Islamic Funds and ETFs

Islamic investment funds are a rapidly growing segment for investors demanding Shariah-compliant products. Assets under management have exceeded $150 billion, and the number of funds is over 1500.

Shariah Screening of Stocks

To include a stock in a Shariah-compliant fund, two levels of filters are applied:

Sectoral Screening (Business Activity)

Completely prohibited sectors:

• Alcohol (production, distribution)
• Pork and related products
• Tobacco
• Weapons (mass-destruction weapons)
• Pornography and adult content
• Gambling and casinos
• Conventional banks and insurance companies (primary activity = riba)

Thresholds for mixed businesses (depend on the standard):

• AAOIFI: income from haram < 5% of total revenue
• Dow Jones Islamic: < 5%
• FTSE Shariah: < 5%
• MSCI Islamic: separate rules by category

Financial Screening (Financial Ratios)

Purpose: to exclude companies with excessive debt load or riba.

AAOIFI standard (the most stringent):

• Interest-bearing debts / Total Assets < 33%
• Accounts receivable / Total Assets < 70% (to exclude debt-heavy business)
• Deposits and interest-bearing securities / Total Assets < 33%

Dow Jones Islamic Market (DJIM):

• Total debt / 24M average market cap < 33%
• Accounts receivable / 24M average market cap < 33%
• (Cash + interest-bearing investments) / 24M average market cap < 33%

Practical effect: Screening removes about 30–40% of the market universe. Tech companies (Apple, Microsoft) typically pass. Financials (banks, insurance) — do not.

Purification (income cleansing)

Even if a company passes screening, part of its income may be from haram sources (up to 5% according to the threshold). The investor is obligated to “cleanse” the corresponding portion of income by donating it to charity.

Purification sum calculation: The share of haram income of the company × number of shares × holding period.

Many Shariah-compliant platforms calculate this automatically.

Largest Indexes

DJIM (Dow Jones Islamic Market World Index)

• Coverage: 2500+ companies in 70 countries
• Launched in 1999 — first in the world
• Shariah board: accredited scholars

MSCI Islamic (MSCI World Islamic Index)

• MSCI screening methodology
• Used as a benchmark for many Islamic ETFs

FTSE Shariah World Index

• FTSE + Yasaar Research
• Regular re-screening (quarterly)

S&P Shariah Index

• S&P methodology + AAOIFI standards

Islamic ETFs

Global

iShares MSCI World Islamic UCITS ETF (ISWD) — BM Assets Manager. Most popular in Europe/GCC. Based on MSCI World Islamic.

SPDR S&P 500 Shariah Industry Exclusions ETF — State Street. American stocks with Shariah screening.

UAE/GCC Specifics

Nasdaq Dubai Islamic Index ETF — listed on Nasdaq Dubai.

Local funds: Emirates Islamic, DIB Capital offer UCITs funds oriented towards GCC investors.

Takaful (Islamic Insurance)

Takaful is an alternative to conventional insurance for Shariah-compliant investors.

Mechanics: Participants contribute premiums to a common fund (Waqf or Tabarru' — donation). The managing company charges a wakala fee. The surplus of the fund is returned to participants (not to the insurer).

Types:

• Family Takaful: equivalent to life insurance
• General Takaful: equivalent to P&C insurance

Key players in GCC: Abu Dhabi National Takaful, Dubai Islamic Insurance (AMAN), Arabian Shield (Saudi).

Portfolio Construction with Islamic Restrictions

Main challenges:

1. Absence of financial sector (20–25% of MSCI World) → underweight in diversified portfolio
2. Limited fixed income universe (only sukuk) → fewer opportunities in bonds
3. Concentration in tech and healthcare
4. Less hedge instruments (derivatives are limited)

Compensating strategies:

• Commodities through Shariah-compliant structures (physical gold, silver — permissible)
• Private equity in relevant sectors
• Real estate (historically core for Islamic investors)
• Infrastructure sukuk