What Are the Differences Between Halal Shares and Halal ETFs?

Muslims nowadays look for ways to invest in accordance to Islam. Through Halal Shares and Halal ETFs Muslims have more options available. The launch of Hejaz Equities Fund (ASX: ISLM) Hejaz Property Fund (ASX: HJZP) and Hejaz Sukuk Fund (ASX: SKUK) marks the first listed Shariah-compliant ETFs on the ASX. 

Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges like stocks. They track the performance of an underlying index, such as the S&P 500 or a specific sector. ETFs offer diversification and can be a convenient way to invest in various asset classes. 

The halal status of an ETF depends on its underlying assets and investment strategy. Some ETFs may invest in companies that deal with prohibited activities, such as interest-based finance, alcohol, or pork. It’s crucial to research and verify the halal compliance of an ETF before investing. 

Pros: 

• Diversification: ETFs provide exposure to a wide range of assets, reducing risk. 
• Liquidity: They trade on stock exchanges, offering high liquidity. 
• Low costs: ETFs generally have lower expense ratios compared to mutual funds. 
• Tax efficiency: ETFs often have tax advantages due to their structure. 

Cons: 

• Market risk: ETFs are subject to market fluctuations, meaning their value can go up or down. 
• Tracking error: ETFs may not perfectly track their underlying index, leading to performance differences. 
• Halal compliance: It’s essential to verify the halal status of an ETF’s underlying assets. 

Hejaz vets companies for Shariah compliance using guidelines set by an independent Shariah board. These guidelines prevent investment in socially or morally damaging companies. As a result, Hejaz Halal ETFs offer investors the peace of mind of knowing that their investments are being managed by their Islamic values. 

Shares, also known as stocks, represent ownership in a company. When you buy shares, you become a part-owner of that company and have a claim on its profits and assets.

A stock is considered halal if the company it represents adheres to Islamic principles. This generally means that the company does not engage in prohibited activities, such as alcohol, or pork. Additionally, the company’s business practices should be Shariah-compliant and socially responsible. 

Pros: 

• Potential for high returns: Shares can offer significant returns if the company performs well. 
• Ownership: Owning shares gives you a say in the company’s affairs through voting rights. 
• Dividend income: Some companies pay dividends to shareholders, providing a regular income stream. 

Cons: 

• Market risk: Share prices can fluctuate, and there’s a risk of losing your investment. 
• Research and due diligence: It’s essential to research companies thoroughly before investing to assess their financial health and prospects. 
• Halal compliance: Verifying the halal status of a company can be time-consuming.  

Shariah-compliant shares are units of equity ownership companies that meet Islamic investment screens. Shares exist as a financial asset that provides an equal distribution to any residual profits in the form of dividends. Hejaz follows Shariah Ethical Screening processes set by independent bodies AAOIFI and GIFS. 

Halal ETFs are for investors who want a variety of Shariah-compliant assets. Hejaz benchmarks against MSCI World Islamic which targets clean energy, community services, and health care. Hejaz does not invest in companies and industries that are Islamically impermissible. These companies involve alcohol, pork, tobacco, weapons, gambling, and pornography. 

Halal ETFs and Halal Shares are both investment options that adhere to Islamic principles. However, they differ in several key aspects: 

• Investment vehicle: Funds that invest in a basket of securities. 
• Diversification: Built-in diversification through multiple holdings. 
• Liquidity: Generally more liquid due to trading on exchanges. 
• Costs: Typically lower expense ratios. 
• Halal compliance: Requires careful verification of underlying assets. 

• Investment vehicle: Individual ownership of a company’s shares. 
• Diversification: May require more research to diversify. 
• Liquidity: Can be less liquid, especially for smaller companies. 
• Costs: May have higher transaction costs. 
• Halal compliance: Requires individual company research. 

In summary, Halal ETFs offer a more diversified and often more liquid investment option, while Halal Shares provide direct ownership in individual companies. Both options require careful research to ensure compliance with Islamic principles. 

Many conventional ETFs invest in companies that involve haram activities under Shariah law. iShares ITA and SPDR XAR are some examples of conventional ETFs that are not Shariah-compliant as they invest in Aerospace and Military (Investopedia, 2022). Many ETFs do not consider environmental, social, or governance (ESG) criteria when selecting investments. Shariah compliance and ESG criteria both seek to promote sustainable and responsible investing. However, Shariah compliance has extra requirements above ESG investing such as avoiding interest. 

In contrast, the ESG benchmark assesses a company’s environmental, social, and governance practices. ESG considers a range of environmental factors when making investment decisions. These include a company’s climate policies, energy use, waste, and pollution. Social factors include a company’s stakeholder relations, diversity, justice, and fighting against racism. 

While Shariah compliance and ESG criteria can sometimes overlap, but they are not the same. For example, an ESG-compliant fund may exclude military or tobacco investments but might invest in pig products and Riba (interest). Shariah compliance adds more requirements concerning liquidity, morality, and honesty. Hejaz screens against companies that derive more than 5% of their gross revenue from impermissible income. Exclusions include alcohol, military, Riba (interest), pig products, and conventional financial institutions. 

Shariah-compliant Shares and ETFs offer some advantages for Muslims. Hejaz provides Shariah-compliant ETFs and investment options. Muslim investors can invest in line with their values with the Hejaz Equities Fund (ASX:ISLM)  the Hejaz Property Fund (ASX:HJZP) and the Hejaz Sukuk Fund (ASX:SKUK). 

To learn more about these and other Halal investment options, check out our other blog posts on investing your house deposit, the 9 golden rules of investing, and investing in the hereafter ore Sadaqah Jariyah. We’ll delve deeper into specific topics and provide valuable insights to help you make informed investment decisions. 

Disclaimer: 

General information only. Investments carry risks, past performance is not indicative of future performance. Read the PDS and TMD before making financial decisions. Promoted by Hejaz Asset Management Pty Ltd AFSL 550009