The Halal equity investing outperforms conventional
This article was first published in IFN Volume 20 Issue 27 dated the 5th July 2023.
Investing in shares of companies is permissible in Islam as long as those invested shares are Shariah compliant. A Shariah compliant investment should not involve any of the activities prohibited by Islam, such as riba (usury), maisir (gambling), or gharar (uncertainty). So, the following sectors are deemed non-compliant:
- entities that deal with interest (insurance and banking);
- entities with excessive debt;
- institutions that are engaged with alcohol, adult entertainment, pork-related products, tobacco, gambling, firearms and defense, and others.
As we can see, these limitations are not significant and do not preclude the faithful from participation in the global stock market. Among the most popular among Islamic investors companies are Apple, Saudi Aramco, Tesla, Exxon Mobile, Johnson & Johnson and many others.
Nowadays it is relatively easy to check whether the stock is Halal. Zoya, Islamicly and Amal Invest have handy apps that within seconds will establish the conformity of thousands of companies’ shares to Shariah standards.
Still, the easiest is to invest in an index fund (a type of a mutual fund or an exchange-traded fund) that seeks to track the returns of a market index. Among the most popular Shariah compliant indices are S&P 500 Shariah, FTSE Global Equity Shariah series and a number of FTSE Bursa Malaysia Shariah indices. Even a small cap MOEX (Moscow Exchange) launched MOEX Shariah Index with the assistance of the author of this article (this index contains only 13 of Russia “blue chips”).
In the times of economic uncertainty and turmoil, Islamic indices often outperform their conventional counterparts. In general, the former are tech, healthcare and consumer products “heavy” and lack exposure to banking and defense sectors. For example, 37.6% of the S&P Shariah represent IT sector (28.3% in the conventional index), and only 4.1% represent the financials (12.4% for the latter).
For example, Standard & Poor’s Shariah index is composed of 267 companies (the conventional index is made out of 503 companies). The former’s weighted average carbon intensity factor (metric tons of CO2 per $1 million invested) is 118.25, which is significantly lower than for the conventional S&P 500’s — 177.73. Top constituents for both indices are the same — Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla and Meta.
