Sharia-compliant investing, also known as Islamic finance, is a system of finance that adheres to the principles of Islamic law, or Sharia. It has gained significant attention and traction in recent years as an ethical and socially responsible form of investment that aligns with the beliefs and values of Muslim investors.

This paper will explore the core tenets of Shara-compliant investing and profile a particular ETF solution that reflects Shariah-compliant values.

Understanding Shariah-compliant investing

Shariah is a set of Islamic religious laws that governs aspects of day-to-day life for Muslims, in addition to religious rituals. Shariah also provides Muslims with a set of principles and guidelines to help them make important decisions in their lives, including those related to finances and investments.

Therefore, Shariah-compliant investing requires investment decisions to follow Islamic principles governing finances and investments.

The principles of Shariah-compliant investing

At the core of Sharia-compliant investing are several key principles derived from Islamic law. The first and foremost principle is the prohibition of “Riba”, or interest. In Islamic finance, earning interest or engaging in transactions that involve interest is considered unethical and prohibited. This principle stems from the belief that money should not generate more money on its own, but rather should be invested in productive and tangible assets to generate returns.

Another fundamental principle of Sharia-compliant investing is the avoidance of “Gharar”, or uncertainty. Investments involving excessive uncertainty or ambiguity are considered “Haram” or forbidden. This principle emphasizes transparency and clear understanding in all financial transactions to avoid any element of deceit or ambiguity.

Furthermore, Sharia-compliant investing prohibits investment in businesses that deal with Haram, or forbidden, activities such as alcohol, gambling, pork, and other illicit activities. This principle reflects the importance of ethical and socially responsible investing in Islamic finance, aligning investments with moral and ethical standards.

Growth of Shariah-compliant investing

Globally, Shariah-compliant strategies have grown in recent years, as a recent Morningstar report placed total assets at CAD 60.4 billion as of February 2023, whereas a decade earlier (i.e. February 2013), assets were CAD 30.3 billion. With Islamic finance becoming increasingly integrated into the global financial system, its ethical and socially responsible approach to investing has attracted not only Muslim investors but also non-Muslims seeking ethical investment opportunities.

Regarding performance, Shariah-compliant investing has exhibited strong returns over the years. In looking at the max drawdown performance of the S&P 500 Shariah Index TR versus the S&P 500 Index TR, the former has showcased the ability to minimize losses. Particularly noteworthy is its performance during the Great Financial Crisis (2008-2009), with the Shariah tilted Index experiencing less severe losses than the S&P 500 Index. From a return performance perspective, the S&P 500 Shariah Index TR has provided similar, if not better, long-term performance relative to the S&P 500 Index.

How to invest in Shariah-compliant funds

For Canadian investors interested in Shariah-compliant investments, the options are fairly limited, as the most notable mutual fund offerings are the Global Iman Fund and the recently launched Mackenzie Futurepath Shariah Global Equity Fund.

For ETF solutions, the Wealthsimple Shariah World Equity Index ETF (Ticker: WSHR) is currently the only offering available to Canadian investors. This ETF complies with Shariah law and excludes companies deriving more than 5% of their income from alcohol, tobacco, pork-related products, weapons, conventional banking or insurance companies, and adult entertainment. The ETF also excludes companies with excessive leverage.

WSHR mirrors the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index, which is designed to measure the performance of stocks in developed markets that are Shariah compliant and characterized as having the highest combination of quality and low volatility as determined by a multi-factor score. Index constituents are weighted relative to the inverse of their volatility, with the least volatile constituents receiving the highest weights, subject to constraints based on liquidity.

An important note regarding the ETF and the underlying index is that they have been certified by a team of Islamic researchers at Ratings Intelligence Partners, and dividend purification (i.e., the process of purging any income a company makes from sources that are not shariah-compliant, or “impure”) information is made available quarterly. The ETF’s Shariah certification can be found here.

Conclusion

Sharia-compliant investing represents a unique approach to finance that emphasizes ethical, socially responsible, and transparent investment practices. For Canadian investors who desire to invest in a Shariah-compliant ETF solution, the Wealthsimple Shariah World Equity Index is worthy of consideration, given the diligence and intentionality put forth in managing the fund to reflect Shariah-compliant values.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.