The Ultimate Ranking of All Halal ETFs

Disclaimer: This post is for informational and educational purposes only, not financial or investment advice. The opinions are solely those of the author, not any organization. Consult a professional before making investment decisions, as all investments carry risk. The author is not liable for losses or damages resulting from the use of this information. Past performance does not predict future results.

Why Buy ETFs?

Exchange-Traded Funds (ETFs) provide easy exposure to a desired market segment. For today’s time-constrained investors buying ETFs is often easier and quicker than researching each company in a particular target segment.

Furthermore, with one ETF investors can diversify into a basket of hundreds of stocks at much lower costs, especially if compared to investing in index funds. Even though they offer similar trading flexibility to stocks, ETFs tend to be less volatile because of the large number of constituent assets they hold and can therefore be considered a lower-risk investment than individual stocks.

Given the many benefits of investing in ETFs, we took a deep dive into the various ETFs that cater to halal-conscious investors, and we are really excited to share our findings with you in the hopes you can benefit from our research.

Starting with listing the various 'halal' ETFs available in the market.

ETFs Catering to Halal-Conscious Investors

Fixed-Income ETFs

SP Funds S&P Global REIT Sharia ETF (Ticker: SPRE), and
SP Funds Dow Jones Global Sukuk ETF (Ticker: SPSK)

Regarding REITs and Sukuk, PIF finds they are, regardless of labels, materially reliant on interest-bearing debt. Therefore, PIF is uncomfortable with either product from a halal perspective. For more discussion on this topic, you may be interested in Sukuk on Trial and REITS: Halal or Haram?

Equity (Growth) ETFs

Available in UK and Europe:

iShares MSCI World Islamic UCITS ETF (Ticker: ISWD/ISDW) – Passively managed ETF that provides diversified exposure to developed companies in the developed world.
iShares MSCI EM Islamic UCITS ETF (Ticker: ISDE/ISDM) – Passively managed ETF that provides diversified emerging markets exposure with direct investment in emerging markets companies.
iShares MSCI USA Islamic UCITS ETF (Ticker: ISUS/ISDU) – Passively managed ETF that provides exposure to a broad range of companies in the U.S.
Saturna Al-Kawthar Global Focused Equity UCITS ETF (Ticker: AMAL/AMAP/ASWE) – An Actively managed ETF focusing on Shariah-compliant stocks with positive ESG characteristics. The fund typically invests in 30-45 stocks of what it sees as high-quality, attractively priced global companies that are best-in-class on a variety of ESG, financial, and valuation metrics and have solid growth prospects.

Available in the USA:

Wahed FTSE USA Shariah ETF (Ticker: HLAL) - Passively managed ETF listed on the NASDAQ that tracks the FTSE Shariah USA Index and provides exposure to US Equities it deems to be sharia-compliant. Using large and mid-cap stocks from the FTSE Global Equity Index Series as a base universe, constituents are screened against standards set by Yasaar Limited
SP Funds S&P 500 Sharia Industry Exclusions ETF (Ticker: SPUS) - Passively managed ETF that tracks the performance of around 200 stocks from the S&P 500 Index with low debt levels. According to their manager, SP Funds, these resilient companies may be better positioned to weather economic downturns because of their lower levels of indebtedness.

Available in Canada:

Wealthsimple Shariah World Equity Index ETF (Ticker: WSHR) - Passively managed ETF that follows the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index. Companies in this index are weighted by risk, not market capitalization, and companies are screened to perform well on a low-volatility, high-quality multi-factor score. (You can see our video review of Wealthsimple here).

What is the Appeal of Sharia-Compliant ETFs?

In addition to the obvious religious motivation and benefits such as diversification, lower costs, and trading flexibility, Sharia-compliant ETFs can potentially avoid risky allocations to highly leveraged instruments.

This is because the screening methodology generally applied by all Islamic ETFs should screen out over-leveraged corporations from the fund/index.

This characteristic is especially relevant during times of rising rates and economic downturns when debt levels often determine which companies survive and which don't.

What Are “Sharia-Compliant” ETF's Screening Criteria?

With the exception of AMAL ETF which is actively managed, the ETFs in our list try to follow their respective underlying Index, which in turn is based on an even broader market index.

For example, say we have XYZ World Index, which is an index of all companies in the world in the "Consumer Discretionary" industry (level 1 screen). From the XYZ World index, we then screen for U.S. companies in the Consumer Discretionary industry (level 2 screen). We can call this the "Consumer Discretionary USA Index". Then we screen for all US companies in the Consumer Discretionary industry which are also Shariah-compliant (level 3 screen), and that’s how we get a "Consumer Discretionary USA Islamic Index". The point here is that a shariah index is usually a subset of a much broader market index that has its own screening criteria. The Shariah screen is usually applied at the very end, after screening for other objectives e.g. ESG, low-volatility, large-cap only, US-only, etc.

That said, all Islamic ETFs are screened for shariah compliance based on Business Activity, and some combination of Financial Ratios that measure a company’s reliance on interest (riba). These screens are applied to each underlying company’s stock in the respective ETF.

Based on our analysis, the business activity screening is generally the same for all Shariah-compliant ETFs, which is:

No investment in companies that are directly active in, or derive more than 5% of their revenue (cumulatively) from prohibited activities (Alcohol • Tobacco • Cannabis • Pork related products • Conventional Financial Services • Defense / Weapons • Gambling / Casino • Music • Hotels • Cinema • Adult Entertainment • Online dating).

Based on each fund’s methodology, subtle differences exist in the financial ratio screening criteria applied by each fund.

In addition to the business activity screen, MSCI Global Islamic Indexes, from which the underlying indices for the iShares MSCI World Islamic UCITS ETF, iShares MSCI EM Islamic UCITS ETF, and iShares MSCI USA Islamic UCITS ETF are derived, do not allow investment in companies where any of the following ratios exceed 33.33%:

Total Debt over Total Assets;
The sum of a company's Cash and Interest-Bearing Securities over Total Assets; or
The sum of a company’s Accounts Receivables and Cash over Total Assets.

Wahed FTSE USA Shariah ETF follows the FTSE USA Shariah Index, a subset of FTSE Global Equity Shariah Index Series which is based on the FTSE Global Equity Index Series universe. Screening is undertaken by Shariah consultants, Yasaar Limited. After initially screening for prohibited revenue (of less than 5%), the following financial ratio criteria are applied to screen constituents for index inclusion:

Debt is less than 33.33% of total assets
Cash and interest-bearing items are less than 33.333% of total assets
Accounts Receivable and Cash are less than 50% of total assets
Total interest and non-compliant activities income should not exceed 5% of total revenue.

As per the methodology for S&P Shariah Indices, the following financial ratio criteria are applied in screening shariah-compliant companies for the underlying indexes followed by SP Funds S&P 500 Sharia Industry Exclusions ETF:

Debt / Market Value of Equity (36-month average) < 33 %
Cash Compliance: Certain rules related to cash holdings must be met, these are:
- Accounts Receivables / Market value of Equity (36-month average) < 49 %
- (Cash + Interest Bearing Securities) / Market value of Equity (36-month average) < 33%

The Wealthsimple Shariah World Equity Index ETF is based on the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index, a subindex of the Dow Jones Islamic Market Indices. As per the Methodology for Dow Jones Islamic Market Indices, the following financial ratio criteria are used for screening:

All of the following must be less than 33%:

Total debt divided by trailing 24-month average market capitalization
The sum of a company’s cash and interest-bearing securities divided by the trailing 24-month average market capitalization
Accounts receivables divided by trailing-month average market capitalization

The financial ratio screening criteria for the Saturna Al-Kawthar Global Focused Equity UCITS ETF are as follows:

The total amount of interest-bearing debt does not exceed 30% of the market capitalization of the company.
The total amount of interest-bearing securities does not exceed 30% of the market capitalization of the company.
The total revenue from Prohibited Activities does not exceed 5% of the company’s total revenues.

Best ETF for Growth?

All ETFs in this category are targeted toward growth investors with a mid-to-long investment horizon.

Contenders:

Only available in UK/Europe:

iShares MSCI World Islamic UCITS ETF (ISWD/ISDW)
iShares MSCI Emerging Markets Islamic UCITS ETF (ISDE/ISDM)
iShares MSCI USA Islamic UCITS ETF (ISUS/ISDU)
Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAL/AMAP/ASWE)

Only available in USA/Canada:

Wahed FTSE USA Shariah ETF (HLAL)
SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)
Wealthsimple Shariah World Equity Index ETF (WSHR)

UK/Europe Growth ETFs

Lowest Expense Ratio: iShares MSCI USA Islamic ETF (ISUS/ISDU) at 0.5% TER

Highest Yield: iShares MSCI EM Islamic ETF (ISDE/ISDM) with a 2.21% trailing 12-month yield

Lowest Price/Earnings (P/E) ratio: iShares MSCI EM Islamic ETF (ISDE/ISDM) with 12.28 P/E

Highest ESG rating: iShares MSCI World Islamic ETF (ISWD/ISDW) with MSCI ESG rating of AA

Lowest Carbon Intensity: iShares MSCI USA Islamic UCITS ETF (ISUS/ISDU) with 194.03 tons of Co2 emissions per $1 Million in Sales

Good Diversification: iShares MSCI World Islamic ETF (ISWD/ISDW) provides diversified exposure to developed markets (see table below). This ETF strikes a good balance between sector and geographic diversification.

Verdict: Best ETF for Investors in UK and Europe

Overall, for halal-conscious investors in the UK and Europe, we find iShares MSCI USA Islamic ETF (ISUS/ISDU) has an edge over the other ETFs due to its low expense ratio, exposure to S&P 500 Shariah exclusions, low carbon emissions, and highest 1-year price gains (see table below). Though not as geographically diversified as the other ETFs, ISUS provides exposure to 100+ of the best US corporations.

We rank iShares MSCI World Islamic ETF (ISWD/ISDW) as the second-best ETF option for European and UK investors because of its low expense fee, high ESG rating, positive 1-year price change, and most of all, strong diversification.

Having started in January of 2008, MSCI Islamic ETFs are some of the first Islamic ETFs. They have provided respectable returns to investors over the last 14 years. All other ETFs discussed in this article are much more recent, having only come into existence in the past 2 to 3 years, with most being just a year old.

Investors who would like an actively managed fund may be interested in Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAL/AMAP/ASWE), which has an inception date of September 01, 2020. However, bear in mind this fund has one of the highest expense ratios (0.75% current – capped at 0.99%), the worst price performance (down more than 30% in the past year) and it is the worst-performing ETF compared to all the other ETFs discussed in this article. Also, with only USD $5.4 million in net assets, it is also the smallest fund compared to all other ETFs.

To be fair to Saturna Al-Kwather though, it does not yet have a long enough history to draw high-confidence conclusions about its investment returns.

North-American Growth ETFs (USA and Canada)

ETF with:

Lowest expense ratio: SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS) at 0.49% Total Expense Ratio (TER), though at 0.50% the TER for the other two ETFs is only a smidge more.

Highest Yield: SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS) with 1.22% trailing 12-month yield - which is only slightly higher than HLAL's 1.03% yield.

Lowest 1-year price drop: Wahed FTSE USA Shariah ETF (HLAL) had the lowest 1-year price drop of 3.54%. During the same time SPUS and WSHR, both have fallen 7.02% and 11.70% respectively.

Good Diversification: Wealthsimple Shariah World Equity Index ETF (WSHR) takes the lead in this category as it not only provides exposure to diversified business sectors but also provides good geographical diversification (see table below). The ETF invests primarily in equity securities of developed world markets and seeks to replicate the performance of the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index. This index is designed to measure the performance of stocks in developed markets anywhere in the world, which are Shariah-compliant, and characterized as having the highest combination of quality and low volatility multi-factor score. On the other hand, SPUS and HLAL are US-exclusive ETFs.

Verdict: Best ETF for Investors in US and Canada

This is a tough one, as both American Islamic ETFs, SPUS and HLAL, have similar expense ratios, yields, and net assets, and both ETFs exclusively hold US stocks. We call a virtual tie between Wahed's HLAL and Shariah Portfolio’s SPUS because the two American ETFs basically have similar returns when measured since inception dates in 2019 (~24% since December 2019).

For investors who would like more diversification and more international exposure to developed markets, Wealthsimple Shariah World Equity Index ETF (WSHR) could be a good choice. Though we may not rank this young Canadian ETF (inception: May 2021) on par with iShares MSCI World Islamic ETF (ISWD/ISDW) - a 14-year-old European ETF also providing exposure to developed markets - it is the next best alternative to it - especially if you are located in North America where the average retail investor may not have access to ISWD/ISDW.

Conclusion

To summarize, based on our review of all the Islamic ETFs discussed above, we conclude that:

ETFs provide several benefits over investing in index funds or individual stocks and can be a worthwhile alternative for investors who just want to follow the market’s performance without much effort;
During tough economic conditions (like the ones we face today) Islamic ETFs, and Shariah-compliant companies in general, may have an advantage when compared with alternatives considering their lower debt levels;
SP Funds S&P Global REIT Sharia ETF (SPRE) claims to offer strong potential for returns, capital preservation, and inflation hedging however their actual sharia compliance is highly doubtful (at best) in our view.
iShares MSCI USA Islamic UCITS ETF (ISUS/ISDU) and iShares MSCI World Islamic UCITS ETF (ISWD/ISDW) are the best-in-class Islamic ETFs available to Muslim investors in Europe and UK
- ISUS continues to be the best-performing Islamic ETF, and it focuses only on US stocks
- ISWD is the second-best Islamic ETF and provides more diversified exposure to global developed markets, including the USA
For North-American investors, Wahed’s HLAL ETF and Sharia Portfolio are very similar both in terms of performance and Total Expense Ratio

Disclaimer: All views expressed are our own and are not to be understood as personalized financial advice. Past performance is no guarantee of future results.

Sources:

Islamic Indexes - MSCI

iShares MSCI World Islamic UCITS ETF | ISWD

MSCI World Islamic Index – Fact sheet

iShares MSCI USA Islamic UCITS ETF | ISUS

MSCI USA Islamic Index – Fact sheet

iShares MSCI EM Islamic UCITS ETF | ISDE

MSCI Emerging Markets Islamic Index – Fact sheet

S&P 500 Shariah | S&P Dow Jones Indices (spglobal.com)

SPUS | SP FUNDS (sp-funds.com)

S&P 500 Shariah Industry Exclusions Index | S&P Dow Jones Indices (spglobal.com)

SPRE | SP FUNDS (sp-funds.com)