The world of faith-based exchange-traded funds in the U.S. got a new member of the congregation with Tuesday’s launch of the Wahed FTSE USA Shariah ETF (HLAL). The product’s sponsor is Wahed Invest LLC, a Shariah-compliant robo-advisor in New York City.
According to Wahed’s website, Shariah-compliant investing, or halal investing is a subset of socially responsible investing. The company says its portfolios are based on modern portfolio theory and are screened to cater to Islamic and socially responsible investors. That includes both stocks and sukuk, which are Islamic bonds structured to avoid the Islamic prohibition on interest. Shariah is the body of Islamic law governing religious rituals and daily life based on the Quran and the teachings of Muhammad.
Sukuk is the plural form of the Arabic word "sakk," which mans certificate, legal instrument, deed or check.
Wahed's new ETF tracks the FTSE USA Shariah Index comprising U.S. large- and mid-cap companies deemed to be Shariah-compliant based on their business activities and certain financial ratios. Potential candidates for the index are screened by Yasaar Limited, a London-based Shariah compliance services and consultancy to financial institutions.
Companies that earn income that exceeds 5% of their total revenue from Shariah-prohibited activities are excluded from the index. Proscribed activities include conventional finance (non-Islamic banking, finance and insurance, etc.); as well as anything related to alcohol, pork, casinos and gambling, adult entertainment, tobacco, and weapons, arms and other defense manufacturing.
Shariah-compliant financial ratios include debt that’s less than 33.333% of total assets; cash and interest-bearing items that are less than 33.333% of total assets; and accounts receivable and cash that are less than 50% of total assets. In addition, total interest and non-compliant activities income should not exceed 5% of total revenue.
The resulting index consists of more than 200 holdings that are market-cap weighted and reconstituted quarterly. The fund’s expense ratio is 0.50%.
As of the end of June, the top holdings were Apple Inc. (11% weighting); Johnson & Johnson (4.5%); Exxon Mobil Corp. (3.9%); Procter & Gamble (3.3%) and Pfizer (2.9%). The portfolio’s dividend yield was 2%.
The oil and gas sector had the largest sector weight at 13%, which is surprising for a SRI-oriented fund, as well as for a halal-focused investment philosophy which, as detailed on Wahed’s website, “Investments in domains that may cause harm to human beings or other elements of creation, for that matter, (i.e. the environment) are prohibited.”
Then again, the SRI and environmental, social and governance (ESG) community isn’t of the same mind regarding the inclusion—or exclusion—of fossil fuels in the fund portfolios of this category.
Faith-based ETFs are a tiny sliver of the overall ETF universe. There are a handful of U.S.-listed products based on Christian principles. A small number of Islamic funds are listed in Europe, but the only previous Islamic-centered ETF to trade in the U.S.—the JETS Dow Jones Islamic Market International Index Fund, run by Javelin Investment Management—closed in October 2010 after a run of slightly more than one year.