ETF - Exchange Traded Fund
The Exchange Traded Fund (ETF) is a financial instrument designed to passively track indices of stocks, bonds or commodities. The ETF invests according to a predetermined index.
The fund does not guarantee index-linked yield, and the investor's return can be higher or lower than the selected index, due to the fund's trading activity and deviations (usually small) in the composition of the fund's assets. The ETF is committed to making its best efforts to monitor the index, and therefore the ETF should yield a similar, but not necessarily identical return to the yield of the index it follows.
An ETF is a hybrid product because it is traded on the stock exchange similarly to any security traded on the stock exchange, and the fund can be purchased or sold through the stock exchange. At the same time, the investor has the option of buying or selling the ETF in a similar manner to open-end mutual funds (which are not traded on the stock exchange).
The ETF is subject to the Joint Investments Trust Law, similarly to mutual funds.
The process of converting ETNs to ETFs
In accordance with an ordinance from the Ministry of Finance, the process of converting the ETNs (Exchange Traded Notes) into ETFs was executed in 11 stages. In Each stage a group of ETNs with similar characteristics turned into ETFs. The first stage took place on October 4, 2018 and the last stage took place towards the end of 2018.
ETNs were subject to the Securities Law. ETFs were subject to the Joint Investments Trust Law, in accordance with Amendment 28, similar to mutual funds.
The difference between ETNs and ETFs
An ETN and an ETF are two types of financial instruments designed for a similar purpose – to passively track indices relating to stocks, bonds and commodities.
The substantive difference between the two products is in the manner of tracking –while the ETN is committed to giving investors the same yield as the index, the ETF is obliged to make its “best effort” in tracking the index. Consequently, an ETF is a product that should yield a similar but not identical return to the return on the index that it tracks.