An Overview of Shariah Compliant Indices

According to Reuters, Standard and Poor’s were to launch Shariah-compliant versions of some of its equity indices yesterday. [Shariah forbids Muslims from receiving interest payments and from investing in companies involved in the production or sale of pork, alcohol, tobacco, pornography, gambling and non-Islamically structured finance or life insurance.] The indices - the S&P 500 Shariah, S&P Europe 350 Shariah and S&P Japan 500 Shariah – are very similar in nature to Socially Responsible Investing [SRI] indices such as those by KLD.

This is not a new index in this space, by any means, as it comes out to compete with a similar index from Dow Jones which was launched back in 1999.

No details yet on how the S&P index is constructed, but the Dow Jones site gives the following description of the composition guidelines for its DJ Islamic Market Index:

The selection universe for the DJIM Index is the Dow Jones World Index, which covers approximately 95% of the float-adjusted market capitalization of 44 countries that are open to foreign investors. For the complete methodology of the Dow Jones World Index see Guide to the Dow Jones Global Indexes.

The DJIM Index includes all securities in the Dow Jones World Index that pass the following screens for Islamic compliance:

Industry Type: Excluded are companies that represent the following lines of business: alcohol, tobacco, pork-related products, financial services, defense/weapons and entertainment.

Financial Ratios: Excluded are companies whose:

* Total debt divided by trailing 12-month average market capitalization is 33% or more.
* Cash plus interest-bearing securities divided by trailing 12-month average market capitalization is 33% or more.
* Accounts receivables divided by 12-month average market capitalization is 33% or more.

Since 2000, there has been a fund traded on the NASDAQ which, although has the term “Index” in its name, could be classified as only a “partial index fund”. This is the Dow Jones Islamic Index K (IMANX).

According to Google Finance:

The fund normally invests at least 80% of net assets in domestic and foreign securities included in the Dow Jones Islamic Market indexes, as well as up to 20% of net assets in securities chosen by the fund's investment advisor that meet Islamic principles.

So the fund is 80-100% passive, 0-20% active. More on the fund, its mandates and the managers who run it can be found on its website.

Performance wise, there’s not much difference to the S&P 500 as shown in this 3-year chart:

There’s also another Shariah-compliant index from FTSE and its site also gives details on its composition rules.

In terms of investable instruments and specifically ETFs, I don’t think there’s much out there. Here’s something I found information regarding an Islamic Index ETF but it’s traded in Kuwait.

Thus, for anyone interested in this type of mandate in a quasi-index form, the choices are pretty much limited to IMANX.