Etfs And Halal Investing: What You Need To Know

Exchange-traded funds (ETFs) are a popular investment vehicle, offering investors a simple way to gain exposure to a wide range of assets and markets. For Muslim investors, however, the question of whether ETFs are halal arises due to the need for compliance with Islamic principles. The good news is that there are indeed halal ETFs available, but careful evaluation is required to ensure they meet the necessary criteria.

ETFs are funds traded on a stock exchange that pool money from multiple investors to invest in a specific theme, such as an index, commodity, or sector. They are attractive because they provide diversification, accessibility, and lower fees compared to other investment options. However, the challenge for Muslim investors is ensuring that the underlying assets within an ETF are sharia-compliant.

The process of determining whether an ETF is halal can be complex, as it involves evaluating each holding within the fund for adherence to Islamic principles. While a small proportion of non-compliant assets (less than 5%) can be considered halal, profits from these must be donated to charity. A simpler approach is to look for ETFs with a Shariah certificate, although only a handful of ETFs have obtained such certification.

Some popular halal ETFs include the Wahed FTSE USA Sharia ETF (HLAL) and the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS). These ETFs invest in large and mid-cap US stocks while adhering to Islamic principles.

In summary, while Muslim investors can find halal ETFs, it requires careful due diligence to ensure compliance with Islamic guidelines.

Sharia-compliant ETFs

As a result, Sharia-compliant ETFs tend to contain a large number of companies from the healthcare and technology sectors.

ETFs are Exchange-Traded Funds, which are a collection of various securities. This means that for an ETF to be Sharia-compliant, each underlying asset must be evaluated for its adherence to Islamic principles.

There are a few ways to determine if an ETF is Sharia-compliant. The easiest way is to check for a Sharia certificate on the fund's website, or to look for the words "Sharia" or "Islamic" in the ETF's name. However, only a handful of ETFs have obtained such certification.

If an ETF does not have a Sharia certificate, it can still be considered halal to invest in if the majority of its holdings pass Sharia compliance. This can be done by manually researching each underlying asset or by using a halal investment screening tool, such as Zoya.

• Wahed FTSE USA Sharia ETF (HLAL)
• SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)
• SP Funds S&P Global REIT Sharia ETF (SPRE)
• IShares MSCI World Islamic UCITS ETF (ISWD.SW)
• IShares MSCI EM Islamic UCITS ETF (ISDE.L)
• IShares MSCI USA Islamic UCITS ETF (ISUS.L)
• SP Funds Dow Jones Global Sukuk ETF (SPSK)
• Wealthsimple Shariah World Equity Index ETF (WSHR.NE)

Halal ETFs: Performance

When it comes to the performance of Halal ETFs, there are a few key metrics and considerations to keep in mind. Here are some factors that can help evaluate the performance of Halal ETFs:

• Expense Ratios: Halal ETFs tend to have higher expense ratios compared to traditional ETFs. An expense ratio between 0.5% and 0.75% is considered good, while ratios above 1% are generally considered high and should be avoided. Lower expense ratios indicate a more cost-effective investment option.
• Tracking Error: This measures how closely an ETF follows its benchmark index. A lower tracking error is preferable as it indicates the ETF is better at replicating the performance of its benchmark index.
• Trading Volume: Halal ETFs with higher trading volume are usually more liquid, making them easier to trade. Higher trading volume can also indicate a tighter bid-ask spread, suggesting the ETF is competitive and actively traded.
• Turnover Rate: The turnover rate reflects how often an ETF buys and sells its holdings. A high turnover rate can lead to higher trading costs and potential tax consequences in non-tax-advantaged accounts. Broad market index ETFs typically have lower turnover rates.
• Assets Under Management (AUM): AUM represents the total market value of assets under an ETF's management. A higher AUM generally indicates greater investor interest and stability. Higher AUMs can also lead to improved liquidity and lower trading costs.
• Performance Benchmarking: To assess the performance of a Halal ETF, it can be compared to a benchmark index such as the S&P 500. Additionally, the Compound Annual Growth Rate (CAGR) can be used to evaluate long-term performance, providing a more accurate picture of an ETF's growth over time.
• Diversification: It is important to consider the diversification of a Halal ETF's holdings. A well-diversified ETF reduces the risk associated with concentrating investments in a small number of companies or sectors.
• IShares MSCI USA Islamic UCITS ETF (ISUS): This ETF has been underperforming compared to the S&P 500, with a CAGR of 6.11% over a 15-year period. It has high concentration in its top 10 holdings, which include Microsoft, Tesla, and Exxon Mobil.
• SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS): SPUS has outperformed the S&P 500 since its inception, with a 15.59% return compared to 12.35% for the S&P 500. Its top holdings include Apple, Microsoft, and Amazon.
• Wahed FTSE USA Shariah ETF (HLAL): HLAL has consistently outperformed the S&P 500 since its launch in 2019, with a CAGR of 14.59%. Its top holdings include Microsoft, Apple, and Meta Platforms.
• SP Funds S&P Global REIT Shariah ETF (SPRE): SPRE has underperformed the S&P 500 since its inception, with a low yearly return. It is also highly concentrated, with its top 10 holdings accounting for about 74% of the fund's assets.
• IShares MSCI World Islamic UCITS ETF (ISDW): ISDW has significantly underperformed the S&P 500 over a 15-year period, with a CAGR of only 3.84%. Its top holdings include Novo Nordisk and GBP Spendable Cash.
• Invesco Dow Jones Islamic Global Developed Markets UCITS ETF (IGDA): IGDA has a slightly lower CAGR compared to the S&P 500 since its inception. It has a relatively low expense ratio of 0.40% and provides global diversification. Its top holdings include Meta Platforms and Alphabet.
• Wealthsimple Shariah World Equity Index ETF (WSHR): WSHR has underperformed the S&P 500 but offers better diversification, with its top 10 holdings representing only 9.56% of the fund. Its holdings include Singapore Telecommunications and Novartis.
• Wahed Dow Jones Islamic World ETF (UMMA): UMMA has substantially underperformed the S&P 500 since its launch. Its top holdings include Taiwan Semiconductor and Novo Nordisk.
• SP Funds Dow Jones Global Sukuk ETF (SPSK): SPSK is the only US-listed fund providing access to Sukuk, which are Islamic financial certificates similar to bonds. However, it has lost money since its inception and has a negative yearly return.
• IShares MSCI Emerging Markets Islamic UCITS ETF (ISDE): ISDE has lost money over a 15-year period, with a negative yearly return. It has high expense ratios and poor diversification, with its top 10 holdings representing 51.14% of the index.

In summary, when evaluating the performance of Halal ETFs, it is important to consider expense ratios, tracking error, trading volume, turnover rate, AUM, benchmarking against indices like the S&P 500, and the diversification of holdings. While some Halal ETFs have outperformed the broader market, others have underperformed or incurred losses. It is crucial for investors to conduct thorough research and consider their investment goals and risk tolerance when selecting Halal ETFs.

Halal ETFs: Concentration

When considering Halal ETFs, it is important to assess the concentration of the top holdings within the fund. Concentration refers to the weight or percentage of the fund's portfolio that is made up of its top holdings, typically the top 10 holdings. This is a crucial factor in evaluating the diversification benefits offered by an ETF.

Diversification is a key advantage of ETFs, as they provide exposure to a basket of securities rather than a single security. By diversifying across multiple assets, investors reduce the risk associated with individual holdings. Therefore, a well-diversified ETF will have a lower concentration of its top holdings.

When assessing concentration, it is important to compare the weight of the top holdings relative to the overall portfolio. For example, if an ETF's top 10 holdings account for 75% of the fund's total assets, it indicates a high concentration level. On the other hand, if the top 10 holdings account for only 25% of the portfolio, it suggests better diversification.

Let's consider some examples of Halal ETFs and their concentration levels:

• SP Funds S&P Global REIT Sharia ETF (SPRE): This ETF has a high concentration, with its top 10 holdings accounting for about 74% of the fund's assets.
• IShares MSCI USA Islamic UCITS ETF (ISUS/ISDU): The ISUS/ISDU ETF has a very high concentration, with its top 10 holdings representing 54.9% of the fund.
• Wahed FTSE USA Shariah ETF (HLAL): HLAL has a concentration level of 52.87%, which is still considered high but slightly better than some other Halal ETFs.
• SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS): SPUS's top 10 holdings represent 52.74% of the fund, which is better than some peers but still relatively concentrated.

When evaluating concentration, it is also worth noting that some ETFs may have a higher concentration in a specific sector, such as technology or healthcare. This sector concentration can impact the overall risk and performance of the ETF.

In summary, when considering Halal ETFs, investors should pay close attention to the concentration levels of the top holdings. A well-diversified ETF will have a lower concentration, reducing the risk associated with any single holding. However, some Halal ETFs may still have relatively high concentration levels, so it is important to compare and assess each fund individually.

Halal ETFs: Benchmark comparison

When it comes to selecting a Halal ETF, Muslim investors must navigate a delicate balance between financial performance and compliance with Islamic principles. This process can be challenging, as ETFs encompass a diverse array of securities, each requiring evaluation against Shariah guidelines. However, with the right tools and knowledge, it is possible to identify Halal ETFs that align with both financial goals and religious tenets.

Understanding Halal ETFs

Exchange-Traded Funds (ETFs) have become an increasingly popular investment vehicle, offering investors a convenient way to access a wide range of assets. The appeal of ETFs lies in their depth and diversity, allowing investors to gain exposure to numerous stocks, bonds, commodities, sectors, and geographies through a single investment. This accessibility, combined with their generally lower fees compared to mutual funds, has made ETFs a favoured choice for both novice and seasoned investors.

Within the realm of Halal investing, ETFs present a unique set of considerations. The bundled nature of ETFs, where multiple assets are packaged together, increases the likelihood of exposure to non-compliant areas such as gambling, alcohol, tobacco, or usury. As a result, Muslim investors must diligently scrutinise the underlying assets of an ETF to ensure they adhere to Shariah principles.

Benchmark Comparison

When evaluating the performance of a Halal ETF, it is common to use a benchmark such as the S&P 500 as a reference point. By comparing the returns of a Halal ETF to that of a well-known index like the S&P 500, investors can gain insight into how their chosen ETF fares in the broader market. This comparison allows investors to assess whether their investment is delivering returns commensurate with its level of risk.

Additionally, it is important to recognise that ETFs are often long-term investments, and short-term fluctuations may not accurately reflect their overall performance. To account for this, investors can utilise the Compound Annual Growth Rate (CAGR) metric, which provides a more accurate indication of long-term returns by accounting for the reinvestment of profits.

Top Halal ETFs

Several Halal ETFs have consistently appeared on lists of top-performing or popular choices:

• Wahed FTSE USA Shariah ETF (HLAL): Tracks large- and mid-cap US stocks, with a focus on technology, communication services, and healthcare sectors.
• SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS): Filters out non-compliant S&P 500 companies, offering exposure to large US companies, particularly in the technology sector.
• IShares MSCI World Islamic UCITS ETF: Provides exposure to international businesses and has a low expense ratio of 0.30%.
• Wealthsimple Shariah World Equity Index ETF (WSHR): The first Shariah-compliant ETF in Canada, focusing on developed markets and offering diversification across sectors.
• Invesco Dow Jones Islamic Global Developed Markets UCITS ETF (IGDA): Offers diversified exposure to Shariah-compliant equities in developed markets globally, with a relatively low expense ratio of 0.40%.

Key Considerations

While benchmark comparison is a valuable tool, it is important to remember that it is just one aspect of evaluating Halal ETFs. Here are some additional factors to consider:

• Performance: Assess the average performance of the ETF over a given period, ideally since its launch, using metrics like CAGR.
• Concentration of holdings: Analyse the top 10 holdings to determine the level of diversification within the ETF. A well-diversified ETF reduces the risk associated with any single investment.
• Fees and expenses: Compare the expense ratios and management fees of different Halal ETFs to identify cost-effective options.
• Tax benefits: Explore the potential tax advantages of each ETF, as these can impact your overall returns.
• Liquidity: Consider the trading volume of the ETF, as higher liquidity can indicate better trade execution and lower trading costs.
• Shariah compliance: Ensure that the ETF adheres to Islamic principles by checking for a Shariah certificate or using online screening tools to evaluate the underlying assets.

In conclusion, selecting Halal ETFs that align with your financial goals and ethical principles requires a comprehensive evaluation. By considering benchmark comparisons, performance metrics, fees, diversification, and Shariah compliance, Muslim investors can make informed decisions that balance financial objectives with religious values.

Halal ETFs: Geography

There are a number of Halal ETFs available to investors in different parts of the world. Here is a list of some of the most popular Halal ETFs, along with their respective geographies:

• IShares MSCI USA Islamic UCITS ETF (ISUS/ISDU): This ETF is domiciled in Ireland, providing a tax advantage for foreign investors. It is one of the oldest Halal ETFs, launched in 2007, and focuses on the US market. It has a high expense ratio of 0.30% and its top holdings include Microsoft, Tesla, Exxon Mobil, and Procter & Gamble.
• SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS): This ETF is domiciled in the US and provides exposure to large US companies. It was launched in December 2019 and has a low expense ratio of 0.45%. Its top holdings include Apple, Microsoft, NVIDIA, Amazon, and Alphabet.
• Wahed FTSE USA Shariah ETF (HLAL): This ETF is also focused on the US market and was launched in July 2019. It has an expense ratio of 0.50% and its top holdings include Microsoft, Apple, Meta Platforms, Alphabet, and Tesla.
• SP Funds S&P Global REIT Shariah ETF (SPRE): This ETF provides exposure to the global real estate market and was launched in December 2020. It has an expense ratio of 0.55% and its top holdings include Prologis Inc, Equinix Inc, Goodman Group, AvalonBay Communities Inc, and Equity Lifestyle Properties Inc.
• IShares MSCI World Islamic UCITS ETF (ISWD/ISDW): This ETF is dual-listed on the London Stock Exchange and has a low expense ratio of 0.30%. It invests in a variety of international businesses such as Microsoft, Tesla, Exxon Mobil, and The Procter & Gamble Company.
• Invesco Dow Jones Islamic Global Developed Markets UCITS ETF (IGDA): This ETF provides exposure to developed markets globally and is domiciled in Ireland. It was launched in January 2022 and has a low expense ratio of 0.40%. Its top holdings include Microsoft, Apple, NVIDIA, Amazon, and Meta Platforms.
• Wealthsimple Shariah World Equity Index ETF (WSHR): This ETF is listed on the Canadian NEO exchange and provides exposure to developed markets. It was launched in May 2021 and has a management expense ratio of 0.56%. Its top holdings include Barry Callebaut AG, The Coca-Cola Company, Nestlé S.A., Novartis AG, and Thomson Reuters Corporation.
• Wahed Dow Jones Islamic World ETF (UMMA): This ETF provides exposure to global stocks and was launched in January 2022. Its top holdings include Taiwan Semiconductor Manufacturing Company Ltd, Novo Nordisk A/S, ASML Holding N.V., Infineon Technologies AG, and Shopify Inc.
• SP Funds Dow Jones Global Sukuk ETF (SPSK): This ETF provides access to the global Sukuk market and is the only US-listed fund in this category. It invests in Islamic financial certificates similar to bonds. Its top holdings include KSA Sukuk Limited, SA Global Sukuk Ltd., and SUCI Second Investment Co.
• IShares MSCI Emerging Markets Islamic UCITS ETF (ISDE): This ETF provides exposure to emerging markets and has a large number of international business holdings. It is part of iShares' collection of halal indices. Its top holdings include Taiwan Semiconductor Manufacturing, Samsung Electronics Ltd., and Reliance Industries Ltd.
• HSBC MSCI USA Islamic ESG UCITS ETF (HIUS/HIUA): This ETF provides exposure to the US market and was launched in November 2022. It has a low expense ratio of 0.30% and its top holdings include Microsoft, Tesla, Advanced Micro Devices Inc, Adobe Inc, and Exxon Mobil.
• HSBC MSCI Emerging Markets Islamic ESG UCITS ETF (HIES): This ETF provides exposure to emerging markets and was launched in January 2023. It has an expense ratio of 0.35% and its top holdings include Taiwan Semiconductor Manufacturing Co Ltd and Samsung Electronics Co Ltd.

It is important to note that the availability of these Halal ETFs may vary depending on the country and broker. Some countries, such as Canada and the United Kingdom, have access to most US-listed ETFs, but may incur currency conversion fees. Additionally, the performance and fees of these ETFs should be considered along with their Shariah compliance when making investment decisions.

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