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In today’s diverse and rapidly evolving financial landscape, investors have an increasing number of options that align with their ethical, religious, or personal beliefs. One such niche that has seen noteworthy growth is the sector of Halal-compliant investing.

As a critical aspect of Islamic finance, Halal investing adheres to the principles of Shariah law, which prohibits involvement in activities such as earning interest and investing in businesses that deal in products like alcohol or tobacco.

The rise in demand for Halal investment options has led to the advent of a variety of financial products that cater to this specific market, including Halal Exchange-Traded Funds (ETFs). These funds offer an efficient, cost-effective way to diversify one’s portfolio while staying true to Islamic principles. In an industry that’s traditionally been dominated by conventional investment vehicles, Halal ETFs represent an essential advancement for modern Muslim investors and others interested in ethical investing.

In this article, I will present an in-depth analysis of the best Halal ETFs to invest in for the year 2023.

Stay tuned as I delve into the specifics, including potential risks and rewards, to offer you a well-rounded perspective on the Halal ETFs that deserve your attention in 2023.

 

What is halal ETF?

Halal Exchange-Traded Funds (ETFs) are investment vehicles that are specifically designed to be compliant with Islamic law, also known as Shariah law. These funds aim to provide Muslim investors, as well as those interested in ethical investing, an opportunity to invest in a diversified portfolio without compromising their religious beliefs or values.

ETFs, in general, are funds that track an index, a commodity, bonds, or a basket of assets. Unlike mutual funds, an ETF trades like a common stock on a stock exchange, offering investors the advantage of real-time pricing, lower fees, and more flexibility.

What makes an ETF halal?

Ensuring that an Exchange-Traded Fund (ETF) is Halal or Shariah-compliant involves a rigorous screening process that adheres to certain clear parameters. Here, we discuss these criteria in detail to give investors an in-depth understanding of what qualifies an ETF as Halal-compliant.

A) Business Activity

One of the foremost considerations is the nature of the business activities engaged by the companies that an ETF holds. Islamic finance principles prohibit investing in companies that generate revenue from non-Halal (forbidden) or doubtful sources.

Parameter: If the total revenue from non-Shariah compliant activities of all stocks held by an Equity ETF amounts to less than 5% of its overall revenue, then the ETF is considered Shariah-compliant from a business activity standpoint.

Restricted Business Sectors in Islam

Businesses typically considered not Shariah compliant and therefore not suitable for Halal investment include those involved in gambling and riba, the production or sale of alcoholic beverages, the pork industry, tobacco manufacturing or distribution, the cannabis sector (unless explicitly approved for medicinal use by Islamic scholars), and the adult entertainment industry. These sectors are avoided when identifying Halal-compliant investment opportunities.

B) Interest-bearing Securities and Assets

Islamic finance strictly prohibits earning money from money, like charging interest. Therefore, Halal ETFs cannot include companies that hold a significant number of interest-bearing securities or assets.

Parameter: The aggregate amount of interest-bearing securities and assets of all holdings of the ETF should not exceed 30% of the trailing 36-month average market capitalization of the ETF to be Shariah compliant.

C) Interest-bearing Debt

Another pivotal aspect of Halal investing is the avoidance of companies laden with debt acquired through interest-based lending, which is considered “Riba” and is prohibited in Islamic finance.

Parameter: The interest-bearing debt of the holdings in the ETF must be below 30% of the total market capitalization of the ETF.

These criteria form the backbone of the screening process for Halal ETFs. Only those funds that meet these rigorous conditions are certified as Halal or Shariah-compliant, offering Muslim investors and those interested in ethical investing a vehicle that aligns with their faith and values.

5 best halal ETFs to invest in 2023

In this section, I’ve identified the 5 best Halal ETFs to consider investing in for the year 2023 based on factors like past performance, asset allocation, and Shariah-compliance certification.

Whether you’re a seasoned investor or just starting your investment journey, these options present an excellent opportunity to align your financial goals with your ethical beliefs.

1. Technology Select Sector SPDR Fund (XLhttps://screener.musaffa.com/cabinet/etf/XLKK)

1. Technology Select Sector SPDR Fund (XLK)

XLK was created on 1998-12-16 by SPDR. The fund’s investment portfolio concentrates primarily on information technology equity. The ETF currently has 48956.56m in AUM and 67 holdings. XLK tracks an index of S&P 500 technology stocks.

2. Invesco Water Resources ETF (PHO)

2. Invesco Water Resources ETF (PHO)

PHO was created on 2005-12-06 by Invesco. The fund’s investment portfolio concentrates primarily on theme equity. The ETF currently has 1770.21m in AUM and 37 holdings. PHO tracks a modified liquidity-weighted index of US-listed companies that create products to conserve and purify water.

3. VanEck Semiconductor ETF (SMH)

3. VanEck Semiconductor ETF (SMH)

SMH was created on 2000-05-05 by VanEck. The fund’s investment portfolio concentrates primarily on information technology equity. The ETF currently has 8848.56m in AUM and 26 holdings. SMH tracks a market-cap-weighted index of 25 of the largest US-listed semiconductor companies.

4. iShares Semiconductor ETF (SOXX)

4. iShares Semiconductor ETF (SOXX)

SOXX was created on 2001-07-10 by iShares. The fund’s investment portfolio concentrates primarily on information technology equity. The ETF currently has 8188.49m in AUM and 31 holdings. SOXX tracks a modified market-cap-weighted index of 30 US-listed semiconductor companies.

5. iShares U.S. Medical Devices ETF (IHI)

5. iShares U.S. Medical Devices ETF (IHI)

IHI was created on 2006-05-01 by iShares. The fund’s investment portfolio concentrates primarily on health care equity. The ETF currently has 6050.58m in AUM and 63 holdings. IHI tracks a market-cap-weighted index of manufacturers and distributors of medical devices in the US

Benefits and risks of investing in ETFs

Benefits of Investing in ETFs

One of the most significant advantages of investing in ETFs is the opportunity for diversification. Unlike purchasing individual stocks, where your investment is tied to the performance of a single company, ETFs often hold an array of different assets, such as stocks, commodities, or bonds. This diversification can significantly reduce the level of risk associated with market volatility.

Another key benefit is liquidity. ETFs are traded on stock exchanges, much like individual stocks. This means that investors can easily buy and sell shares of an ETF during market hours, offering a level of flexibility not always present in other investment vehicles like mutual funds. Additionally, ETFs generally have lower expense ratios compared to mutual funds, making them a more cost-effective option for many investors.

Risks of Investing in ETFs

However, it’s essential to acknowledge the risks associated with ETF investments. The most obvious is market risk, which means that your investment will fluctuate based on market conditions. Although diversification can mitigate this to some extent, there is no guarantee against potential loss, particularly in a declining market.

Liquidity can also pose a challenge. While ETFs are generally liquid due to their tradable nature, some specialized or smaller ETFs may suffer from low trading volumes. This lack of liquidity can make buying or selling shares more difficult without impacting the price, particularly in volatile market conditions.

Best Halal ETF Platform

Best Halal ETF Platform

When it comes to finding a reliable platform for Halal ETF screening and investing, Musaffa is the destination you’ve been searching for. Overseen by a panel of distinguished Islamic scholars and Shariah advisors, Musaffa prides itself on offering a curated selection of investment vehicles that not only conform to Islamic teachings but also meet the most rigorous industry standards.

Our Shariah board is at the core of our operations which is committed to continuous oversight of our technology, systems, and operational practices. This ensures that we remain fully compliant with Islamic principles at all times. In addition to that, our team of seasoned financial analysts conducts an exhaustive review of each publicly traded company we consider for our platform. Utilizing a wealth of publicly disclosed data, from annual reports to press releases, our analysts leave no stone unturned in ensuring each investment option aligns with Halal criteria.

But our vision extends far beyond mere compliance and quality screening. We are working towards the launch of a comprehensive Halal investment app that will be accessible in more than 150 countries. This ambitious initiative aims to solidify Musaffa’s standing as the go-to investment platform for Muslims and ethically-minded investors globally. So, if you’re on the lookout for a centralized hub that meets all your Halal investment needs, your search ends with Musaffa. Register with us today to embark on a fulfilling and compliant investment journey.

Bottom line

In an era where ethical considerations are increasingly integrated into financial decisions, Halal ETFs offer a meaningful pathway for Muslim investors and those who prioritize ethical investing. With strict compliance to Shariah law, these funds provide a moral and legal framework that aligns with Islamic teachings, effectively bridging the gap between faith and finance.

Halal investing has come a long way in a relatively short period, thanks to advancements in financial products and technology. By staying tuned to market trends and continually aligning your portfolio with your values, you can both honor your faith and fulfill your financial goals.

 

Please visit our academy to read more about Islamic Finance-related topics.

Also, feel free to sign up for our free Halal stock screening service at musaffa.com

Disclaimer: Important information



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