Israel Transitions From Debt Notes to ETFs in Index Fund Investments

In Israel, the term "exchange-traded fund" (ETF) is now the standard for index-tracking investment products, replacing the older legal structure known as "index notes" or "exchange-traded notes." Prior to reforms between 2018 and 2019, Israeli "index notes" were debt instruments issued by financial entities that promised returns linked to an underlying index but did not hold the assets separately for investors. This exposed investors to "issuer risk," meaning if the issuing body faced financial difficulties, investors could lose money.

The regulatory reform mandated converting most of these index notes into ETFs, which are actual investment funds that hold assets in trust for unit holders, legally separated from the fund manager's assets. This structural change significantly reduces issuer risk because the assets remain protected even if the fund manager encounters financial problems. Despite this shift, the public and market participants often still refer to these products as "index notes" due to longstanding habit.

Today, when Israeli investors buy an index-tracking product on the Tel Aviv Stock Exchange, they are almost always purchasing an ETF with assets held in trust, not a debt note. The reform aimed to enhance investor protection by clarifying the legal and financial structure of these products. For precise and updated details on specific products, investors are advised to consult official sources such as the Israel Securities Authority and the Tel Aviv Stock Exchange.

Key distinctions include that the former index notes were debt instruments with issuer risk, while ETFs are investment funds holding assets separately. Both products trade on the stock exchange, but the ETF structure is now dominant in Israel's market following the 2018-2019 reform.