Islamic finance: A different way to achieve the same result

Sharia-compliant investments differ from the regular ones in their approach, but not in their outcomes. How to choose assets that do not conflict with Islamic law? 

Islamic finance

The concept of Sharia-compliant investing emerged in the 1960s. Islamic law prohibits investments in assets that generate fixed monetary income, bonds in particular. However, it permits purchasing stocks, provided they are issued by companies operating within the bounds of Islamic law — for example, those not engaged in the production or sale of alcohol.  

The first Islamic funds were established in Malaysia in the late 1960s and the Middle East in the mid-1970s. Today, there are around 1,500 of them. The S&P 500 Shariah Index became comparable to the S&P 500 Index, investing in 264 American companies. Another prominent Islamic index, the Dow Jones Islamic Market Index, includes stocks from several of the world’s largest enterprises, comprising 4,702 stocks in total. 

The S&P 500 Index has delivered an average annual yield of 13.7% over the past five years, while its Islamic counterpart has achieved 15.7% per annum.

How are securities selected for inclusion in Islamic funds?

Companies are selected based on the industries they represent. Islamic funds are prohibited from investing in companies involved in the production or sale of alcohol, pork, conventional financial services or specific entertainment industries, such as casinos. Tobacco and firearms are also on the restricted list. Following the first stage of the selection process, the financial performance of the companies that pass the preliminary stage is examined. This stage also includes special requirements. It is worth noting that Sharia law permits a small portion of income from prohibited activities. However, an Islamic fund must allocate this money for charity rather than including it as revenue.

Some people might think that Islamic funds invest in exotic or unconventional businesses, but this is not the case. These funds hold stakes in many renowned companies such as Apple, Nvidia, Nestle, Amazon and Johnson & Johnson. Nevertheless, Islamic funds still have significant room for further investment. 

What about trading?

The attitude towards manipulations on the stock exchange is controversial in Islam, as these actions may be considered akin to gambling. For this reason, Muslim investors are advised to avoid actively trading on the stock market independently. Instead, they are encouraged to invest passively through specialized Islamic funds. Rookie investors may find it challenging to choose a fund that suits their needs. Therefore, we recommend several options for exchange-traded funds (ETFs). These funds are available for investment through intermediaries or brokers based in Kazakhstan and abroad, as well as via foreign insurance companies.

Which funds may Muslims invest in?

Here are some ETFs we recommend for Muslims. Several funds in the list are included in the portfolio: 

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

This is the largest and most popular fund, investing in 226 stocks issued by companies on the S&P 500 Index. Basically, it’s the S&P 500 for Muslims. The fund surged by 122% over the past five years, and its assets under management (AUM) are estimated at $920 million.

• iShares MSCI World Islamic UCITS ETF (ISWD)

The fund invests in 357 stocks from all over the world, reporting a five-year yield of 58% and AUM at $646 million.

We primarily recommend these two funds as they are linked to the good indices. However, if investors want to diversify their portfolios with additional assets, the following funds could be good options: 

• SP Funds Dow Jones Global Sukuk ETF (SPSK)

The fund invests in financial certificates that are comparable to bonds. Investors adherent to the Islamic faith do not invest in traditional bonds. That’s why this fund features securities that are not conventional bonds but special financial instruments known as Sukuk. The owner of Sukuk receives «interest» as a part of the overall profit derived from the issuer’s investment project. As in the case of traditional bonds, the percentage of income is agreed upon beforehand. Over the five years, the fund has generated a yield of only 1.3%. However, it is important to note that this was a challenging period for all bonds. The fund’s AUM stands at $263 million. 

• SP Funds S&P Global REIT Sharia ETF (SPRE)

This is a real estate investment trust (REIT) with a five-year yield of 24% and AUM at $158 million.

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

The fund invests in stocks issued by tech companies from around the world. Over the past five years, it has delivered a yield of 37%.