More Shari’ah-Compliant ETFs Coming

by on September 23, 2009 | ETFs Mentioned:

Index Universe is reporting that two new ETFs meeting the requirements of Shari’ah law could be on the way, including the ShariahShares FTSE USA Fund and the ShariahShares FTSE Developed ex-U.S. Fund. The U.S. fund will reportedly invest in nearly 250 mid- and large-cap companies, while the ex-U.S. Fund will invest in stocks in 25 developed countries around the world.

The Center of MeccaShari’ah, which means “way”, refers to the body of Islamic religious law, and covers many areas of daily life, including politics, banking, business, and social issues. In order to comply with the law, the proposed ETFs would avoid exposure to non-Islamic banks, as well as insurance, alcohol, firearms, entertainment, and tobacco companies. And the funds also won’t invest in companies that produce pork products.

The idea of limiting investments to Shari’ah-compliant companies may seem very restrictive. But most investors will be surprised to learn that the vast majority of publicly-traded companies are compliant with Shari’ah and eligible for inclusion. As such, Shari’ah-compliant ETFs are may closely resemble diversified domestic and global ETFs.

Earlier this year, Javelin Exchange Traded Shares (JETS) introduced the Dow Jones Islamic Market International Index Fund (JVS), the first U.S.-listed ETF to restrict its holdings to companies that comply with Shari’ah. The index underlying JVS consists of approximately 100 companies diversified across more than a dozen countries and various sectors of the global economy.

The major holdings of JVS aren’t obscure companies focusing exclusively on Islamic markets, but rather well-known global firms that refrain from engaging in activities forbidden by Islamic law. According to its web site, the largest holdings of JVS are:

Company % of JVS
BP Plc 4.4%
Total SA 3.8%
BHP Billiton 3.6%
Novartis 3.5%
Roche Holding 3.5%

JVS invests in companies in various industries, but its heaviest concentrations are in oil & gas (30%), basic materials (19%), and health care (18%). The ETF has surged more than 15% since its inception in late June, but has been slow to gain traction among investors. Recently, JVS had a total market cap of just under $5 million and an average daily trading volume of just over 1,000 shares.

Because the U.S. Census doesn’t ask about religions affiliation, it is difficult to give an accurate estimate of the Muslim population in the U.S. The Pew Muslim American Study conducted two years ago placed the figure around 2.5 million, while the Council on American-Islamic Relations estimates 6 million. In either instance, in order to be successful, these ETFs will likely need to catch on with non-Islamic investors as well, which could be a rather significant obstacle given the abundance of global and domestic equity ETFs, many of which maintain very low expense ratios and offer excellent liquidity.

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Disclosure: No positions at time of writing.