Sharia-Compliant ETFs: The First of Many?

In April, FaithShares Advisors filed with the SEC to launch a line of ETFs targeted at religions investors. While “socially responsible ETFs” (such as KLD) and clean energy ETFs (such as PBW) are nothing new, FaithShares proposed to narrow the scope of socially responsible investing significantly by offering funds focusing on specific denominations, including:

• Baptist Values Fund
• Catholic Values Fund
• Christian Values Fund
• Lutheran Values Fund
• Methodist Values Fund

Although many were skeptical at the time that religious ETFs would be a viable opportunity, it appears that they are now becoming a reality, as Javelin Exchange Traded Shares (JETS), a new ETF company, launched its first fund. The Dow Jones Islamic Market International Index Fund (JVS) seeks performance that corresponds to a benchmark index that measures investment return on “Shari’ah compliant securities.”

Shari’ah (also written “Sharia”) is the body of Islamic religious laws that covers many aspects of day-to-day life, including politics, economics, business, sexuality, and social issues. The fund is currently trading on the NYSE Arca Exchange and has an expense ratio of 0.68%.

JETS notes that certain businesses are incompatible with Islamic law and therefore excluded from the fund. These sectors include alcohol, conventional financial services (banking, insurance, etc.), casinos, firearms, and pork-related products. At the end of the second quarter, the fund’s top ten holdings were:

A common misconception over the Islamic Market Fund will likely be the nature of its constituent companies. As evidenced by the table above, this ETF does not focus solely on companies selling religions products or operating primarily in Islamic regions of the world. Beginning with a broad universe of international equities, the fund selects companies that comply with Islamic law. Many of JVS’ holdings are widely-recognized firms that are not Islamic in focus, but offer products and maintain corporate policies that are consistent with the Islamic way of life. Both Dow Jones and JVS maintain supervisory boards of Shari’ah scholars to review potential constituents and determine the components of the fund. JVS has 100 total holdings, and offers excellent geographic diversity, with 23 countries represented. The U.K (18%) France (11%), Canada (11%), and Switzerland (9%) are given the most weight. U.S-based equities have minimal presence in the new ETF.

In addition to avoiding exposure to companies that are deemed to be incompatible with certain religious laws, JVS invests in a well-diversified basket of equities, in terms of both countries and industries. As such, it may be a popular choice for non-Islamic investors as well. The team at FaithShares will no doubt be monitoring the early success of JVS with great interest. If it proves to be a popular investment choice, it’s very likely that we will see a slew of new denomination-specific funds hitting the market.

Disclosure: No positions at time of writing.

Comments

[Ron Robins:]

Interest in spiritual matters usually increases with age--and our population is aging. Furthermore, we have just witnessed enormous ethical lapses in business, finance and government. As a result people will naturally turn to higher ethics and faith. Furthermore, research generally (looking at large numbers of studies) indicates that there is no financial penalty) investing in ethical and faith based portfolios over the long term.

I got interested in ethical investing some forty years ago as I believed that when we invest in a company we share in the responsibility for the activities of the company as well as participate in the outcomes of the company's activities. Therefore anyone valuing their personal or spiritual growth has to take these things into account when investing.

I also believe that if everyone does invest according to their personal values, then, since so many of core values are alike -- and are supportive of higher ideals -- that in the long run, only companies employing these higher values will truly prosper.

For anyone interested I have a globally popular site that covers the latest news and research on ethical and spiritual investing. It's at investingforthesoul.com/

Best wishes, Ron Robins

Jul 03 10:56 AM

[sweathog:]

Why is it that Islamic professional investors like Prince Alwaleed don't seem to have any problem investing in non-sharia compliant equities? Perhaps if Citi had been sharia-compliant it would have avoided making any loans at all and thereby stayed out of trouble, and as for Dubai World, if MGM City Center in Las Vegas had eschewed gambling it wouldn't have been built (and DW wouldn't have lost money)... This just proves that ETFs are gimmicks for retail - and Islamic retail investors just don't have much in the way of assets (not being critical, just saying).

Jul 07 01:50 PM