Muslims Can Now Invest Anywhere Without Breaking Shariah Law
October 26, 2015

Muslims Can Now Invest Anywhere Without Breaking Shariah Law

Nattasha Jamaluddin is stuck between a rock and a cultural hard place. She wants to invest. But she’s Muslim. So she wants to respect Shariah law. That means Nattasha shouldn’t invest in companies that sell or produce alcohol, tobacco, pork products, conventional financial services, (banking, insurance, etc.), weapons, defense products, and entertainment.

That sounds strict. But many faith based mutual funds have similar restrictions. So do many Socially Responsible Funds (SRIs). Shariah compliance, however, means Muslims should also shun government and corporate bonds. The Koran states that interest payments are considered usery. This makes it tougher to create a diversified portfolio.

According to research company Ipsos MORI, roughly 3.2 million Muslims live in the United States. They can buy a few actively managed Shariah compliant investment funds. Such investors could start with the Amana Growth Investor fund (AMAGX). Expenses are 1.08 percent per year. It’s invested in large cap stocks. Amana’s Income Investor fund (AMANX) contains higher dividend paying stocks. It costs 1.12 percent per year. Both funds hold about 85 percent American stocks. The rest is in international stocks and cash.

Amana’s Developing World Investor fund (AMDWX) focuses on emerging market stocks. Expenses are 1.48 percent per year.

Shariah Compliant Portfolio Sample For Americans

Portfolio Allocation Fund Expense Ratio 10 Year Average Compounding Return
40% Amana Growth Investor fund (AMAGX) 1.08% 8.65%
40% Amana Income Investor fund (AMANX) 1.12% 8.71%
20% Amana’s Developing World Investor fund (AMDWX) 1.48% *NA

Amana’s growth and income funds have both peformed well. Over the past 10 years, they averaged compounding annual returns of 8.65 percent and 8.71 percent respectively. That compares with a 7.62 percent return for Vanguard’s S&P 500 index.

Such outperformance, however, is easy to explain. More than 15 percent of the S&P 500 is made up of financial companies. Sometimes, financial stocks beat the market overall. Other times, like over the past 10 years, they lag. Vanguard’s Financials Index, for example, averaged a compounding annual return of just 1.5 percent. Shariah compliant funds don’t include banks and financial service stocks.

Some investors, however, may be waiting for lower cost products. Perhaps Falah Capital has answered that call to prayer. The firm launched Falah Russell-Ideal Ratings US Large Cap ETF (FIA) on October 2nd. It’s the New York Stock Exchange’s first Shariah Compliant ETF. It costs 0.7 percent per year. That’s expensive, compared to most index funds. But it’s still cheaper than most actively managed funds.

Its low trading volume, however, could be a challenge. Based on Morningstar’s data, investors have only added about $1.27 million so far. Low trading volumes increase the difference between the bid price and the asking price. Think of the spread as an invisible commission. What’s more, if the fund doesn’t attact enough investors, the company could close it.

Mohammad Hassan is a senior analyst with Singapore based Eurekahedge, the world’s largest independent hedge fund data provider. It’s also an alternative research firm which covers the global Islamic funds industry.
“Since 2007, worldwide assets under management for Islamic funds have doubled,” says Hassan. “There are now 877 funds worldwide, with around $90 billion in assets under management.”

Still, he isn’t impressed by the industry’s growth. “The public, even Muslims in Islamic finance hubs, are generally unfamiliar about investing with Islamic funds,” he says. “Most opt to leave their money inside their bank accounts.”

But Suleman Khan, Portfolio Manager at South Africa’s Sanlam Private Wealth has noticed a growth in the industry’s financial product offerings, including ETFs. At least four Shariah compliant ETFs now trade on the London stock exchange. They’re available to British investors, or anyone with access to the UK exchange.

Asian, European, African or Middle East investors can access the London Stock Exchange through brokerages like TD Direct International, Saxo Capital Markets or Interactive Brokers.

Shariah Compliant ETFs On The London Stock Exchange

ETF Expense Ratio Invests In…
iShares MSCI World Islamic ETF (ISWD) 0.6% European, U.S., Asian-Pacific and Emerging Market stocks
db X-trackers DJ Islamic Market Titans 100 UCITS ETF (XMIT) 0.5% European, U.S. and Asian-Pacific stocks
iShares MSCI USA Islamic ETF (ISUS) 0.5% U.S. stocks
iShares MSCI Emerging Markets Islamic ETF (ISEM) 0.85% Emerging Market stocks

Muslims, like Nattasha Jamaluddin, can now invest anywhere. They can respect Shariah law and, if they’re patient, they can grow wealthy over time. They just need to spread the word. Money that stagnates in a savings account doesn’t help anyone—except the bank.

That’s something Shariah law would frown on.

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

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