Islamic Global Equity Index: Investing In Hsbc's Sharia-Compliant Fund

The HSBC Islamic Global Equity Index Fund offers an ethical investment strategy that complies with Islamic investment principles. The fund aims to provide long-term capital appreciation by investing in a diversified portfolio of securities defined by a relevant index, such as the Dow Jones Islamic Market Titans 100 Index. With a minimum investment of USD 25 million and an ongoing charge of 0.27%, the fund has grown to over USD 5 billion since its launch in November 2022. Investors can access this fund through various platforms, such as HL, which offers a Stocks and Shares ISA option with tax-free profits in the UK. It's important to note that the future performance of the fund is unknown, and there are risks associated with any investment.

Islamic Investment Principles

• Ban on Interest (Riba): Islam considers lending with interest payments exploitative, favouring the lender over the borrower. As such, interest is deemed usury (riba) and is strictly prohibited.
• Ban on Uncertainty (Gharar): Islamic finance rules ban participation in contracts with excessive risk and uncertainty. Gharar is often observed with derivative contracts and short-selling, which are forbidden.
• Ban on Speculation and Gambling (Maisir): Sharia law prohibits any form of speculation or gambling (maisir). Islamic financial institutions cannot engage in contracts where the ownership of goods depends on future uncertain events.
• Profit and Loss Sharing: All parties involved in Islamic investments share the risks and profits. No one can benefit from the transaction more than any other party.
• Material Finality of the Transaction: Each transaction must be related to a real underlying economic transaction.
• Ethical Investments: Islamic investments are a form of socially responsible investment. Islam does not separate the spiritual from the secular, so investment practices are subject to greater scrutiny as religion is factored into all financial decisions.
• Compliance with Sharia Law: Islamic investments must adhere to Sharia law and its interpretations. An independent Sharia Committee of Islamic scholars oversees the HSBC Islamic Global Equity Index Fund to ensure compliance.
• Global Exposure: The fund tracks the Dow Jones Islamic Market Titans 100 Index of the 100 largest global stocks that comply with Islamic investment guidelines.

Shariah Committee Oversight

The HSBC Islamic Global Equity Index Fund is overseen by an independent Shariah committee to ensure compliance with Islamic principles. The committee consists of two internationally renowned Islamic scholars who provide oversight on the fund's investments to ensure they align with Islamic law. This independent oversight is a key feature of Islamic finance, which differs from conventional finance by banning interest (Riba), uncertainty (Gharar), and speculation (Maisir).

The role of the Shariah committee in Islamic banking is to provide guidance and ensure compliance with Shariah principles in the financial institution's activities, products, and services. They issue resolutions on Shariah matters related to Islamic banking structures, mechanisms, and products. This includes reviewing and approving functions, executive procedures, agreements, contracts, and related documents.

The committee also supervises the conformity of the bank's Islamic activities with Shariah provisions and principles. They do this through Shariah compliance reports and Shariah audit observations, identifying areas requiring attention and proposing corrective measures. Additionally, the committee contributes to product development by providing Shariah-compliant solutions to enhance the bank's performance and meet Shariah standards.

The presence of a Shariah committee is an important mechanism of internal governance and a legitimate control body within Islamic financial institutions. Their oversight helps to protect the interests of investment account holders and shareholders by ensuring that all activities and transactions comply with Shariah rules.

Studies have shown that Shariah supervision and corporate governance variables significantly impact the performance of Islamic banks. The size of the Shariah committee, for example, has been found to positively influence the financial performance of Islamic banks, as a larger committee can provide better interpretation and control of the bank's products and transactions.

Overall, the independent Shariah committee plays a vital role in overseeing the HSBC Islamic Global Equity Index Fund, ensuring its compliance with Islamic principles and contributing to its performance by providing guidance and solutions.

Global Exposure

The HSBC Islamic Global Equity Index Fund offers investors an opportunity to gain exposure to a diverse range of global equities that comply with Islamic investment principles. The fund tracks the Dow Jones Islamic Market Titans 100 Index, which includes the 100 largest global stocks that meet Islamic investment guidelines. This provides investors with a broad range of companies and industries from different countries and regions, helping to diversify their investment portfolio and potentially reduce risk.

Islamic investment principles differ from conventional finance in several key ways. These include a ban on interest (Riba), uncertainty (Gharar), and speculation or gambling (Maisir). Additionally, Islamic investments focus on ethical and tangible underlying assets, with risks and profits shared among all parties to enhance society as a whole. This means that investors can align their financial goals with their values and beliefs.

The fund's global exposure offers several potential benefits. Firstly, it allows investors to access companies and industries from different parts of the world, providing a wider range of opportunities for potential growth and diversification. This diversification can help spread risk and potentially reduce the impact of market fluctuations in any single country or region.

Secondly, investing in global equities can provide access to companies that are leaders in their respective industries, including technology, healthcare, and energy. These companies often have a strong global presence and established operations, which can offer stable and long-term investment prospects.

Finally, the fund's global exposure can help investors tap into emerging markets and economies with high growth potential. By investing in companies from different regions, investors can potentially benefit from the economic growth and development of these regions, providing opportunities for capital appreciation.

It is important to note that global investments also come with their own set of risks, including exchange rate risk and geopolitical uncertainties. However, the HSBC Islamic Global Equity Index Fund is passively managed, aiming to replicate the performance of the underlying index by investing in the same proportion as the index. This means that the fund's performance will closely track the chosen index, providing investors with exposure to a diverse range of global equities that comply with Islamic investment principles.

Full Physical Replication

The HSBC Islamic Global Equity Index Fund is a passively managed fund that aims to introduce Islamic investment principles to investors. The fund is overseen by an independent Shariah Committee to ensure compliance with Islamic principles. One of the key features of the fund is its full physical replication strategy, which means that it aims to invest in all the constituents of the tracked index (in this case, the Dow Jones Islamic Market Titans 100 Index) in the same proportion as the index.

With full physical replication, the fund directly buys the underlying securities of the index in the same proportion as the index itself. This means that if a company represents 1.234% of the index, the fund will invest in that company to the extent that it also represents 1.234% of the fund's holdings. This strategy aims to replicate the index as accurately as possible, providing investors with exposure to the same securities and in the same proportions as the tracked index.

While full physical replication offers a direct way to replicate an index, it may not always be possible or practical, especially for very large, illiquid, or international market indices. In such cases, alternative methods like sampling or synthetic replication may be employed. Sampling involves investing only in the most important or liquid securities that have the greatest influence on the index's performance, while synthetic replication uses derivatives such as swaps to replicate the index's returns without directly investing in the underlying securities.

Overall, full physical replication is a strategy that enables investors in the HSBC Islamic Global Equity Index Fund to gain exposure to a diversified portfolio of securities that adhere to Islamic investment principles. By replicating the index as closely as possible, the fund provides investors with a way to participate in the potential returns of the underlying securities while maintaining compliance with Shariah principles.

Low Costs

The ongoing charge figure for the HSBC Islamic Global Equity Index Fund is 0.27%. This is considered a low-cost investment option. For context, the HSBC MSCI World Islamic ESG UCITS ETF has a TER of 0.25%, while the HSBC MSCI Emerging Markets Islamic ESG UCITS ETF has a TER of 0.35%.

When considering fees, it is worth noting that some investors have reported that HSBC charges high fees for its investment services. One investor on Reddit recommended using a low-cost broker such as T212 or InvestEngine instead of investing through HSBC. Another investor on the same thread recommended using HL (likely referring to Hargreaves Lansdown) to buy the HSBC Global Islamic Index Fund in a Stocks and Shares ISA, where any profits are tax-free. This investor also noted that the HSBC Islamic index fund averages a 10% return per year, although they cautioned that past performance does not predict future returns.

If you are interested in investing in the HSBC Islamic Global Equity Index Fund through HSBC's platform, the GIC (Global Investment Centre), you can review the fee structure on their website. At the time of writing, they charge a 0.25% pa platform fee and no dealing fee for funds.

It is important to carefully review the fee structures and potential hidden costs of any investment platform before proceeding.

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