Don’t Listen To Me, But Please, Hear Me Out: # 14

Published July 28 2020; Updated on Aug 4 2020

Many of you have requested me to help you with Islamic Investing. I am not an expert in Sharia compliant funds, but I researched 11 Islamic Mutual Funds (MF) and Exchange Traded Funds (ETF) and am presenting my findings here. I only reviewed Equity funds and not Bond or Fixed Income Funds.

Before we start, here are some definitions and questions that are good to know about any MF or ETF. Do ask these questions to your broker or investment advisor before making an investing decision.

• Is it an MF or ETF?
• Are Dividends Reinvested?
  • Please request your broker to reinvest dividends. This should improve your returns over time in a well-managed fund.
• What is the Minimum Investment Amount?
  • Many funds will require no minimum investment. In other words, you can invest as little as the price of one share of the fund to start with.
  • Minimum investment therefore could be anywhere from $0 to $250,000 or more. 
  • Some funds may have a modest minimum initial investment of $100 – $3,000, with no requirements for additional monthly investments.
  • I like funds that have no or low minimum initial investment and no follow-on investment requirements. However, you should continue to make regular contributions to the fund for potentially best results.  
• What is the Expense Ratio?
  • Expense Ratio is the percentage of the total value of your investment, that the management will charge towards management, advertising and other operating fees. These usually vary from a 0% to 5%. 
  • A 2% Expense Ratio may sound low to you. But please be aware that the compounding effect of this can erode your gains. For example, let us say, you have been diligently investing in a fund and at the end of 10 years, you have accumulated $500,000. A 2% fee means you are losing $10,000. Not only are you losing 2% every year, but you are also losing the opportunity to grow your investment by that amount. Over long periods, the compounding impact of the 2% is huge. So, try to pick funds with very low Expense Ratio of 0% to under 1%.
• Is it Front Loaded?
  • Some funds will charge a 1-time fee to even enter the fund (entry fee or front loading). This could be up to 5% or more. I strongly advice against investing in funds that are front loaded. Suppose the Front Load Fee is 2%, and you invest $10,000, then only $9,800 is invested for you. 
• Is it Back Loaded?
  • In this case a fund may charge a percent to exit the fund. In other words, when you want to cash out of the fund, the fund managers would charge you a percent of the total value of your fund as at the back end. Once again, I advise against investing in funds that are back loaded. If the fund has a 2% Back Load fee, then if your investments in the fund is now worth $100,000 you will get $98,000. In other words, you lose $2,000 in fees.
• Is there a Redemption Fee?
  • Redemption fees are charged to discourage investors from cashing out too soon. Funds that are illiquid will charge redemption fees. Of course, you know what my advice is by now. Just say No.
• Is it a No-Load Fund?
  • This the Goldilocks solution. We want No-Load or Zero load funds. This means when you invest $10,000, the entire $10,000 is invested in the fund. If you withdraw your funds and the investment is now worth $20,000, you will get the full $20,000.
• What are the Holdings Turnover Rate?
  • Holdings turnover rate means how many times the fund turns over its stocks or other assets. For example, if a Fund has a turnover rate of 25%, then the fund holds each stock for about 4 years before turning them over, i.e., selling and replacing with new stocks. If a Fund’s Turnover rate is too high, then it will be more expensive for investors. Moreover, depending on the tax jurisdiction, there may be more taxes to pay due to capital gains realized in selling stocks.
• Taxes
  • You will have to ask about any taxes you may have to pay based on the product country of your tax residency. This is not my area of expertise.
• Broker or Platform Fee: You absolutely must make sure if the Bank or Broker or Platform (eToro, Swissquote, IG Markets, Robinhood, Charles Schwab, etc) through which you are investing is charging a fee.

Islamic or Sharia Compliant Funds

In Islam, there are strict guidance for investments. In Islam money itself is not considered valuable. It is only an instrument used as a placeholder of value of another asset. Money itself does not have intrinsic value. Some features of an Islamic funds are:

• “Money cannot make money”. This essentially means interest is forbidden. So Islamic Funds cannot grow by taking interest. Depending on the fund holdings, a portion of the fund maybe in cash. In Islamic funds, these cash portions may not be invested in interest bearing instruments.
• It is extremely difficult to create a fund portfolio strictly adhering to all principles of Sharia. Therefore, a fund may require that interest income for any of its portfolio companies may not exceed 5% of the company’s total revenue.
• Debt to Market Capitalization of each company in the portfolio cannot be greater than 25% – 30%.
• No portfolio company maybe involved in the business of Alcohol, Firearms, Pork, Pornography, Gambling or Tobacco.

11 Islamic Equity Funds

I compared the following 11 Islamic Equity Funds. Some are MFs and others are ETFs.

1. iShares MSCI World Islamic UCITS ETF, (ISDW): Equity Fund that tracks The MSCI World Index includes stocks from developed countries
2. iShares MSCI USA Islamic UCITS ETF, (ISUS): Equity Fund that tracks The MSCI USA Index includes stocks from USA
3. iShares MSCI EM Islamic UCITS ETF USD, (ISDE): Equity Fund tracks MSCI Emerging Market Index 
4. Iman Fund, (IMANX): Equity Fund tracks Dow Jones Islamic Market Index as well world stocks
5. Templeton Shariah Global Equity Fund, (TSGEAAU): The Fund invests principally in equity and equity-related securities including common stocks of companies located anywhere in the world, including emerging markets. Capital Appreciation
6. Amana Growth, (AMAGX): Equity Fund seeks long-term capital growth investing in equity securities, including foreign securities.
7. Amana Developing World Fund, (AMDWX): Equity Fund seeks long-term capital growth by investing in companies with significant exposure to countries with developing economies and/or markets. 
8. Amana Income, (AMANX): Equity Fund seeks current income and preservation of capital by investing in equity securities, including foreign securities.
9. Azzad Ethical Fund, (ADJEX): Equity Fund invest in securities of mid-capitalization companies included in the Russell Midcap Growth Index at the time of purchase. 
10. Wahed FTSE USA Shariah ETF, (HLAL): Equity Fund seeks to tracks the FTSE USA Shariah Index. 
11. Arabesque Systematic USA Institutional, (ASUIX): Equity Fund seeks capital appreciation investing in equity securities of U.S. issuers and U.S. dollar denominated cash and cash instruments. 

Comparing Islamic Fund Performance

I used the Vanguard S&P 500 ETF, (VOO), that tracks the performance of the S&P 500 Index as a benchmark.

I collected this information mostly from Bloomberg. I am assuming that the Performance gains or losses are based on trailing 12 months. Yahoo Finance had each each fund’s contribution by sector data. Please note in table above, Arabesque Institutional Fund or ASUIX has a minimum investment of $50,000. This is not feasible for the average individual investor, so I am removing it from further discussions below.

Islamic Fund Returns Vs S&P 500

Amana Growth (AMAGX) by Saturn Capital seems to have done very well compared to VOO. AMAGX returned 15.3% annualized over 5 years. However, it has a higher Expense Ratio of 1.03%, whereas VOO has a Zero Load fund with Zero Expense Ratio and returned 11.3% on average over the past 5 years.

Next, let’s look at iShares MSCI USA Islamic UCITS ETF, a Blackrock fund mainly focused on USA S&P 500 large cap companies. It returned 9.9% on average over the past 5 years with a reasonably low expense ratio of 0.5%.

So, you need to decide for yourself based on these performances, which one’s suit you best. If you are less risk tolerant then you may want to choose a fund that gives a lower average return, but also smaller downside risk. Ask your fund manager to show you returns for 10 consecutive years so that you can see what the volatility or difference in gain/loss is year to year.

Fund Allocation By Sector

Another aspect you can consider is the sector allocation. Tech sector has grown the most in the past 5-10 years. Any fund that has a high allocation in the tech sector may have the potential for higher returns but may also bear higher risks.

You can see that most of the funds have 0% or very low exposure to Financial Services because interest is forbidden in Islam and most Financial Services will have a significant portion of their revenue from interests earned.

Look at Amana Growth Fund, AMAGX. More than half or 52% of its holdings are in tech sector.  Moreover Covid19 has given healthcare sector a big boost in 2020 and AMAGX has nearly 21% allocated to healthcare whereas VOO only has 15.4% in healthcare. Now you see why AMAGX enjoyed a much higher average return of 15.3% over the past 5 years.

Franklin Templeton Fund had 0% in Financial Services and was holding 6.1% in cash that is not generating income. Moreover, it was bullish on Energy sector investing 10.2% in it and with Oil Price crashing, this sector has performed poorly. You can see all 3 Blackrock Funds were also bullish on Energy sector so that 2 of the funds, the World Index and the Emerging Market Index had modest returns. 

Asset Allocation By Sector

Below is a chart version of the table that is perhaps a little easier on the eye.

Asset allocation is not easy, most fund managers get it wrong. I wrote about this here. The work involved is extensive in terms of analysis. This is why fund managers charge fees. But you can see from the table that only 1 of them beat the S&P 500 Index fund (VOO), and only 1 other matched its performance.

Conclusions

There are probably 1000’s of Islamic Funds as Islamic Finance has been one of the fastest growing sectors for investments. If you can find an Islamic Fund that mimics an Index Fund like the S&P 500, that would be ideal.

• When you choose MF’s or ETF’s, always remember to ask the questions listed above to your broker or financial advisor.
• Please ask your broker to show you 10 year returns so that you can see how large the swings are fro year to year. It will help you choose better based on your risk tolerance. You can see 10 year returns in Yahoo Finance, but I am not sure how accurate they are.
• You can find more information on Bloomberg or Yahoo Finance or the fund’s own website. For example, just google, “Amana Growth Fund Sheet” and you will get the right results.
• Past performance does not guarantee future returns. 
• You can find many more Shariah Index funds from S&P 500 or S&P Global 1200

If you would like to understand more about a specific Shariah product you found, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say @shaheedasays.com. I’d be happy to offer you my services.

Disclaimer:

I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.