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 specific products are available, how are they 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
Israeli ETFs are typically structured as exchange-traded notes (shetrei hitchayvut) rather than true fund structures, but for most investors the practical difference is minimal. The important point is that gains from TASE-listed ETFs are subject to Israeli capital gains tax at 25% (or 15% on index-tracking products in some cases - check the specific product).
How much do Israeli ETFs cost?
Management fees (דמי ניהול (Dmei Nihul)) on TASE-listed index products range from 0.05% to 0.5% annually. Broad market trackers (S&P 500, MSCI World equivalents) typically cost 0.1-0.2%. Niche or actively managed products are at the higher end.
Trading commissions through an Israeli brokerage apply on each buy and sell transaction - typically 0.05-0.15% per trade. For buy-and-hold investors making infrequent purchases, this is negligible.
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-listed ETFs (Vanguard VOO, iShares IVV, etc.) 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 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 then reported in Israel, with credit for the withholding.
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 (but not TASE-listed ETFs structured as exchange-traded notes) may be classified as PFICs by the IRS. 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 at management fees of roughly 0.05% to 0.5% (broad-market trackers usually 0.1-0.2%), with gains taxed at 25% Israeli capital gains tax. American olim, however, must avoid Israeli mutual funds and most TASE-listed products because of PFIC classification by the IRS, and instead hold US-listed ETFs (such as Vanguard VOO or iShares IVV) through an Israeli brokerage. For Israeli residents, US-listed and TASE-listed ETFs are both taxed at 25% in Israel; US-listed ETF dividends face roughly 15% US withholding under the US-Israel tax treaty, credited 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 TASE or US-listed index ETFs.
TASE lists hundreds of ETFs and exchange-traded notes covering a wide range of indices. The main categories are Israeli equity (TA-35, TA-125, and sector-specific indices), international equity (US S&P 500, Nasdaq 100, MSCI World, European indices, and emerging markets, all tracked in NIS or as hedged products), Israeli shekel-denominated government and corporate bonds across various durations and credit qualities, and commodities such as gold and oil available as certificates. Israeli ETFs are typically structured as exchange-traded notes (shetrei hitchayvut) rather than true fund structures, though for most investors the practical difference is minimal.
Management fees (Dmei Nihul) on TASE-listed index products range from 0.05% to 0.5% annually. Broad market trackers such as S&P 500 and MSCI World equivalents typically cost 0.1-0.2%, while niche or actively managed products sit at the higher end. Trading commissions through an Israeli brokerage apply on each buy and sell transaction, typically 0.05-0.15% per trade, which is negligible for buy-and-hold investors making infrequent purchases. Israeli ETF fees are higher than US equivalents but have dropped significantly in recent years, so it is worth comparing before buying.
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 (Vanguard, iShares, SPDR) 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-listed ETFs such as Vanguard VOO or iShares IVV 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 both TASE-listed and US-listed ETFs are taxed at 25% Israeli capital gains tax on gains. 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 lowest expense ratios globally, with Vanguard VOO at 0.03% versus roughly 0.15-0.2% for the Israeli equivalent. Many investors use TASE-listed products for Israeli equity exposure and US-listed ETFs for global index exposure.
