Definition of Islamic exchange traded funds

Shariah compliant exchange traded funds (ETFs) have emerged alongside the rapid growth of Islamic finance generally. Islamic ETFs seek to provide investment opportunities beyond the existing pool of investment, for both Muslim and ethical investors. While there has been unprecedented growth of the conventional ETFs market, Shariah compliant ETFs found their rightful place only in February 2006 when the Dow Jones Islamic Market (DJIM) Turkey ETF was listed on the Istanbul Stock Exchange to track the performance of the DJIM Turkey Index. iShares, one of the dominant forces in global ETFs, launched three Islamic funds in December 2007 on the London Stock Exchange amid an increasing shift by ETF providers to offer alternative investment products. The three funds were primarily aimed at European investors with share classes in sterling and US dollars.

Islamic ETFs and conventional ETFs share common characteristics. The main difference between a conventional ETF and Islamic ETF is the benchmark index that the Islamic ETF tracks. An Islamic ETF only tracks an Islamic benchmark index where the index constituents are comprised of companies which are Shariah-compliant. In addition, an Islamic ETF is managed under the Shariah principle and guidelines, and overseen by an appointed Shariah committee. The Shariah committee conducts regular reviews and audits on the Islamic ETF to ensure strict compliance with the Shariah principles and practices

In a study conducted by Nafis Alam (the author of this definition) in 2013 using a sample of conventional and Islamic ETFs listed in UK by iShares for the period of 2008-2011, it was found that Islamic ETFs can beat both conventional ETFs and their selected benchmark index based on risk-adjusted performance measures. Additionally there was also evidence that a portfolio of Islamic ETFs showed less variability and was hence less risky than a portfolio invested in their conventional counterparts.

Examples of Islamic ETF providers include Deutsche Bank’s db-X trackers and BlackRock’s iShares who both offer exposure to world, US, European, Japanese and emerging market equities.[1]

Reference

Alam, N. (2013) “A comparative performance analysis of conventional and Islamic exchange-traded funds”, Journal of Asset Management, 14(1), 27–36.

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