Sharia investing for US investors
Sharia investing is investing according to a set of Islamic principles. Sharia investing for US investors looks at ideas that US investors might use to implement a Boglehead-style portfolio within these principles.
Islamic principles discourage followers from promoting or advancing certain activities. Some of these activities are discouraged on religious grounds, but some are societal or environmental. Haram (forbidden) activities include:
- Weapons and armaments manufacture
- Adult entertainment and pornography
- Pork, pork-related products, and non-halal food production
- Non-Islamic financing
While the first four of these areas are usually non-negotiable, less conservative interpretations might be more relaxed about tobacco, pork, cloning, and financing. Conversely, more conservative interpretations might add the following to the list of forbidden activities:
- All financial services
- Music and video entertainment
- Hotels and retail that include alcohol operations
The number of Sharia-compliant exchange-traded funds (ETFs) and mutual funds is limited. The screening process for their contents can be complex, lengthy, and consequently expensive. As a result, those that do exist have some possible drawbacks:
- Relatively high expense ratios (TERs) compared to ETFs and funds that have a wider investment remit
- Lower diversification, because of the restricted set of allowable investments
- Potential low daily trading volume for ETFs[note 1]
- Likely lower assets under management, increasing the chance of fund closure[note 2]
- Screening may result in a bias towards certain sectors. For example, healthcare and information technology.
Because of these limitations, some Sharia investors may find it acceptable to instead use Socially responsible investing (SRI) or Environmental, social and corporate governance (ESG) funds, or to use a selection of sector-specific ETFs, in place of fully compliant Sharia funds or ETFs.
Sharia fund suggestions
The following ETFs are fully Sharia-compliant and US domiciled.
|Wahed FTSE USA Shariah ETF||Principles-selected, market-cap-weighted index of US equities||0.5%||HLAL|
|SP Funds S&P 500 Sharia Industry Exclusions ETF||Market-cap weighted index of S&P 500 stocks that are Sharia-compliant||0.49%||SPUS|
|SP Funds S&P Global REIT Sharia ETF||Market-cap-weighted index of Shariah-compliant global REITs||0.69%||SPRE|
|SP Funds Dow Jones Global Sukuk ETF||USD-denominated global investment-grade sukuk of various maturities and weighted by market value||0.65%||SPSK|
The following mutual funds offer some level of Sharia-compliance and are US domiciled. Investors should check carefully that the Sharia compliance of these funds matches requirements.
|Allied Asset Advisors Iman Fund||Tracks the Dow Jones Islamic Index||1.33%||IMANX|
|Amana Income Fund||High current income and preservation of capital, consistent with Islamic principles||1.06%||AMANX|
|Amana Growth Fund||Long-term capital growth. Investment decisions are made in accordance with Islamic principles.||1.02%||AMAGX|
|Amana Participation Fund||Capital preservation and current income, consistent with Islamic principles.||0.88%||AMAPX|
|Amana Participation Fund (Institutional)||Capital preservation and current income, consistent with Islamic principles.||0.63%||AMIPX|
|Azzad Wise Capital Fund[note 3]||Invest primarily in certificates entitling the holder to payment of a fixed return on a periodic basis up to and including maturity, at which time the initial investment will be repaid together with a profit amount.||1.29%||WISEX|
|Azzad Ethical Fund[note 3]||Long-term total returns that, after expenses, match or exceed the annualized performance of the Standard & Poor's Midcap 400 Index||0.99%||ADJEX|
- An ETF's trading volume is not a complete measure of its liquidity. See: "Understanding ETF liquidity and trading" (PDF). Vanguard. Retrieved April 25, 2021.
- For example: "RL360 - Liquidation - Aberdeen Standard Islamic Global Equity fund". RL360. Retrieved April 29, 2021.
- This fund does not explicitly claim to be fully Sharia-compliant.
- "Seven Prohibited Industries in Islamic Financial Investments". Dummies.com. Retrieved April 25, 2021.
- "The alignment of Shariah and sustainable investing" (PDF). Schroders/Maybank Islamic Centre of Excellence. November 2019. Retrieved April 25, 2021.
- Shariah-Compliant Funds Definition, from Investopedia
- Islamic finance products, services and contracts, from Wikipedia
- Sharia and securities trading, from Wikipedia
- Retirement Savings, the Muslim Way, from NYT.
- Seven Prohibited Industries in Islamic Financial Investments, from Dummies.com.
- Bogleheads® forum topic: , TedSwippet. April 29, 2021