4 global Shariah-compliant ETFs which you can invest in today

Today, I will be covering a little more on Shariah-compliant ETFs.

As Muslim investors, we have 2 different hats to wear.

Firstly, we have to ensure our investments are aligned with our Shariah guidelines.

Secondly, we also have to ensure the investments bring good enough returns (and beat inflation) to ensure our long-term financial goals such as retirement or saving up for Hajj are achievable.

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While having an Islamic savings account is a good start, that alone is not good enough as the minimal return will be corroded by inflation over time.

Hence, we have to look beyond Islamic savings accounts, and one of the better ways to grow your money will be with Shariah-compliant ETFs.

Why should I invest in an ETF?

Before understanding WHY we should invest in an ETF, we should first understand WHAT is an ETF.

An ETF, or also known as Exchange Traded Funds, is an investment that tracks the performance of an underlying index, and an index refers to a list of the largest listed companies.

There are many indexes globally. For Singapore, the most popular one right now is the Straits Time Index (STI) which consists of the 30 largest companies listed in Singapore.

These companies come from different industries and sectors, and collectively they represent the Singapore market.

Hence this index is normally used as a benchmark to determine how well, or otherwise, the Singapore economy fares.

When the Singapore economy does well, STI goes up too. Same goes the other way round.

For STI ETF, it simply invests in this group of companies and mirrors the allocation of STI.

Because of the need for active picking and managing of the individual stocks by the fund manager, it greatly reduces the management fees.

This is an attractive option for retail investors to kickstart their investment journey as it is low cost, passively managed and by mirroring an index (i.e. buying the whole market), returns tend to move in an uptrend over the long-term. 

(Well… unless you feel that the market will crash and never recover. Not impossible but highly unlikely as long capitalism exists – if you asked me)

Shariah-compliant ETF: Do we have for the Singapore market today?

The short answer is, unfortunately, not.

I wrote an article about the FTSE ST Singapore Shariah Index, which is considered as the halal version of the STI here.

However since then, we have yet to see any ETF that is created to mirror it. Perhaps not yet.

Having said that, we should not limit to within our shores only.

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There are a handful of Shariah-compliant ETFs globally that we should pay our attention to, and in fact, these ETFs cover a more well-diversified portfolio of companies spanning across different markets, sectors and industries.

I’ve compiled it into the table below for easy reference.

Shariah-compliant ETFs

In case you are unable to see the table above, here is the list:

  1. iShares MSCI World Islamic UCITS ETF (ISWD)
  2. iShares MSCI USA Islamic ETF (ISUS)
  3. iShares MSCI Emerging Markets Islamic ETF (ISDE / ISEM)
  4. Wahed FTSE USA Shariah ETF (HLAL)

Without further ado, let’s dive right in.

[1] iShares MSCI World Islamic ETF (ISWD)

As stated by its fund manager, Blackrock Asset Management, on its website:

The fund seeks to track the performance of an index [MSCI World Islamic Index] composed of companies from developed countries and which comply with Shariah investment principles.

BlackRock

In its factsheet as of 31st March 2020, it has about 481 holdings, or companies, across the world’s developed markets and since the US is the biggest market, it accounts almost half of its holdings (~49%).

The rest are shared across other countries such as Japan (11%), Switzerland (10%), France (6%), UK (5%), Germany (5%) and more.

Hence you can see that it has generally a well-diversified exposure globally on developed markets with some concentration on the US market.

The top 5 sectors in focus are:

  1. Healthcare
  2. Information Technology 
  3. Consumer Staples
  4. Energy
  5. Industrials

And the top 10 holdings (consists about 25% of their total portfolio) are:

  1. Johnson & Johnson
  2. Nestle
  3. Procter & Gamble
  4. Intel
  5. Roche Holding
  6. Merck & Co
  7. Pfizer
  8. Novartis
  9. Exxon Mobil
  10. Adobe

Their annualised 10-years return currently stands at 4.42%, while its expense ratio is at 0.6%.

‘Expense ratio’ here means is that for every $10,000 invested, investors are charged $60 annually.

As a comparison, the expense ratio of STI ETF is 0.3% while an actively-managed mutual fund can easily fetch 1.5% or more.

It may not be the cheapest among ETFs, but it definitely beat mutual funds in terms of costs.

To download its factsheet, you can do the following:
Step 1: Go BlackRock’s website here
Step 2: click ‘Fact Sheet’ at the top right corner



Step 3: Download the EN version (English)

[2] iShares MSCI USA Islamic ETF (ISUS)

Another fund by Blackrock, but this time it predominantly focuses on the US market. 

Its past 10-years annualised return indicates a better return than its regional counterpart at 6.78%, while cumulatively at 92.62%.

If you have invested $10,000 back in 2010, the amount would have grown to $19,262 as of March 2020.

This could be because the US market has seen a good bullish run since the 2008 subprime crisis and sectors such as the information technology (IT) have seen exponential growth due to the technology boom.

Its expense ratio is also slightly cheaper too, at 0.5%.

However, that being said, we have to be mindful that this comes with a higher geographical risk because of a single country exposure.

For any news on the US market, it may cause volatile fluctuations in its price. So do understand your risk appetite before jumping right in.

To check out its fact sheet, you can follow the same steps as earlier mentioned, starting from here.

[3] iShares MSCI Emerging Markets Islamic ETF (ISDE / ISEM)

As the name suggests, this fund focuses mainly on emerging markets.

If you’re someone who prefers to have a diversified exposure in emerging markets with good potential growth, this could be a consideration.

At the time of writing, its holdings currently stand at 35% in China stocks, 21% in Korea and 15% in Taiwan.

The top 3 companies the fund is investing in are Alibaba (18%), Taiwan Semiconductor (12%) and Samsung (10%), which already account for 40% of their total portfolio.

However, from the chart below, the movement has been rather sideways for the past 10 years, except for the bullish run between 2008 to 2010 and 2015 to 2017.

The annualised 10-year return is -1.48%, which means you’re better off allocating your capital into the first 2 ETFs (World or USA Islamic), unless you can time the market well.

The expense ratio is also the highest among the four at 0.85%.

As mentioned in its fact sheet, one of the key risks is that “emerging markets are generally more sensitive to economic and political conditions than developed markets”.

This is well-reflected in the big dip in 2020 in the chart above due to the current global COVID-19 pandemic.

[4] Wahed FTSE USA Shariah ETF (HLAL)

This is the latest fund in the list, which was incepted in 2019.

As compared to the first 3 ETFs which are managed by BlackRock, this fund is managed by Wahed, more popularly known for its Shariah-compliant robo-advisory platform.

Similarly to iShares MSCI USA Islamic ETF, it mainly focuses on the US market only.

As of March 31 2020, it has a total of 221 constituents and the top 3 sectors account for half (50%) of its overall portfolio. They are:

  • Technology Hardware & Equipment (26%)
  • Pharmaceuticals & Biotechnology (15%)
  • Health Care Equipments & Services (9%)

Not surprising that it is listed on NASDAQ as it is heavily skewed towards high-growth technology companies.

NASDAQ is well-known for listing the top technology companies of today such as Apple, Facebook and Alphabet Inc (or Google as we all know it).

The current top 10 holdings are:

  • Apple Inc
  • Johnson & Johnson
  • Procter & Gamble
  • Intel
  • Merck & Co
  • Pfizer
  • Cisco
  • Exxon Mobil
  • Adobe Inc
  • Chevron

Additionally, its expense ratio is 0.5% so it is definitely one of the cheaper ones in terms of management fees.

Since it is less than a year old, the jury is still out on how well this fund will perform in the coming years.

To delve deeper into its fact sheet, you may check out at Wahed website here and click on the ‘ETF Factsheet’ as shown below.

In Summary…

If you go deep into the factsheet and reports, one notable difference you can see across the 4 ETFs is that there is almost zero allocation in certain highly-lucrative sectors such as the financial sector.

Why is that so?

It is because in a conventional financial company, there is excessive earnings coming from usury (interest) and high leverage on debt over total assets.

Hence, by investing in Shariah-compliant ETFs, it helps retail investors like you and me to filter out these companies quickly and get some exposure into the right and best-performing stocks around the world today.

And as mentioned at the start of this article, we do not have to limit ourselves to the Singapore market only when there are much bigger Shariah-compliant opportunities beyond our shores.

The best of it all, our brokerages in Singapore today do offer trading and/or investing services in the overseas stock markets too, and it is not that complicated to do so.

Now it’s your turn.

I’ve summarised the various Shariah-compliant ETFs you can invest in today.

Now I want to turn it over to you. Which one would you go for today, especially in the midst of this depressed economy due to the COVID-19 situation?

Or would you rather wait on the sideline and see how this unfolds further?

Let me know in the comment section below.

8 Comments

  1. Zan June 17, 2020
    • Khairul Ruzaini June 27, 2020
      • Sore Boar July 4, 2020
        • Mkh August 18, 2020
      • Eliza July 18, 2020
  2. Natasha June 18, 2020
    • Khairul Ruzaini June 27, 2020
  3. Muhammad July 18, 2020

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