The Koran is the Islamic text which guides all aspects of Muslim life. Sharia is Islamic law which includes guidelines that impact Muslims’ financial decisions; these include the prohibition on earning interest on fixed income investments such as bonds, which are a common component of an investment portfolio. Instead of earning interest on loans (a bond is a loan from the investor to the bond issuer), a borrower and a lender should share the risks and rewards (like investing in stocks).
To achieve an asset allocation that reflects an investor’s risk tolerance and goals, Muslim investors may consider a fixed income option like sukuk, which is a Sharia-compliant bond alternative. Sukuk pays income to investors in the form of a share of the profits rather than in the form of interest. It can be backed by real estate that generates rental income instead of loan interest. Bonds typically have a maturity date and are redeemed at a specified price, while sukuk can rise or fall in value at maturity depending on the price of the asset on which they are based.
Some Muslim investors hold higher levels of liquidity to meet their allocation of fixed income securities, but other options include direct ownership of real estate, land or commodities. Gold is a common and appropriate asset class that can be purchased directly and stored in vaults or through exchange traded funds like State Street. SPDR Gold Trust. It is an ETF that holds gold bars stored in the vaults of HSBC in London and trades on the New York Stock Exchange.
Sharia law also guides the types of businesses in which investors should and should not invest, leading to a specific set of principles for socially responsible halal stock market investing. This means that traditional mutual funds or ETFs may be banned, and investment advisers may need an investment policy statement with strict restrictions and guidelines.
Actions of businesses that profit from alcohol, interest-bearing businesses, gambling, media, pork, pornography, tobacco or guns and other businesses deemed unethical should be avoided. Even derivatives, futures and short sales can be considered illegal.
Global Growth Assets offers the oldest Canadian Halal mutual fund, the Iman Global Fund. It invests in equity securities of public companies listed on the Dow Jones Islamic Market Titans 100 Index. The fund can be purchased in all types of accounts, including TFSAs, RRSPs, RRIFs and RESPs, but can not be available in all financial institutions.
For passive investors, there are options listed in the United States like Wahed FTSE USA Sharia ETF and SP Funds S&P 500 Sharia Industry Exclusions ETF, which trade on the Nasdaq and the New York Stock Exchange, respectively.
Wealthsimple launched the Wealthsimple Shariah World Equity ETF in early 2021. They currently offer a Halal investment portfolio for Muslim investors which consists of 50 actions in an all-equity portfolio. (Read our comparative review of Wealthsimple and Questrade services.)