What are index-tracking ETFs? A complete guide for 2025
In the investment world of 2025, ETFs continue to gain momentum and have become a central tool for private and institutional investors alike. One of the most popular and accessible categories is the index-tracking ETF. So what exactly is it? How do they work? And why are they worth considering? Here is the complete guide.
What is an index-tracking ETF?
An ETF (Exchange Traded Fund) that tracks an index is an investment fund traded on the stock exchange just like a share, whose goal is to track the performance of a particular index – for example: Tel Aviv 35, the S&P 500, the Nasdaq 100, MSCI World, and others.
In simple terms: if the index rises, the fund rises too (more or less), and if the index falls, the fund falls accordingly.
How does it work in practice?
The fund holds all (or most) of the securities that make up the index, in the same weights, so that its return is as close as possible to the index's return.
There are two main replication methods:
- Physical replication – actually purchasing the index's assets.
- Synthetic replication – using derivatives or financial agreements to track the index (less common in Israel).
Advantages of index-tracking ETFs
- Risk diversification – an index investment spans dozens or hundreds of stocks, so investment risk is spread out.
- Low costs – significantly lower management fees than actively managed mutual funds.
- Transparency – you can see exactly which assets the fund invests in.
- High liquidity – you can buy and sell during the trading day, just like a share.
- No need to "pick stocks" – there is no need to analyze each company separately.
Disadvantages worth knowing
- No active management – the fund will not try to "beat the market," only to track it.
- Exposure to market declines – like any index investment, there is a risk of loss during downturns.
Examples of popular ETFs in Israel in 2025
- Tachlit S&P 500
- Kesem TA-125
- Harel Nasdaq 100
- Meitav MSCI World
Who is it suitable for?
- Investors looking for a passive investment solution for the long term.
- Those who want easy exposure to global markets.
- Beginner and advanced investors alike – thanks to their accessibility and simplicity.
Summary
Index-tracking ETFs are a smart, simple, and accessible investment tool, especially well suited to the current era. They allow broad diversification, low costs, and passive investment management that suits most of the public – all without giving up market performance.
In 2025, with growing financial awareness in Israel, ETFs continue to star in investment portfolios – and now is the time for you, too, to get to know them in depth.