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How to invest in Shariah-Compliant Assets

Aktualisiert: März 16


„Do not devour another’s property wrongfully — unless it be by trade based on mutual consent.” — Al-Nisa: 29


After several financial crises in the western world, it is certain that greed and egoism will lead to misery and poverty. On the other side, Islamic Investments can make a difference so that all participants gain sustainable profit without exploiting anyone.


What is Islamic Finance


Islamic Finance operates under the potent mechanism of Islamic laws called Shariah. The philosophy behind that is to act ethically and sustainably when dealing with money. Do not damage others, instead have the bigger picture to improve people’s life. All business transactions are based on mutual interest so that risk and profit are shared equally. You don’t want to exploit or get exploited by your business partner. This includes a high transparency to create trust between the parties. De facto, halal are only assets that fulfill the following principles:


  • Interest free (Riba)

  • Avoiding uncertainty in transactions (Gharar)

  • Trading with halal industry only -> not involved in: gambling (Maysir), bets (Qimar), alcohol, prostitution/porn, tobacco, pork


Conventional Providers of Islamic Funds


Many providers of Islamic investments do offer products that might be convenient to Sharia Law, but do not accomplish the goal of increasing wealth. When analyzing those offers, we’ve found a significant lack of financial understanding. In particular, they try to sell investments in gold as a safe haven for wealth building. But as you learn in Investment 101: GOLD IS NOT AN INVESTMENT!



How to invest in Islamic Assets — The smart way


I believe it makes most sense to take responsibility for your investments and buy the assets by yourself. The smart and easy way to do that is to buy so-called Exchange Traded Funds (ETFs) on the stock market that comply Sharia Law.


ETFs are passively managed portfolios characterized by a high diversification of assets to minimize the investment risk. An Islamic ETFs collected a bundle of company stocks that are conform to Sharia Law. These stocks will not pay any interest but they will increase their market value in the future so that you can sell them for a higher price.


To avoid gambling with your private money, you don’t want to stake everything on one card (=company). Instead, the scientific principles of the modern portfolio theory implies that you invest in at least 20 different companies that interact in different industries and countries. This will make sure, that in case one company fails, your money is still safe.


As Islamic ETFs are not based on speculation but on sustainable growth, you need to invest long term — approximately 10 years or longer are recommended. This does not mean you cannot touch your money in these years, but because every stock market has ups and downs, you don’t want to withdraw money during a recession. If you keep this in mind you will benefit by an average yearly growth around 7–9%.


An essential advantage of ETFs are the low management costs. For a usual (active managed) investment fund, you usually pay up to 3% yearly management fees and sometimes other costs being buried in the fine print. However, Islamic ETFs are not managed actively by a portfolio manager, since you decide when to buy or sell your assets. Because of that, ETFs only charge a yearly fee called TER (Total Expense Ratio) between 0,5% to 0,85% on the value of your invested capital.



Islamic ETFs


Due to the sustainable and ethical focus, Islamic investment funds have a more defensive nature and therefore demonstrated a lower volatility compared to conventional stock portfolios. Although Islamic ETfs ensure less risk, the performance is still remarkable.

In 2020 there are three Islamic ETFs on the market that are based on conventional Index portfolios but exclude companies which are not Sharia conform:

  • iShares MSCI World Islamic UCITS ETF (WKN: A0NA46)

  • iShares MSCI Emerging Markets Islamic UCITS ETF (WKN: A0NA47)

  • iShares MSCI USA Islamic UCITS ETF (WKN: A0NA48)


Make it easy at first and start investing in the MSCI World Islamic.



MSCI Islamic World ETF


The MSCI Islamic World ETF is the safest and most diversified index fund. It includes stocks from 527 different companies in 23 different industrial countries. The ETF reached a powerful performance of 101% in 10 years, which correspond 7,2% per year.



Where to buy Islamic ETFs


Islamic ETFs are still relatively “exotic” and not many providers offer them. However, there are two German broker with good conditions that allow to either buy ETFs for one time investment or a savings plan to invest a smaller sum every month.


  1. Trade Republic: Offers a free brokerage account, no management fees, no order costs for savings plans. You can already start investing with a sum of 25€ monthly. However, the platform is only available with German language, yet.

  2. Flatex: is distinguished as one of the best brokers in Germany, but also offers an English platform. As long as you have a seperate bank account with an International Bank Account Number (IBAN) and you are not taxable in the US, you can open a brokerage account at Flatex. The brokerage account has only a management fee of 0,1% per year and order costs of 1,50€. You can already start investing with a sum of 50€ monthly.



Conclusion:

Islamic investments are based on the religious laws of the Sharia. However, they are not only favourable for muslims, but also for investors seeking sustainability, transparency and fairness. Modern investment opportunities make it easy to buy a diversified portfolio (ETFs) of Sharia conform stocks and also offer high return rates of 7–8 % p.a.

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