Israel Transitions From Debt Notes to ETFs in Index Fund Market Reform

In 2018-2019, Israel implemented a significant reform transforming most of its "index notes" (Teudat Sel) into exchange-traded funds (ETFs), aligning with international standards. Previously, Israeli index notes were debt instruments issued by financial entities that promised returns linked to specific indices but did not hold the underlying assets separately for investors. This structure exposed investors to issuer risk, meaning if the issuer faced financial trouble, investors could lose their returns.

The reform replaced these notes with ETFs, which are actual investment funds holding assets in trust for unit holders, legally separated from the managing entity's assets. This change drastically reduces issuer risk, as the assets remain protected even if the fund manager encounters financial difficulties. Despite this shift, the term "Teudat Sel" remains commonly used in Israel due to linguistic habit, though it now generally refers to ETFs rather than the old debt notes.

The article explains the legal and structural differences between the two products, emphasizing the importance of issuer risk and asset custody. It also advises investors to consult official sources like the Israel Securities Authority and the Tel Aviv Stock Exchange for up-to-date product information. Today, Israeli investors purchasing index-tracking products on the Tel Aviv Stock Exchange are almost always buying ETFs under the modern structure, even if colloquially referred to as "Teudat Sel."