The global market for Exchange Traded Funds (ETFs) has been growing exponentially over the past decades since their inception in the 1990s to a jaw-dropping volume of currently $4tn in terms of invested assets, but this growth story can almost solely be attributed to the conventional finance sector. In Islamic finance, such funds are far less popular and assets under management are only a tiny fraction – estimated at about 0.01% or $400mn – of the total global ETF market and remain a niche segment in the Shariah-compliant financial world which seems to keep preferring mutual funds over ETFs.
There was little movement in the most recent past apart from two notable issuances. The year 2018 saw the world’s largest single-country Islamic ETF issued by Qatar’s Masraf Al Rayan bank, the Al Rayan Qatar ETF with initial assets of $120mn, as part of Qatar’s drive to increase foreign investment from Southeast Asia, the UK and Europe. Another recent Islamic ETF was launched in July 2019 in the US by Wahed Invest, a Shariah-compliant robo-advisor in New York City under the name of Wahed FTSE USA Shariah ETF and the appropriate ticker of HLAL. The fund tracks the FTSE USA Shariah Index, comprising US large- and mid-cap companies classified as Shariah-compliant. Currently, this ETF has net assets of less than $24mn, but, nevertheless, since launch had reached a total yield of about 9%. The only previous Islamic-centred ETF to trade in the US, the JETS Dow Jones Islamic Market International Index Fund run by Princeton-based asset manager Javelin Investment Management, closed in October 2010 after slightly more than one year.
Analysts acknowledge that the market for Islamic ETFs has not lived up to its potential while the reason for the lower popularity of Islamic ETFs is not immediately clear, at least from an investor’s perspective. ETFs are structured similarly to mutual funds, are tracking a stock or bond index and trade like a common stock on a stock exchange. Advantages for investors include broad market exposure through diversification, transparent portfolio holdings, buying and selling flexibility, low fees and tax efficiency. In case of Islamic ETFs, they would simply have to track a Shariah-compliant index.
This is where the issues begin: There are not that many halal stock indices compared to conventional ones, which results in a smaller scope for Islamic ETFs. Under this condition, they do not attract as many assets as their conventional counterparts with the result that none of the current Islamic ETFs has assets of more than $150mn – the largest is currently the iShares MSCI World Islamic UCITS ETF – whereas bigger conventional ETFs have assets under management of at least a few hundred billions in value. The small asset volume, together with the fact that Islamic ETFs are likewise structured as low-cost funds but still need to undergo a comprehensive and costly Shariah screening exercise, as well as financial leverage screenings to exclude companies with high debt, henceforth lowers the motivation for Islamic financial institutions to grow this market segment. In addition to that, there is usually lower trading volume and, as a result, the funds are less liquid.
So, the Islamic fund market remains currently dominated by mutual funds, while there are only a handful of Islamic ETFs concentrated on Malaysia, the Gulf Co-operation Council, Turkey, Europe and the US. Malaysia’s stock exchange currently lists five Islamic ETFs under the MyETF brand and one that tracks a gold index, while a small number of global Islamic ETF are marketed by Blackrock’s iShares brands.
There are also a few Shariah-complaint ETFs in Turkey and in India where they run under ethical or socially responsible investments. Deutsche Bank closed its Shariah ETF business in 2015. The three ETFs under the db Xtrackers brand listed in Luxembourg had a total asset volume of less than €40mn.
Faith-based ETFs and funds in general – not only based on Islamic, but also Catholic, Protestant and Jewish and, much rarer, Hinduist and Buddhist beliefs– are expected to remain in a niche in the foreseeable future. They have strict rules what to buy and what not to buy, and renouncing stocks associated with certain entertainment, advertising and media activities, as well as pork, tobacco, gambling, alcoholic beverages, arms and weapons, conventional financials, high-interest lending, leveraged debt and all others that stand against a specific faith removes a number of core industry stocks with dependable revenue and dividend streams.
For example, the Dow Jones Dharma Index fund launched with much fanfare in 2008 whose investment strategy was based on Buddhist, Hinduism, Jainism and Sikh principles as the first and so far only one of its kind, was quickly discontinued.
