Halal investing: Top halal ETFs as of February 2023
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There are lots of things to consider when you want to invest in Shariah-compliant funds.
Halal investing means that money should only be invested on businesses, products and services that are ethical and meet the requirements of Shariah law and Islamic principles.
This means that halal products and services must not be derived from gambling, alcohol or interest-based transactions.
Because of these requirements, a lot of people are using halal ETFs, or exchange traded funds, as a way to make a profit while keeping their assets in line with the Koran’s teachings.
In this article, we will delve deeper into the world of Shariah-compliant, halal ETFs to show you the best options available for making a profit while still keeping in line with Islamic principles.
What are the requirements for halal ETFs?
Halal investing means that money is only spent on businesses, products and services that are ethical and meet Islamic principles. The word halal refers to what is lawful or permitted in Islam.
The idea behind halal investing is simple: you can make money while staying in line with your faith. In fact, many Muslims believe it’s their duty to find ways to invest ethically so as not to profit from companies whose activities go against Islamic law.
While the idea is in itself very straightforward, implementing it takes a lot of work because there are a lot of regulations and standards that must be followed that are based on Shariah principles.
For instance, not only does halal investing expressly forbid investments in companies that involve pork or alcohol in their business, but also products and services derived from gambling, alcohol or interest-based transactions.
A fund that complies with Shariah regulations must also have a Shariah board that is appointed, undergo a yearly Shariah audit, and donate certain prohibited forms of income, such interest, to charities.
These rules make managing a Shariah-compliant fund more challenging and expensive. For instance, Islamic scholars who serve on shariah boards may charge annual fees that reach millions of dollars, increasing the entire cost of managing the fund.
It is largely a justifiable cost, since it is both challenging and time-consuming for such scholars to reach agreement for analysis and implementation of a certain course of action because they have different interpretations of Islamic law.
The fact that riba or interest is forbidden in Islam is one of the most crucial things to understand about Islamic investing.
Unfair trading practices, as well as loan fees and penalties, are usually referred to by the Arabic verb “riba,” which means “to increase” or “to exceed.
Islam’s definition of interest is a price paid for the use of money. According to Islamic law, interest can only be accepted when commodities and services are exchanged or when one person loans something to another without expecting anything in return.
In other words, if the borrower returns the loaned money with something extra, without the lender’s bidding, it is not considered riba. Depending on the nature of the transaction, this can play out in different ways.
Receiving interest on loans or savings is still referred to as riba even if the interest rate is not higher than market rates.
The topic of Islamic investing is complicated. Understanding how it works and what it entails can be challenging, particularly if you are unaware of the wide variety of goods on the market.
If you require further explanation regarding the nuances of Islamic investing, be sure to speak with a financial professional.
Why should I invest in halal ETFs in particular?
Because the strict restrictions, many Muslims find Islamic investing to be tricky.
Many Muslims just invest in halal firms that don’t engage in any of the prohibited businesses, businesses that adhere to Islamic law or those with a large Muslim customer base.
There are also options for investments that provide a guaranteed return rate instead of an interest rate (which is considered haram).
The Asian Development Bank estimates that the industry’s global assets reached a minimum of $1.9 trillion in 2015.
As a result of the industry’s continued expansion, Islamic finance has become systemically relevant in several Asian countries, including Brunei, Bangladesh, and Malaysia, where it has gained at least 15% market share in the domestic banking sector.
By and large, however, the market for Islamic investments is smaller than conventional investment markets because of its constraints.
Even as more socially conscious investors start to reconsider their investments and the sector is expanding quite quickly, there is often very few choices available for Muslim investors who want to make the most out of their money.
This is where halal ETFs can come in. Halal ETFs make Islamic investing in the stock market simple.
Index funds and ETFs follow a certain index of securities, like the S&P 500 or Nasdaq 100. An ETF tracks the performance of a certain investment index, like the S&P 500 or Dow Jones Industrial Average, and its price then reflects its net asset worth.
ETFs trade similarly to stocks because, as their name suggests, they are funds traded on exchanges.
ETFs frequently include a wide range of underlying assets, so rather than buying individual company shares, you can buy a fund that follows the performance of the entire market sector, industry, or index where that company is present.
Because of this, halal ETFs can track particular indexes with Shariah-compliant investments, and it will be the same as if you are buying these halal investments all at once. And the best part of it is you can do it all without keeping track of them individually.
Halal ETFs often follow an Islamic benchmark index, which is made up of businesses that clearly refrain from engaging in any pursuits that Islam forbids, like interest-based lending (riba), gambling (maisir), and ambiguity (gharar).
Sharia law is applied to these indexes. Western financial institutions are typically omitted from these since they rely on interest income from loans and is regarded as being inconsistent with Sharia law.
Another point is that businesses must have a certain level of stability, and as a result, cannot exceed set limitations for leverage or debt.
Furthermore, there are a number of exclusion standards for non-Sharia-compliant markets and sectors that are quite comparable to standards for sustainable indexes.
As a result, the healthcare and technology industries are heavily represented in Sharia-compliant indexes.
Most importantly, halal ETFs are run by a committee that has been appointed to regularly review the investments that make up the fund to make sure they strictly comply to Islamic rules.
Investing in halal ETFs can easily be done with an online brokerage platform. Fortunately, the best part about ETFs is that they are traded similarly to conventional stocks, and so they are very easy to purchase or sell shares of through your broker.
What are the benefits of ETFs?
ETFs are often thought to be more liquid than individual equities, which means they are simpler and less expensive to trade in addition to what we have already mentioned.
Investors utilize them as a vital component of their portfolio management plan for this reason.
The fact that ETFs charge less in fees than mutual funds is the primary advantage of investing in them. This is because an ETF may track the performance of the indexes it is based on throughout the day and automatically reflect their values. ETFs require little to no management.
ETFs also provide you access to the entire market without requiring you to initially purchase individual securities, which is another major benefit.
They are also very affordable that a beginning investor can buy them at just $100. This enables investors who lack sufficient funds to make big investments but still need something liquid and accessible when they do.
ETFs are rather simple in terms of investments. Due to their high liquidity, you can buy and sell them at any time, which makes investing in them simpler.
This liquidity is crucial for the flexibility of a portfolio. The ease and accessibility of buying or selling shares might provide you more control over how you react to changes in the market.
There will always be a huge number of buyers and sellers trying to trade ETFs if a certain stock is rising or dropping.
Additionally, the liquidity can aid in wealth management by providing a place for you to store your funds while you review or appraise your investment portfolio.
After buying an ETF, you can effectively keep it till your investment grows. You can choose whether to use the revenues of the sale to meet any demands you may have or to invest them in a different asset class.
And because ETFs are traded on exchanges where investors can easily access them as compared to traditional mutual funds where you rely on a middleman to make decisions for you, investors like you have access to more information with ETFs than you would with traditional mutual funds.
When trading ETFs, you have access to data like bid/ask spreads, order executions, trading volumes, price quotes from different market makers like banks, brokers, or hedge funds, bid/ask spreads, and more, which can offer you more confidence when making your investment decisions.
This is especially helpful for Islamic investing as you have all the tools you need to ensure your investments adhere to your faith.
If a particular investment makes you uncomfortable or doubtful, the tools, information, and the liquidity you have up your arsenal can give you the means to correct your portfolio. Of course, you can always rely on a professional financial planner who is familiar with Sharia compliance as well!
Top halal ETFs as of February 2023
iShares MSCI World Islamic UCITS ETF
This is one of three Islamic ETFs that started trading in 2007 offered primarily by iShares. Much of the makeup of this halal ETF is invested in stocks of information technology, healthcare, and energy companies. Its three largest assets are stocks Microsoft, Tesla, and Exxon Mobil Corp, all of which are global corporations that adhere to Islamic investing guidelines.
iShares MSCI USA Islamic UCITS ETF
This Islamic ETF, the second in iShares’ 2007 batch, follows the same fundamentals as the globe ETF but is solely focused on companies that are listed in the United States. Microsoft, Tesla, and Exxon Mobil Corp again lead the list of its assets, which are largely comparable to those of the global fund.
iShares MSCI Emerging Markets Islamic UCITS ETF
The last iShares offering selects only businesses from emerging markets. These are primarily situated in Asia, with South Korean, Indian, and Chinese businesses accounting for more than half of the portfolio.
This makes it a far more volatile ETF than the two listed above it. The largest share of the fund’s assets are invested in Samsung Electronics, followed by those in Reliance Industries, Cia Vale Do Rio Doce, and Al Rajhi Bank.
Wahed FTSE USA Sharia ETF
This fund makes investments in Islamic-compliant large- and mid-cap equities from the FTSE Global Equity Index Series. Like iShares’ halal ETFs, this fund invests a majority in information technology, energy, and healthcare firms, with the top assets being Apple Inc. and Microsoft Corp.
S&P 500 Sharia Industry Exclusions ETF
The fund aims to follow the S&P 500 Sharia Industry Exclusions Index’s performance. Apple Inc. and Microsoft Corp. top the list of its assets, with Alphabet Inc. following close behind.
SP Funds S&P Global REIT Sharia ETF
A popular strategy for making passive income is property investing, which comprises buying a house and renting it to tenants in exchange for a steady monthly income. Investing in land and real estate is generally acceptable as halal provided that there are no forbidden features present.
Therefore it makes sense that a Sharia-compliant real estate investment trust (REIT), which combines the greatest qualities of real estate and trust funds, is a good halal ETF to invest in. Before fees and expenses, SPRE aims to replicate the S&P Global All Equity REIT Shariah Capped Index’s performance.
Wahed Dow Jones Islamic World ETF
This actively-managed ETF tracks the Dow Jones Islamic Market International Titans 100 Index (the “Index”), which aims to give investors exposure to international equities in developed and emerging markets (aside from the United States) while adhering to Islamic ethical and ESG principles.
What is interesting about this halal ETF is that hen building the fund, further ESG (Environmental, Social, and Governance) screening is also taken into consideration.
Environmental standards take into account a company’s environmental stewardship efforts. Under the social criteria, the management of connections with clients, partners, staff members, and the communities in which it operates is reviewed.
Governance includes the areas of leadership, executive compensation, audits, internal controls, and shareholder rights.
ETFB Green SRI REITs ETF
This is another halal ETF that further screens investments through ESG standards, and it aims to mimic the performance of the FTSE EPRA Nareit Ideal Ratings Developed REITs Islamic Green Capped Index prior to fees and expenditures.
The fund follows the performance of the index through passive management. The index it follows is made up of a portfolio of developed market exchange-listed real estate investment trusts that also satisfy IdealRatings, Inc.’s standards for business, finance, socially responsible investing, and green investing.
Depending on the energy usage and green building certification, constituent weights are modified as well.
SP Funds Dow Jones Global Sukuk ETF
Financial certificates known as sukuk, which are akin to bonds and issued on international financial markets, are designed to adhere to Sharia, or Islamic law, and its investment rules.
Sukuk differ from traditional bonds in that they are built on several contracts to generate financial commitments, and investors receive returns that are thought of as profit sharing rather than interest.
International financial institutions, foreign governments (especially those of emerging markets), as well as foreign government agencies, instrumentalities, or special purpose vehicles, are all potential sukuk issuers.
The SP Funds Dow Jones Global Sukuk ETF aims to mimic the Dow Jones Sukuk Total Return (ex Reinvestment) Index’s performance before fees and expenditures.
The majority of the Index’s constituents, which have an average weighted maturity of about six years, represent investments in other nations. The Index also includes investment-grade sukuk denominated in dollars.
The minimum time to maturity for sukuk is one year, and they must have a credit quality rating of at least BBB-/Baa3 from Standard & Poor’s Financial Services LLC, Moody’s Investors Service, Inc., or Fitch Ratings, Inc. in order to qualify for inclusion in the Index.
Aside from allowing Muslim investors to make money while adhering to their faith, Halal ETFs have many advantages, including diversification, cheaper costs, transparency, and flexibility in trading.
They may also allow investors to be able to stay away from risky investments in highly leveraged instruments.
Due to their lack of exposure to highly leveraged corporations and traditional financial services, Sharia-compliant investors survived the financial crisis of 2008–2009, demonstrating the advantages of this strategy.
As a result, it is not surprising that many non-Muslims consider Sharia-compliant investing to be a great strategy to protect themselves from leverage.
Halal investing allows Muslim investors to invest in companies that meet Islamic principles and gives them access to a wide range of options when it comes time for retirement planning or other long-term goals like buying a home or starting a business venture.
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