Shakespeare’s character, Polonius, continues to delight audiences that watch Hamlet. In the play’s first act, he gives his son some good advice. The younger man is getting ready to continue his education in Paris. At one point, Polonius says: “Neither a borrower nor a lender be.” Muslims can relate. After all, Polonius’ words echo Shariah law.
When Muslims invest, they aren’t supposed to loan money that pays interest. That rules out bonds. The Koran says such interest would be usery, which is against Shariah law.
Muslims also have other faith-based investment principles. They aren’t supposed to invest in financial institutions or companies that produce or sell alcohol. They shouldn’t invest in companies associated with gambling, weapons of mass destruction, pornography or cloning.
That crosses plenty of investments off the list. But Muslims can still build stock market wealth. If they buy low-cost, Shariah-compliant stock market funds, they can reap big rewards, while complying with faith-based principles.
Plenty of financial companies have created Shariah-compliant funds. But their fees are high. As with regular mutual funds or unit trusts, the less you pay in fees, the more money you will make.
That’s why Muslims should consider Shariah-compliant ETFs. They only include stocks in industries that comply with their religion. What’s more, they charge lower fees than actively managed funds. As a result, they have much higher odds of earning strong returns.
Three examples trade on the London Stock Exchange. They include the iShares MSCI World Islamic ETF (ISWD). It includes 525 stocks from dozens of developed market countries. The United States is the world’s biggest market, so almost half of the fund comprises U.S. stocks. The rest is split between European, Asian, Canadian and Australian shares.
The iShares MSCI USA Islamic ETF (ISUS) is another Shariah-compliant fund on the London Stock Exchange. New investors might compare the returns of this fund to the World Islamic ETF…and then choose the U.S. fund. They might be impressed that the American Shariah-compliant fund gained a total of 99.84 percent during the ten-year period ending June 30, 2018.
That compares to a ten-year total return of 58.11 percent for the Shariah- compliant world stock index. But focusing on the U.S. fund might be a mistake.
After all, it doesn’t include European, Asian, Australian or Canadian stocks. As a result, it’s far less diversified.
What’s more, U.S. stocks are currently expensive. Based on the most respected predictor of long-term returns (something called the CAPE ratio) U.S. stocks are expected to lag global markets in the decade ahead. A world stock index provides U.S. stock exposure, without going overboard.
Muslims should also include the iShares MSCI Emerging Markets Islamic ETF (ISDE). It contains 260 stocks from several emerging market countries. Emerging market shares have high growth potential. But they can be volatile, and they can sometimes fall hard. That’s why investors shouldn’t put more than 10 percent of their portfolio’s value in emerging market stocks.
Shariah-compliant ETFs Trading On The London Stock Exchange
|ETF||Expense Ratio||Invests in...|
|iShares MSCI World Islamic ETF
|0.60%||European, U.S., Asian-Pacific and
Emerging Market stocks
|iShares MSCI USA Islamic ETF
|iShares MSCI Emerging Markets
Islamic ETF (ISEM)
|0.85%||Emerging Market stocks|
Source: iShares UK
By now you might be asking, “How do we manage risk?” Diversification helps. Non-Muslims should build portfolios with stocks and bonds. Muslims could use stocks and gold instead. The Accounting and Auditing Organization for Islamic Financial Institutions recently approved a new Shariah Standard on gold. That means Muslims can buy gold ETFs.