Shariah-Compliant ETF To Launch in Europe

by: Richard Kang

As a follow up to my entry of December 20th, 2006 titled An Overview of Shariah Compliant Indices, we get news from HedgeWeek.com of “the first Shariah compliant ETF to be offered in western Europe.”

Trading on the SWX Swiss Exchange, the EasyETF DJ Islamic Market Titans 100 will be managed by BNP Paribas Asset Management. This ETF tracks the Dow Jones Islamic Market Titans 100 Index, a blue-chip index tracking the 100 largest global companies that comply with Islamic investment guidelines. Again, from my December 20th piece, here’s the link for more info on the DJIMT and a brief outline of the composition guidelines for the 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.

No word on fees or if something similar in terms of a US domiciled offering is in the works. I couldn’t pull up the Dow Jones Islamic Market Titans 100 Index on Bigcharts.com, so this chart is from Yahoo Finance:

islamic index

I’ve compared the DJIMT 100 Index with the iShares S&P Global 100 Index (NYSEARCA:IOO). The two “top 100” indices seem to be moving in line over the past 3 years. Only a slight overperformance for IOO during the strong run up in 2003 but again, nothing too significant. Taking a look at the composition of the two ETFs over time, I don’t see anything that could cause too much of a difference between these funds. My sense is that if the financial services subindex greatly deviates from that of the broader benchmarks, there could be some significant divergence between the two “top 100” indices. However, here’s a chart showing IOO versus the iShares S&P Global Financials Sector Index ETF (NYSEARCA:IXG):

islamic index

Clearly, we have some divergence here as the financials have greatly outperformed the global top 100 stocks. Since the Shariah compliant index must be underweight financials to some significant degree based on the given guidelines, this explains the DJIMT 100 Index’s underperformance versus IOO.

Financials are a significant component of global indices unlike other sectors mentioned in the Shariah guidelines so I’ll leave my comparative analysis at that.