Introducing The Shariah Portfolios

Last update on June 29, 2015.

Koran

 

A few Muslim readers have asked for Shariah compliant portfolios in the past. It took me longer than I thought, but I’m happy to report that the Shariah portfolios are now available to MoneyGeek’s regular members.

For those of you who don’t know, the Muslim religious law, called Shariah law, forbids participating in certain types of investment activities. Such activities include the following:

  • Receipt and payment of interest
  • Buying and selling of prohibited goods, such as alcohol, tobacco and pornography
  • Transferring of risk (e.g. insurance)
  • Gambling of any form

In practice, that means that a Shariah compliant (a.k.a. halal) investment portfolio can’t include the following types of investments:

  • Bonds
  • Banks
  • Alcoholic beverage companies
  • Tobacco companies
  • Pork producers
  • Gun manufacturers
  • Media companies that publish adult content, not just pornography
  • Insurance companies
  • Casinos

It would have been ideal to construct the portfolio with a couple of Shariah compliant ETFs. Unfortunately, while several such ETFs exist in Europe, I’m aware of only one such ETF that trades in North America, called the Falah Russell-Ideal Ratings U.S. Large Cap ETF (Ticker: FIA).

While I could have constructed the portfolio with FIA, I didn’t feel fully comfortable with it. For one thing, the ETF only covers U.S. stocks. Lacking other Shariah compliant ETFs that cover other geographies, the resultant portfolio would have been a little undiversified.

Also, I’m a little concerned as to whether FIA will still be around in the long term. The FIA has very few assets under management, and it didn’t trade for the entire month of May. If this ETF doesn’t attract substantially more money, I believe it will lose value and eventually shut down.

Instead of relying on FIA, I decided to construct the portfolios by focusing on different industry sectors, not including non-compliant investments. As of right now, MoneyGeek’s Shariah portfolios target ETFs in the following sectors.

  • Energy
  • Infrastructure (pipelines, etc)
  • Mining
  • Technology
  • Healthcare
  • Industrials
  • U.S. Real Estate
  • Utilities

Each chosen sector ETF includes companies from around the globe (i.e. not just North America). Even though these global ETFs cost a little more than U.S. focused ETFs, I believe the increased diversification benefit is worth the cost.

Also, while MoneyGeek’s other portfolios include bonds, I’ve chosen to exclude them in favour of cash in the Shariah portfolio. Cash fulfills the same main function as bonds - it provides safety - but cash also allows the investor to put more money into stocks in the event that stock prices go down.

As with MoneyGeek’s other portfolios, I will update the Shariah portfolios as the markets change and as new ETFs become available. The changes will not happen frequently - hopefully not more than once a year.

So there you have it. If you have any feedback, let me know using the comments section. Please keep in mind that, as a Christian, I may not be familiar with the nuances of Muslim theology.

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