Equity ETFs for Halal Investors
- What are ETFs?
- Overview of Halal ETFs
- Deep dive
- Which should I pick?
If you’re unsure what to invest in, and don’t have the time to do in-depth research, then ETFs are the next best thing.
This is the definitive, always up-to-date post on Halal ETFs, covering all ETFs that list only halal stocks, their performance, expense ratios — and my recommendations for which you should choose.
What are ETFs?
Exchange Traded Funds, or ETFs for short, are just a basket made up of stocks. Instead of you buying many individual stocks, you can choose to buy an ETF and get ‘exposure’ to the whole group.
Shariah-compliant ETFs are groups of stocks that are, well, shariah-compliant. They usually filter down some bigger group of stocks (like the S&P500 or the FTSE 1000).
Overview of Halal ETFs
Below is a table showing a complete list of Shariah compliant ETFs across different geographies, and across different segments of the market:
|Ticker||Geo||Segment||Expense||Domicile||Div. Yield||2020 Return||Avg Return|
Tip: Since they serve a similar goal, consider reviewing my post on halal mutual funds that also offer diversification across various market segments (though these carry higher expense ratios, since they are ‘actively managed’ by a fund manager).
Here’s an explanation of the various columns you’re looking at:
- Segment: This explains which stocks the ETF bundles up for you. ‘Cap’ is short for ‘Market capitalization’ — which indiciates how much a company is worth. Here’s a breakdown by size:
- Large cap: Over $10 billion
- Mid cap: Between $2 billion — $10 billion
- Small cap: Between $300 million — $2 billion
Expense: This is the expense ratio for a fund, and is a % that is charged every year from investors in the fund3. These are typically miniscule for ETFs (e.g. just 0.03% for VOO, the Vanguard S&P500 ETF), but halal ETFs are more expensive.
Domicile: This indicates where the fund is registered. The reason it’s important is because of tax implications, specifically for foreign (non-US) investors. Dividends are taxed at 30% for US-domiciled funds, but Ireland-domiciled funds are taxed at just 15% (assuming there’s no mutual tax treaty that supersedes this rate) and are not subject to Estate Tax.4
- Div. Yield: This is the distribution yield, which is a measure of the cash flow generated by the stocks in relation to their total value. Some stocks distribute dividends to investors, which is just a share of the profit they generated.
Now, let’s dive into each one of these ETFs to understand their performance drivers and decide on which to pick.
Comparing ETFs can be tricky, especially since there are so many factors to consider. The primary one though for us is simple — prospective returns. How much do I stand to make if I invest in this ETF?
Since we’re not in the forecasting business, the only thing we have to go on is past performance. We’ll consider the annualized performance (average annual return since inception) plus the 2020 return alone (which we can use to compare ETFs with different inception dates to each other over the same time period)5
ISDU / ISUS 🇺🇸
This is the ‘OG’ Halal ETF — launched all the way back in 2007. There are two flavors of this ETF, the
ISDU flavor (in USD) and the
ISUS (in GBP). Otherwise, they’re identical.
ISDU is also part of iShares’s collection of halal indices that includes ISDW (targeting the developed World) and ISDE (targeting Emerging markets).
That’s ISD”U” for US, ISD”W” for World and ISD”E” for Emerging.
Here’s how it’s fared against the S&P500 (which it’s supposed to be based on, and from which it filters out the non-halal constituents) over the past 10 years:
100% return over 10 years may sound great, but the S&P500 did 200% over the same time period!
Further, the Top 10 holdings in this ETF represent ~51.75% (!) of the fund — which is considered very concentrated6:
|JNJ||JOHNSON & JOHNSON||8.96%|
|PG||PROCTER & GAMBLE CO/THE||8.13%|
|XOM||EXXON MOBIL CORP||3.79%|
(For a list of all of the constituents in this ETF, check out this 🔗 Google Sheet I prepared.)
Let’s analyze performance using these two metrics:
- Since inception (CAGR): 6.6%/yr (vs S&P500’s 9.5%/yr)
- Performance in FY2020: +7.1% (vs S&P500’s +18.2% gain)
Overall, the performance of this ETF is underwhelming. The fact that it’s domiciled in Ireland does make things better for foreign investors from a tax perspective, but that’s little consolation for the dismal performance.
Note: I’m considering the growth in NAV (Net Asset Value) in the performance figures above, which includes dividends.
The new kid on the block, SPUS launched Dec 12, 2019 — just as the ground underneath the markets was starting to collapse due to COVID19.
Lets compare its performance to that of the S&P500 since inception:
That’s more like it! SPUS actually outperformed the market during this period — resulting in +28% returns vs. 19.85% for the S&P500.
The Top 10 holdings represent ~45%, still very concentrated — but better than ISDU:
|FB||FACEBOOK, INC. CLASS A||3.91%|
|GOOGL||ALPHABET INC. CLASS A||3.23%|
|GOOG||ALPHABET INC. CLASS C||3.14%|
|JNJ||JOHNSON & JOHNSON||2.56%|
|PG||PROCTER & GAMBLE COMPANY||2.09%|
|HD||HOME DEPOT, INC.||1.74%|
One look at the Top 10 and we can understand why SPUS did so well — it’s dominated by technology stocks, though it does hold a wide variety of other stocks too (like Home Depot and P&G above). Once again, to see the complete list, check out this 🔗 Google Sheet I prepared.
Let’s analyze performance. For this bit, having a single year to fall back on just won’t do. Helpfully, we already know from their prospectus that SPUS is designed to track the S&P 500 Shariah Industry Exclusions Index7:
- Since Dec 31, 2010 (CAGR): +13.45%/yr
- Performance in FY2020: +26.51%
Why the big difference between ISDU and SPUS, you say? Fear not, I did a complete overlap comparison between the ETFs to find out exactly why (more on that below).
Let’s continue with the remaining ETFs first.
This ETF was launched mid-2019, by the team at Wahed (an investing app that caters to Muslims). It’s also focused on the US market, so let’s benchmark it’s performance with the S&P500:
Once again, we have an outperformer — rising 40% since inception vs the ~28% of the S&P500.
Upon reviewing the Top 10 holdings for HLAL, we notice that there’s far less concentration that both ISDU and SPUS (just 38.59%):
|JNJ||JOHNSON & JOHNSON||3.37%|
|PG||PROCTER AND GAMBLE CO||2.69%|
|HD||HOME DEPOT INC||2.33%|
|ADBE||ADOBE SYSTEMS INCORPORATED||1.83%|
|MRK||MERCK & CO. INC||1.73%|
|TMO||THERMO FISHER SCIENTIFIC INC COM||1.63%|
To make an apples-to-apples comparison of performance, let’s review the stats. Once more, we’re going to have to rely on backtested data from the underlying index. In the case of HLAL, that’s the FTSE Shariah USA Index (datasheet here):
- Since Dec 2010 (CAGR): +12.5%/yr
- Performance in FY2020: +24.7%
You’ll notice that it underperforms SPUS slightly, but still fares much, much better than ISDU!
This fund was born along with it’s brothers, ISDU and ISDW, on 7 Dec, 2007. It focuses on ‘Emerging Markets’, the politically correct term for countries that are ‘less developed’. This principally includes all of the countries that aren’t US/Europe — that’s mainly China, India, Brazil and the Middle East.
The largest companies in these regions tend to be commodity-based, so they rely on extracting and processing natural resources. This means they’re more exposed to fluctuations in the price of whatever the underlying commodities are (e.g. gold, aluminum, copper, etc).
Brace yourselves as we observe the performance of this bad boy since inception8:
This is definitely the black sheep of the family — in the 15 years of it’s existence, it’s only managed to scrape together 6.18% in gains (~11% counting dividends). What sane person would put any money in this ETF, especially with the insane 0.85% expense ratio?!
I had to summon the energy to keep going — have a look the Top 10 holdings:
|2330||TAIWAN SEMICONDUCTOR MANUFACTURING||17.7%|
|BABA||ALIBABA GROUP HOLDING ADR REPRESEN||15.5%|
|5930||SAMSUNG ELECTRONICS LTD||13.49%|
|RELIANCE||RELIANCE INDUSTRIES LTD||2.61%|
|VALE3||CIA VALE DO RIO DOCE SH||2.43%|
|660||SK HYNIX INC||2.4%|
|5935||SAMSUNG ELECTRONICS NON VOTING PRE||2.04%|
|51910||LG CHEM LTD||1.46%|
|6400||SAMSUNG SDI LTD||1.29%|
Dear Lord, what?! The Top 10 holdings represent a whopping 63% of the index … and 4% of the fund is USD! I could buy the Top 3 stocks and already have exposure to half this ETF, with none of the fees!
Note: You can’t actually buy Samsung stock through a broker because South Korea doesn’t make it easy for foreigners to own their companies stocks. Same for India (Reliance), which restricts foreign ownership.
This is an abominition of an ETF — the only redeeming quality I see is that 2020 appears to have fared much better than the 14 years prior:
- Since inception (CAGR): 0.65%/yr
- Performance in FY2020: +10.7%
Mind you, that’s still significantly worse than the S&P500!
ISDW / ISWD 🌐
Finally, it’s time to look at ISDW. This is the 3rd of the ISD’s and it targets the ‘Developed world’ — kind of like an ISDU, but across the globe.
Let’s take a look at performance vs S&P500:
(Note: Finding consistent historical data can be a real nightmare sometimes. I was trying to do this through Yahoo! Finance, but there’s a huge gap between Oct ‘20 — Jan ‘21. We’ll settle for this chart from iShares).
An +85.19% gain in 15 years — roughly half the performance of the S&P500 which gained +175% in the same timeframe.
|JNJ||JOHNSON & JOHNSON||4.24%|
|PG||PROCTER & GAMBLE||3.47%|
|ROG||ROCHE HOLDING PAR AG||2.41%|
|INTC||INTEL CORPORATION CORP||2.2%|
|ASML||ASML HOLDING NV||2.18%|
Not much concentration at all in the Top 10 — roughly inline with the S&P500 (itself, fairly heavily concentrated, mind you). Notice how quite a few of the names are repeated in some of the other ETFs we’ve seen so far. We’ll analyze overlap in more detail in the next section.
Finally, here’s what performance looked like:
- Since inception (CAGR): 4.1%/yr
- Performance in FY2020: +8%
Which should I pick?
So after the deep dive you’re probably thinking: “Ok, that was a lot of info. How am I supposed to decide on which one(s) to pick?”
The short answer is:
For US 🇺🇸, SPUS is the best choice overall — in terms of 2020 performance, as well as overall growth over the past 10 years.
For International 🌐, ISDW is really your only option. Just make sure to account for the overlap between your choice of US ETF and ISDW, referencing the table below9:
Remember, I’m assuming that you’re picking an ETF because you don’t have the time/interest to do the research to find the best stocks to invest in. Instead, you just want to ‘buy the market’ and are satisfied with average returns.
Check out my post on Portfolio Design to learn how to design a portfolio to suit your specific goals.
Q) Since SPUS is domiciled in the US, won’t I owe more tax (vs. say, ISDU, which is domiciled in Ireland)?
A) Assuming you’re a foreign (non-US) investor, yes. You’d be liable for 30% tax on SPUS/HLAL dividend returns vs. 15% on ISDU/ISDE/ISDW. The crucial point is that this is 30% of the dividend yield — itself only ~1%/yr. The end result is almost negligible — at \((30\% - 15\%) * 1\% = 0.15\%\). The performance difference is a much more important consideration. I’ve written a detailed article on tax for foreign investors here.
The MSCI USA Islamic Index reflects Sharia investment principles and is designed to measure the performance of the large and mid cap segments of the US market that are relevant for Islamic investors. The index, with 97 constituents applies stringent screens to exclude securities based on two types of criteria: business activities and financial ratios derived from total assets. Source ↩
Tracks the S&P 500, filtering out all non-Shariah compliant stocks ↩
I describe it as a fee for simplification. In reality, this amount is deducted from the NAV (Net Asset Value) that underpins the ETF, and not directly from the investors. ↩
This is not tax advice, and I’m not your tax attorney. If you’re unsure about where you stand from a tax perspective, it’s a good idea to consult with someone who is. ↩
Deciding solely on return since inception is misleading because our assessment gets impacted by macroeconomic factors that impact the economy as a whole. ↩
For reference, the S&P500’s Top 10 (which many complain about being too concentrated) represent just ~25% ↩
While that index was only launched Oct 24 2019, it is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns. ↩
I wasn’t able to get a chart that does a side-by-side comparison between ISDE and the S&P500 with dividends reinvested. It doesn’t make a huge difference though — with dividend returns, ISDE is only +11% over the entire 11 years of it’s existence! ↩