sal since the Amendment 28 conversion. A US person who is a direct or indirect shareholder of a passive foreign investment company files Form 8621. This is covered in detail in the next article.
A Practical Portfolio Approach
For most olim, a sensible starting portfolio might combine:
- Keren Hishtalmut invested in a broadly diversified equity track (handles itself automatically)
- Pension invested in an age-appropriate equity/balanced track
- Additional savings in a Kupat Gemel L'Hashkaa or a brokerage account holding low-cost TASE or US-listed index ETFs
This approach minimizes fees, maximizes tax-advantaged accounts, and provides broad market exposure with minimal complexity. As your situation evolves - particularly if you are American and navigating PFIC rules - you may need to specialize further.
Low-cost index investing works in Israel, but the right product depends on your tax status. TASE-listed ETFs let you track the S&P 500, Nasdaq 100, or MSCI World in NIS, and gains on marketable securities are taxed at 25% for an individual. Read each fund's management fee from its prospectus and TASE product page rather than assuming a range. American olim need to be careful: since Amendment 28 converted Israeli exchange-traded notes into funds, TASE-listed kranot sal are foreign funds for US purposes, and a US shareholder of a passive foreign investment company files Form 8621. The usual answer is to hold US-domiciled, SEC-registered index ETFs through an Israeli brokerage. On dividends, Article 12 of the US-Israel treaty caps source-state withholding at 25% of the gross dividend for an individual, with credit given in Israel. A practical starting portfolio combines a Keren Hishtalmut, an age-appropriate pension track, and additional savings in a Kupat Gemel L'Hashkaa or a brokerage account holding low-cost index ETFs.
TASE lists a wide range of index products. The main categories are Israeli equity (TA-35, TA-125, and sector indices), international equity (US S&P 500, Nasdaq 100, MSCI World, European indices, and emerging markets, tracked in NIS or as hedged products), shekel-denominated government and corporate bonds across durations and credit qualities, and commodity trackers. Israeli trackers used to be exchange-traded notes (teudot sal), but Amendment 28 to the Joint Investment Trust Law converted them into funds, and TASE lists them as kranot sal today.
Management fees (Dmei Nihul) vary widely between TASE-listed index products, and two funds tracking the same index can price very differently, so read the fee from the fund prospectus and its TASE product page rather than assuming a range. Trading commissions through an Israeli brokerage apply on each buy and sell transaction, are negotiable, and vary by broker. For a buy-and-hold investor they matter far less than the annual management fee, which compounds every year you hold.
American olim must avoid Israeli mutual funds and most TASE-listed ETFs because they may be classified as PFICs (Passive Foreign Investment Companies) by the IRS, which carries punitive US tax treatment for US persons. The PFIC problem applies specifically to Israeli-domiciled mutual funds and ETFs. US-listed ETFs are NOT classified as PFICs because they are US-domiciled funds registered with the SEC. The practical solution many American olim use is holding US-listed ETFs (identified by US CUSIP numbers) through an Israeli brokerage, which gives access to low-cost index investing without triggering the PFIC rules. The PFIC issue is covered in detail in the next article.
Yes. Many Israeli investors hold US-domiciled, SEC-registered index ETFs listed on US exchanges instead of, or in addition to, TASE-listed products, which is possible through most Israeli brokerages that offer access to US markets. For Israeli residents, the tax treatment is the same as for Israeli products: gains are taxed at 25% Israeli capital gains tax. Dividends from US-listed ETFs are subject to US withholding tax, typically 15% under the US-Israel tax treaty, and are then reported in Israel with credit for the withholding.
Currency risk is real and can come from two directions. If you earn in NIS and invest in a NIS-denominated ETF tracking a USD index, you are not exposed to exchange rate risk within the product itself. If you invest in USD-denominated US securities from an NIS salary, you need to convert currency with each purchase, incurring a small spread. A TASE-listed S&P 500 ETF held in NIS still exposes you to both market movements and USD/NIS exchange rate fluctuations, since the underlying index is priced in dollars.
Beyond ETFs, Israel has a large mutual fund (keren nemanot) industry. Israeli mutual funds are actively managed in most cases and charge higher fees than index ETFs, typically 0.5-1.5% annually. For most long-term investors, the evidence strongly favors index products over active management, with the possible exception of specific bond or alternative funds where active management adds genuine value. American olim should note that Israeli mutual funds may be classified as PFICs by the IRS; the PFIC treatment of specific TASE-listed products depends on how each one is structured, so any US person should verify a product’s classification before buying.
For most olim, a sensible starting portfolio might combine a Keren Hishtalmut invested in a broadly diversified equity track that handles itself automatically, a pension invested in an age-appropriate equity or balanced track, and additional savings in a Kupat Gemel L'Hashkaa or a brokerage account holding low-cost TASE or US-listed index ETFs. This approach minimizes fees, maximizes tax-advantaged accounts, and provides broad market exposure with minimal complexity. As your situation evolves, particularly if you are American and navigating PFIC rules, you may need to specialize further.
For most non-US, non-UK olim the choice is straightforward, since gains on marketable securities are taxed at 25% for an individual either way. TASE-listed products are more convenient: they trade in NIS, require no currency conversion, and mean simpler Israeli tax reporting. US-listed ETFs offer the deepest liquidity and, in the largest index funds, some of the lowest expense ratios available anywhere. Fees differ between funds tracking the same index, so compare the specific product before buying. Many investors use TASE-listed products for Israeli equity exposure and US-listed ETFs for global index exposure.