Halal Etf Investing: Picking The Right Fund

Exchange-Traded Funds (ETFs) are a type of investment that allows you to own a small piece of many different things at once. For Muslims, selecting the right ETFs requires balancing financial performance with Shariah compliance. While there are several US-listed Shariah-compliant ETFs, they tend to be more expensive than non-halal funds.

When choosing a Shariah-compliant ETF, investors should consider factors such as the underlying index, expense ratio, tracking error, trading volume, turnover rate, and assets under management (AUM). The cheapest halal ETF has a yearly expense ratio of 0.49%good expense ratio is considered to be between 0.5% and 0.75%

- SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS)

- Wahed FTSE USA Shariah ETF (HLAL)

- SP Funds S&P Global Technology ETF (SPTE)

- SP Funds S&P World ETF (SPWO)

- Wahed Dow Jones Islamic World ETF (UMMA)

- SP Funds S&P Global REIT Shariah ETF (SPRE)

- SP Funds Dow Jones Global Sukuk ETF (SPSK)

- Wealthsimple Shariah World Equity Index ETF (WSHR)

- iShares MSCI Emerging Markets Islamic UCITS ETF (ISDE)

- iShares MSCI World Islamic UCITS ETF (ISWD/ISDW)

- iShares MSCI USA Islamic UCITS ETF (ISUS/ISDU)

- Invesco Dow Jones Islamic Global Developed Markets UCITS ETF (IGDA)

- Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAP/AMAL)

- HSBC MSCI USA Islamic ESG UCITS ETF (HIUS/HIUA)

- HSBC MSCI Emerging Markets Islamic ESG UCITS ETF (HIES)

Shariah-compliant ETFs

When selecting a Shariah-compliant ETF, it is important to consider factors such as the underlying index methodology, performance, size, cost, age, income, domicile, and replication method. While there are a limited number of Shariah-compliant ETFs available, here is an overview of some of the options to consider:

Invesco Dow Jones Islamic Global Developed Markets UCITS ETF:

Invesco's ETF provides exposure to Shariah-compliant stocks across developed markets globally. With a focus on large-cap growth stocks, its top holdings include well-known tech companies. It has an expense ratio of 0.40%, making it a cost-effective option.

IShares MSCI World Islamic UCITS ETF:

This ETF offers diversified exposure to international businesses, with a focus on strong industries like technology. It has an impressively low expense ratio of 0.30%, making it an attractive choice for cost-conscious investors.

IShares MSCI USA Islamic UCITS ETF:

Providing exposure to the US equity market, this ETF tracks the MSCI USA Islamic Index and has an expense ratio of 0.30%. Its top holdings include major US companies across sectors such as technology, energy, and healthcare.

IShares MSCI Emerging Markets Islamic UCITS ETF:

For those seeking exposure to emerging markets, this ETF has almost half of its holdings in the tech industry. With over 300 holdings, it provides a diverse range of investment options.

Wahed FTSE USA Shariah ETF (HLAL):

Audited for Shariah compliance by Yasaar Limited, this ETF tracks the FTSE Shariah USA Index. With a tilt towards technology, communication services, and healthcare, it includes well-known companies like Microsoft, Apple, and Tesla. It has an expense ratio of 0.50%.

SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS):

This ETF provides exposure to large US companies that are Shariah-compliant, excluding certain industries. With a heavy weighting in technology, its top holdings include Apple, Microsoft, NVIDIA, and Amazon. It has an expense ratio of 0.45% and a low turnover rate of 5%.

Wealthsimple Shariah World Equity Index ETF (WSHR):

As Canada's first Shariah-compliant ETF, WSHR invests in Shariah-compliant companies across developed markets, focusing on quality and low volatility. Its portfolio includes consumer staples, technology, and healthcare companies. It has a management expense ratio of 0.56%.

Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAP/AMAL):

Offered by Saturna Capital, this ETF provides exposure to high-quality global stocks that meet Islamic investing principles and ESG criteria. With a focus on the tech and healthcare sectors, its top holdings include Taiwan Semiconductor and Microsoft. It has an expense ratio of 0.75%.

HSBC MSCI USA Islamic ESG UCITS ETF (HIUS/HIUA):

This ETF provides exposure to large- and mid-cap US companies that comply with Shariah principles while integrating ESG factors. With a strong focus on the technology sector, it has an expense ratio of 0.30%.

HSBC MSCI Emerging Markets Islamic ESG UCITS ETF (HIES):

For those seeking exposure to emerging markets, this ETF offers a Shariah-compliant and ESG-focused approach. With a heavy weighting in technology, its top holdings include Taiwan Semiconductor and Samsung Electronics. It has an expense ratio of 0.35%.

Halal index funds

When selecting a Halal index fund, it is important to consider not only Sharia compliance but also factors such as expense ratios, tracking errors, and underlying holdings. Here is an overview of some of the top Halal index funds available:

SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS)

SPUS provides exposure to large US companies that comply with Islamic principles. It has an expense ratio of 0.45% and a low turnover rate of 5%. Its portfolio is heavily weighted towards technology, with top holdings including Apple, Microsoft, NVIDIA, Amazon, and Alphabet.

Wahed FTSE USA Shariah ETF (HLAL)

HLAL is one of the best ETFs to purchase, offering exposure to large and mid-cap US companies that are Sharia-compliant. It has an expense ratio of 0.50% and a turnover rate of 29%. Its portfolio has a notable tilt towards technology, communication services, and healthcare. Top holdings include Microsoft, Apple, Meta Platforms, Alphabet, and Tesla.

SP Funds S&P Global Technology ETF (SPTE)

SPTE is a halal ETF primarily invested in the tech industry, tracking the performance of Shariah-compliant, large-cap equity securities within the IT sector. Its top holdings include Taiwan Semiconductor Manufacturing, NVIDIA, Microsoft, Apple, and SAP SE.

SP Funds S&P World ETF (SPWO)

SPWO follows an index that measures the performance of Shariah-compliant companies in developed and emerging markets outside the US. Its holdings are diversified across the tech, healthcare, industrials, and consumer cyclical sectors. Top holdings include Taiwan Semiconductor Manufacturing, Novo Nordisk, Nestle SA, and Astrazeneca PLC.

Wahed Dow Jones Islamic World ETF (UMMA)

UMMA provides exposure to the largest Shariah-compliant companies outside the US, representing 21 nations. The majority of its holdings are in the tech industry. Top holdings include Taiwan Semiconductor Manufacturing Company, Novo Nordisk, ASML Holding, and Infineon Technologies.

SP Funds S&P Global REIT Shariah ETF (SPRE)

SPRE is the only Shariah-compliant global REIT ETF available, providing exposure to Shariah-compliant REITs from developed and emerging markets. Its top holdings include well-known REITs such as Prologis, Equinix, Goodman Group, and AvalonBay Communities. It has an expense ratio of 0.55% and a trailing 12-month yield of 4.31%.

SP Funds Dow Jones Global Sukuk ETF (SPSK)

SPSK is the only Sukuk ETF in the US, providing exposure to Islamic financial certificates similar to bonds but structured to comply with Islamic law. Its holdings are backed by various types of assets, including tangible and intangible assets. Top holdings include sukuk issued by entities such as KSA Sukuk Limited and SA Global Sukuk Ltd.

Wealthsimple Shariah World Equity Index ETF (WSHR)

WSHR is the first Shariah-compliant ETF in Canada, tracking an index of Shariah-compliant companies across developed markets. It has a management expense ratio of 0.56% and a trailing 12-month yield of 1.38%. Its portfolio differs from traditional market-cap-weighted indexes, focusing on quality and low volatility factors. Top holdings include Barry Callebaut, The Coca-Cola Company, Nestlé, and Novartis.

IShares MSCI Emerging Markets Islamic UCITS ETF (ISDE)

ISDE offers exposure to emerging markets across the world, with almost half of its holdings in the tech industry. Its top holdings include Taiwan Semiconductor Manufacturing, Samsung Electronics, Reliance Industries, and Vale.

IShares MSCI World Islamic UCITS ETF (ISWD/ISDW)

ISWD/ISDW has a low expense ratio of 0.30% and provides exposure to international businesses across strong industries, particularly the tech sector. Its top holdings include Microsoft, Tesla, Exxon Mobil, and The Procter & Gamble Company.

IShares MSCI USA Islamic UCITS ETF (ISUS/ISDU)

ISUS/ISDU provides exposure to the US equity market, with an expense ratio of 0.30%. Its top holdings include Microsoft, Tesla, Exxon Mobil, Procter & Gamble, and Johnson & Johnson, representing a diverse range of sectors.

Invesco Dow Jones Islamic Global Developed Markets UCITS ETF (IGDA)

IGDA offers a diversified portfolio of Shariah-compliant equities in developed markets, tracking the performance of the Dow Jones Islamic Market Developed Markets Index. It has an expense ratio of 0.40%. Its top holdings include Microsoft, Apple, NVIDIA, Amazon, and Meta Platforms, with a strong focus on the technology sector.

Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAP/AMAL)

AMAP/AMAL is a Shariah-compliant ETF that provides exposure to high-quality global stocks that meet Islamic investing principles and ESG criteria. It has an expense ratio of 0.75%. Its holdings are concentrated in the tech and healthcare sectors, with top holdings including Taiwan Semiconductor Manufacturing, Microsoft, Eli Lilly, and Alphabet.

HSBC MSCI USA Islamic ESG UCITS ETF (HIUS/HIUA)

HIUS/HIUA is a relatively new halal ETF that provides exposure to large and mid-cap US companies that comply with Shariah principles and integrate ESG factors. It has an expense ratio of 0.30%. Its top holdings include Microsoft, Tesla, Advanced Micro Devices, and Adobe.

HSBC MSCI Emerging Markets Islamic ESG UCITS ETF (HIES)

HIES is a new ETF offering exposure to large and mid-cap companies across 24 emerging markets, adhering to Shariah principles and integrating ESG factors. It has an expense ratio of 0.35%, with a strong focus on the technology sector. Its top holdings include Taiwan Semiconductor Manufacturing and Samsung Electronics.

These Halal index funds offer diverse investment options, allowing investors to build Sharia-compliant portfolios that align with their values and financial goals.

Islamic principles

Business Activity

The nature of the business activities of the companies held by an ETF is a crucial factor. Islamic finance principles prohibit investing in companies that generate revenue from non-Halal or forbidden sources. If the revenue from non-Shariah-compliant activities is less than 5% of the overall revenue of the stocks held by an Equity ETF, it is considered Shariah-compliant. Restricted business sectors that are typically not suitable for Halal investment include gambling, riba (interest-based lending), alcoholic beverages, the pork industry, tobacco, the cannabis sector (unless approved for medicinal use by Islamic scholars), and the adult entertainment industry.

Interest-Bearing Securities and Assets

Islamic finance strictly prohibits earning money from money, such as charging interest. Therefore, Halal ETFs cannot include companies that hold a significant number of interest-bearing securities or assets. The aggregate amount of interest-bearing securities and assets should not exceed 30% of the trailing 36-month average market capitalization of the ETF to be considered Shariah-compliant.

Interest-Bearing Debt

Halal investing also involves avoiding companies with high levels of debt acquired through interest-based lending, which is considered "Riba" and prohibited in Islamic finance. The interest-bearing debt of the holdings in the ETF must be below 30% of the total market capitalization for it to be Halal.

Management and Compliance

Halal ETFs are managed by an appointed committee that regularly reviews the fund to ensure strict adherence to Islamic principles. The committee ensures that the ETF complies with the parameters set for business activity, interest-bearing securities and assets, and interest-bearing debt. Additionally, some ETFs may have a Shariah certificate, indicating that they have been certified as Shariah-compliant.

By following these Islamic principles and guidelines, investors can identify and invest in Halal ETFs that align with their religious and ethical beliefs while also pursuing their financial goals.

Sharia-compliant companies

Sharia-compliant funds have many requirements that must be met. These include the exclusion of investments in companies that derive the majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment, or weapons.

Other characteristics of a Sharia-compliant fund include the appointment of a Sharia board, an annual Sharia audit, and the purification of certain prohibited types of income, such as interest, by donating them to charity.

• Saturna Capital: Offers several Sharia-compliant investment funds through its Amana series, including the Amana Growth Fund (AMAGX), which seeks long-term capital growth through investments adhering to Islamic principles.
• S&P Dow Jones Indices: Has created multiple Sharia-compliant indexes, such as the S&P 500 Shariah, S&P Global Healthcare Shariah, and S&P Global Infrastructure Shariah.
• IShares: Provides a range of Sharia-compliant ETFs, including the iShares MSCI USA Islamic UCITS ETF and iShares MSCI World Islamic UCITS ETF.
• Wahed: An investing app that caters to Muslims by offering Sharia-compliant ETFs like the Wahed FTSE USA Shariah ETF and the Wahed Dow Jones Islamic World ETF.
• SP Funds: Offers Sharia-compliant ETFs such as the SP Funds S&P 500 Sharia Industry Exclusions ETF and the SP Funds S&P Global REIT Sharia ETF.

When investing in Sharia-compliant companies, it is important to consider factors such as fund size, cost, age, income, domicile, and replication method. Additionally, the methodology of the underlying index and the performance of the ETF should be taken into account.

Sharia-compliant investing presents a unique set of challenges and considerations. Investors should commit to Sharia compliance and develop clear frameworks to guide their investment process. It is also essential to understand the opportunity sets and underlying exposures of different asset classes to make informed decisions about risk and return.

Halal investment screening tools

There are several tools available to help investors identify and select halal investments, including ETFs. These tools typically involve screening companies based on specific criteria to determine their compliance with Islamic principles and guidelines. Here are some of the notable ones:

Finispia

Finispia is an award-winning FinTech company that offers a range of ethical financial services, including halal screening. Their platform allows users to screen stocks, ETFs, REITS, funds, and more across over 90 stock exchanges worldwide. Finispia's screening methodologies are inspired by five Islamic investment methodologies: DJ, FTSE, S&P, MSCI, and AAOIFI. They also offer educational resources and courses on Islamic finance and investment.

Islamicly

Islamicly is a Shariah-compliant trading platform that collaborates with 32+ leading stock brokers globally. It offers a Shariah screening process that is certified by leading Shariah scholars and is trusted by 300,000+ Muslim investors globally. The platform allows users to connect their existing broker accounts and automatically monitors their holdings, alerting them to any compliance changes. Islamicly also provides institutional-grade Shariah advisory services to guide investors in making compliant investment decisions.

Sahih Invest

Sahih Invest provides Islamic screening and halal stock analysis for investors. They employ a rigorous verification methodology developed in partnership with the Russian Islamic Institute and approved by the Spiritual Board of Muslims of the Republic of Tatarstan. Sahih Invest's team includes Shariah experts certified by AAOIFI, analysts with doctoral degrees, and specialists trained under the ACCA DipIFR program. They conduct quarterly checks and analyse companies' financial statements to ensure compliance with Islamic principles.

Amal Invest

Amal Invest offers an online guide to halal ETFs, providing information on various Shariah-compliant ETFs available in different geographies and market segments. Their guide includes performance comparisons, top holdings, and expense ratios to help investors make informed decisions. While they do not provide a specific screening tool, their educational content can assist investors in understanding the halal ETF landscape.

JustETF.com

JustETF.com is a website that provides a comprehensive list of Sharia-compliant ETFs, along with detailed information on each fund. The ETFs are ranked by fund size, and the website offers comparisons based on factors such as size, cost, age, income, domicile, and replication method. It serves as a valuable resource for investors looking for transparent information on Sharia-compliant investment options.

Frequently asked questions