A pair of index-tracking exchange-traded funds based on Islamic principles debuted in the latter part of this month, adding to the small but growing roster of faith-based funds.
The products are sponsored by SP Funds, an asset management firm in Bellevue, Wash., that adheres to guidelines set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based nonprofit entity that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions.
Sharia is the body of Islamic law governing religious rituals and daily life based on the Quran and the teachings of Muhammad. It has certain restrictions regarding finance and commercial activities.
The SP Funds Dow Jones Global Sukuk ETF (SPSK) that launched on Monday provides targeted exposure to sukuks, which are bond-like products structured to avoid the Islamic prohibition on interest.
That follows the December 18 debut of the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS) that invests in S&P 500 companies that meet AAOIFI guidelines.
The SPSK product holds 85 U.S. dollar-denominated investment-grade sukuks that have an outstanding issue size of at least $200 million and a minimum one year to maturity. These sukuks represent investments in seven foreign countries, and have an average weighted maturity of 5.92 years.
As per fund literature, sukuks are unlike conventional bonds in that they’re based on various contracts to create financial obligations and the returns to investors are considered to be profit sharing, not interest. Issuers of sukuks may include international financial institutions, foreign governments and foreign government agencies.
The fund’s expense ratio is 0.65%.
Meanwhile, the SPUS equity fund excludes companies engaged in the following activities: alcohol; gambling; defense/weapons; tobacco; adult entertainment; pork products; credit cards; music, cinema and broadcasting; interest-based businesses; and highly leveraged businesses.
The underlying S&P 500 Shariah Index had 248 constituents when the fund launched. According to the prospectus, the fund is deemed to be non-diversified because “it may invest a greater percentage of its assets in the securities of a single issuer or a small number of issuers than if it was a diversified fund.”
SPUS has an expense ratio of 0.49%.
Faith-based investing is often lumped into the socially responsible investing category. While still a tiny subset of the overall investing universe, it has slowly gained momentum in ETF circles during the past couple of years with the roll out of biblically inspired funds from Inspire Investing (five products) and Timothy Partners Ltd. (four products).
The largest and oldest U.S.-listed ETF focused on Christian values, the Global X S&P 500 Catholic Values ETF (CATH), is a large-cap domestic fund that follows the guidelines of the United States Conference of Catholic Bishops.
It launched in 2016 and has more than $303 million in assets. Its three-year annualized return of 15.06% is just a hair less than the 15.08% gain on the SPDR S&P 500 ETF (SPY) during that period.
The expense ratio on CATH is 0.50%, which is significantly more than SPY’s fee of 0.09%. But that evidently doesn’t matter much to people who seek investments deemed to be aligned with Catholic principles.
In the non-biblical sphere of faith-based investing, the two new products from SP Funds join an existing Islamic-themed ETF that debuted last July—the Wahed FTSE USA Shariah ETF (HLAL).
HLAL is sponsored by Wahed Invest LLC, a Sharia-compliant robo-advisor in New York City. The fund tracks an index comprising U.S. large- and mid-cap companies deemed to be Sharia-compliant based on their business activities and certain financial ratios. Potential candidates for the index are screened by Yasaar Ltd, a London-based Sharia compliance services and consultancy to financial institutions.
That fund has more than $23 million in assets and charges an expense ratio of 0.50%.