Islamic Investing: Index Funds Halal?

Investing in index funds is a popular way to grow your money and protect it from losing value over time due to inflation. However, for Muslims, the type of investment vehicle they can use is limited by Sharia law. Halal investing forbids investing in debt, making many traditional investment options off-limits. This has resulted in Muslims limiting their investments to cash savings and real estate, leading to a lack of diversification. However, some companies, like Wahed Invest, are trying to solve this problem by offering the first-ever halal index funds, enabling Muslims to invest in Sharia-compliant companies and adhere to their values without compromising returns.

Wahed S&P Shariah Fund

Wahed Invest LLC is an SEC-registered investment advisor and the first digital advisor to focus on building a halal investment platform. The company's easy-to-use platform is also the only halal-focused system overseen by an Ethical Review Board, which ensures that investors do not inadvertently put their money into companies that are involved in industries that conflict with their values, such as liquor, firearms, gambling, and tobacco.

In 2018, Wahed announced the launch of two new funds: the Wahed S&P Shariah Fund and the Wahed S&P Dividend Growth Fund. The Wahed S&P Shariah Fund is the first passive, index-tracking investment option in the United States, and it has the advantage of zero fund management fees, unlike existing halal mutual funds, which charge fees of 1% and above.

The fund is based on the S&P 500, the most widely used index to gauge large-cap U.S. companies, but it omits sectors that are prohibited by Shariah guidelines, such as financials, gambling, alcohol, and defense. The fund provides investors with passive, index-oriented equity exposure to Shariah-compliant investment options.

The Wahed S&P Shariah Fund is NASDAQ listed and globally accessible. It tracks the FTSE Shariah USA Index, which has been fully certified as Shariah-compliant through the issue of a Fatwa (Islamic legal opinion).

Wahed S&P Dividend Growth Fund

Wahed Invest LLC is an SEC-registered investment advisor and the first digital advisor focused on building a halal investment platform. Wahed's platform is also the only halal-focused system that is overseen by an Ethical Review Board, which ensures that Muslims and other Americans can invest in companies that align with their values.

The Wahed S&P Dividend Growth Fund is one of the two funds that Wahed announced in 2018, the other being the Wahed S&P Shar'iah Fund. The Wahed S&P Dividend Growth Fund is designed to track the performance of Shariah-compliant companies within the S&P 1500 Composite that have followed a managed-dividend policy of consistently increasing dividends every year for at least 20 years. The fund has zero management fees, unlike existing halal mutual funds, which charge fees of 1% and above.

The Wahed S&P Dividend Growth Fund, like other Wahed investment portfolios, is approved by an Ethical Review Board, enabling Muslims to feel confident that their investments are ethically sound and halal. Wahed screens potential portfolio investments based on a strict set of constraints in accordance with best-practice Shariah-compliance standards, reviewed by their Shariah supervisory board (SSB). The SSB ensures that no portfolio holds investments in any company or fund that provides conventional financial services or manufactures/sells products not approved by the SSB, such as liquor, tobacco, gambling, and weaponry.

Wahed's platform is easy to use and has a low minimum investment of $100, making ethical investing accessible to almost anyone. Wahed also monitors and periodically rebalances your portfolio for no additional cost.

Halal fixed-income products

Fixed-income investments are a staple of mainstream investment portfolios, but finding fixed-income products that align with Islamic principles can be challenging for Muslims. Bonds are typically not considered halal, and while Sukuk—an Islamic bond—exists, they are not as widely available. However, there are still several options for Muslims to consider when it comes to fixed-yield returns.

Sukuk

Sukuk is an Islamic alternative to conventional bonds. They are structured to comply with Sharia law and have several key differences from traditional bonds. Sukuk holders are not lenders; instead, they own a portion of the underlying assets and receive a share of the revenues generated by those assets. If there is no revenue, there are no returns. Sukuk tend to build a buffer to smooth out revenue fluctuations and provide investors with a regular, steady return.

One challenge with Sukuk is that they are not as readily available as conventional bonds. They require a suitable underlying property, which can be a limiting factor. Government-issued Sukuk exist, but they are still far less common than traditional bond issuances. Another issue is foreign currency exposure, as the top Sukuk funds are based in foreign countries, leaving them vulnerable to currency fluctuations.

Despite these challenges, there are some accessible options for investing in Sukuk. Wahed Invest offers Sukuk in all of their portfolio types, with their very conservative portfolio consisting of 92.50% Sukuk. Oasis Crescent also provides a Sukuk fund (their Global Income Fund) available on Hargreaves Lansdown or Simply Ethical, an ethical halal investment platform. The Franklin Global Sukuk Fund A(acc) EUR is another good option, but it has high fees and investment minimums. Cur8 Capital, IFG's investment platform, provides access to high-yielding Sukuk funds offered by top fund managers in the Middle East, with investment minimums starting at £5000.

Property

Property is another halal option for fixed-income investing. There are various ways to invest in property, each with its own advantages and considerations:

• DIY approach: This gives you full control, but it also requires a significant upfront investment and entails a lot of work. You'll need to find and assess properties, handle legal matters, and manage the investment yourself. Financing can be challenging, and borrowing money from a bank comes with its own legal requirements and fees.
• Property investment company: This approach addresses many of the pitfalls of the DIY method. Companies like Yielders pool money from multiple investors, invest in properties, and then share the yield and capital returns. They handle all the work, from selecting assets to managing the investment and administration. However, you'll need to pay various fees, which can reduce your returns.
• Property fund: If you're not ready to commit to full property ownership, consider investing in a REIT (Real Estate Investment Trust). These products are well-structured, offer liquidity, and provide diversification to your portfolio. However, they offer limited capital appreciation, and it's essential to carefully assess their Sharia-compliance as not all REITs are halal.
• Development projects: Platforms like Intro Crowd, Godwin, and Ethis Indonesia allow you to invest in development projects, offering higher yields but also carrying more risk.

Other Options

In addition to Sukuk and property, there are some higher-risk, higher-reward fixed-yield options to consider:

• SME financing: Platforms like Qardus offer sharia-compliant financing to small and medium-sized enterprises. As an investor, you can earn fixed returns of 8-12% over a 1-2 year period by providing halal short-term loans to businesses. However, there is a risk of delayed or defaulted payments.
• Property development investing: Platforms like Godwin Capital, Top Yielders, and IntroCrowd offer fixed returns of 8-11% by investing in property development projects. However, these investments are illiquid, and there is a risk of project delays or failures, potentially resulting in losses.

Halal Index Funds

When it comes to index funds, Wahed Invest LLC stands out as the first digital halal-focused ethical investing platform in the United States. They offer two S&P Shar'iah-compliant investment funds: the Wahed S&P Shar'iah Fund and the Wahed S&P Dividend Growth Fund. These funds provide passive, index-oriented equity exposure and do not charge any fund management fees.

Shariah-compliant companies

Shariah-compliant funds have many requirements that must be met. Some of these requirements include the exclusion of investments in companies that derive a significant portion of their income from the sale of alcohol, pork products, pornography, gambling, military equipment, or weapons. Shariah-compliant funds also require the appointment of a Shariah board, an annual Shariah audit, and the purification of certain prohibited types of income, such as interest, by donating them to charity.

Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a suitable investment, although carried interest poses a problem within Shariah law.

In terms of specific companies, Saturna Capital provides several Shariah-compliant investment funds through its Amana series. The Amana Growth Fund, launched on February 3, 1994, seeks long-term capital growth through investments adhering to Islamic principles. As of November 2017, it had $1.7 billion in total assets under management.

Additionally, S&P Dow Jones Indices has created several Shariah-compliant indexes for Muslim investors, such as the S&P 500 Shariah, which was launched in December 2006. This index comprises all the Shariah-compliant constituents in the S&P 500. Other Shariah-compliant indexes maintained by S&P Dow Jones include the S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, and the S&P Developed Large and Mid Cap Shariah.

In Canada, Global Iman Fund has been offering the longest-running halal mutual fund since 2009, with a minimum investment of $500. Wealthsimple, one of Canada's largest robo-advisors, also introduced a halal portfolio this year, with no minimum investment and relatively low fees.

Overall, Shariah-compliant companies and investment funds aim to provide Muslims with investment opportunities that align with their religious beliefs and values.

Halal mutual funds

Muslims are not allowed to invest in all categories of funds, and there are certain restrictions on their investment types. Shariah-compliant funds invest within the boundaries of Islamic law, which include the following:

• Muslims cannot invest in anything that could harm other people or the environment, or in companies that promote weapons, alcohol, tobacco, pork, gambling, pornography, etc.
• Muslims are expected to avoid interest or Riba. The Kuran states that anyone who engages in this has declared war against God. Therefore, Muslims are not allowed to invest in companies that deal with Riba.
• These funds tend to avoid immoderate levels of risk. Derivatives and companies with high debts are not included.
• These funds avoid investment in fixed-income instruments.

There are several options for investing in Halal mutual funds. The first is to invest with an advisor who knows about Shariah-compliant investments. If you have a large sum to invest, you can go to one of the major banks and get a professional investment advisor to manage your investments.

The second option is to invest in a Halal mutual fund. Mutual funds pool together money in a portfolio consisting of many different investments. This portfolio is actively managed by professional fund managers. The longest-running Halal mutual fund in Canada is the Global Iman Fund, which has been in operation since 2009. Their minimum investment is $500, and investments can be part of your RRSP or TFSA.

The third option is to invest through a robo-advisor with a Halal portfolio. Like mutual funds, robo-advisors allow investors to diversify their investments, but they use technology to minimize human intervention and costs. Wealthsimple, one of Canada's largest robo-advisors, introduced a new Halal portfolio this year. There is no minimum investment, and everything can be done online.

The fourth option is to invest in your own selection of Halal stocks. If you are not happy with the selection of stocks offered by the above options and do not have enough to work with an advisor, you can invest in your own selection of Halal stocks.

The fifth option is to invest in precious metals or a precious metals mutual fund or ETF. Gold and silver have been stores of value since time immemorial. You can buy gold and silver bullion at the bank or certain stores or online. You can also buy shares in the Bullion Management Group (BMG), which offers mutual funds that represent shares of physical gold, silver, and platinum stored in secure vaults.

The sixth option is to invest in land or property. If you have a large sum to invest, you can buy a piece of land or property to either profit from the rent or from selling it at a higher price in the future.

The seventh option is to invest in housing cooperatives. Islamic housing cooperatives were developed as a way for Muslims to buy homes without using interest-free loans. Members purchase shares, which help buy other members' homes. They then receive dividends based on their share of the rent from these homes. The longest-running Islamic housing cooperative in Canada is the Ansar Cooperative Housing Corporation, which has been in operation since 1981.

In the United States, Wahed Invest LLC is the first digital advisor focused on building a Halal investment platform. Wahed provides a comprehensive, easy-to-use option to invest in ethically responsible investment portfolios. Wahed's new funds offer two improvements over other Shariah funds. First, the Wahed S&P Shar'iah investment solutions will be the first passive, index-tracking investment option available in the United States. Second, the new solutions will have zero fund management fees, compared to fees of 1% and above charged by existing Halal mutual funds.

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