5 Things You Didn’t Know About... ETFs In Israel
ETFs, or Exchange Traded Funds, have been around for a good few years now. Starting in the US in the early 1990s, they have exploded in popularity and variation, and are an extremely common and useful part of many an investment portfolio around the world. This is due to their relatively low-fees, high liquidity and the fact that passive investing is becoming the way to go for more and more investors.
For any of you with your financial-head in the sand, an ETF is basically a fund that aims to track a certain index (although there are also actively-managed ETFs) and trades like a regular stock on an exchange - think continuous trading throughout the day, the ability to place buy/sell limits, option creation, etc.
With trillions of Dollars under management across the globe, and thousands of ETFs to choose from, the growth of ETFs doesn’t look like a trend that is going to abate any time soon.
In Israel, whilst the history doesn’t go back quite as far, ETFs have been around in one form or another since Psagot launched their first Teudat Sal (which technically was an ETN rather than an ETF) on the Tel Aviv stock exchange back in the year 2000.
With a major change having taken place in Israel's index-tracking market just recently, and ETFs such an important investment tool, here are 5 more things you didn’t know about investing in Israeli ETFs (Kranot Sal):
1. They are now called Kranot Sal - Israel’s main exchange-traded product actually used to be ETNs (Teudot Sal) rather than ETFs (Kranot Sal). Without getting too technical, ETNs carried a higher level of counterparty risk than an ETF. Therefore, the Securities Authority pushed through a reform whereby ETNs turned in to ETFs.
2. Volume - At the end of March 2019, there were 600 ETFs trading on the Tel Aviv stock exchange, with 90.5bn Shekel under management.
3. Returns - Israeli ETFs, like their foreign counterparts, do not contractually have to provide the exact return of the index they are tracking, rather it is on a “best effort” basis (as opposed to their predecessors – ETNs – which had to track exactly).
4. Management Fees - As opposed to international ETFs, Israeli ETFs can have a variable annual management fee in the form of “security belt” (loosely translated from the Hebrew 'Retzuat Bitachon') which can be either 0.1%, 0.2% or 0.3% on top of the regular management fee. This upgrade is in order to bring the tracking error (the difference between the ETFs' performance and the performance of the index it is tracking) down to a minimum.
5. American Citizens - As if investing in Israel (or anywhere outside of the US for that matter) wasn't hard enough, the above-mentioned reform took away another way for US citizens to invest. This is because whilst the ETNs were deemed fine from a PFIC point of view, ETFs unfortunately are not.
At IAL, we provide a variety of savings and investment solutions for your money in Israel. For more information contact us here.