Launch Partners

Launch Partners

Islamic ETFs boom as investors seek Halal premium

The number of Islamic exchange-traded funds (ETFs) has nearly doubled as Shariah compliant benchmarks continue to outperform their conventional counterparts.

IFN Investor data shows there are 53 Islamic ETFs as at the end of Q1 2024, up from 33 in September 2023 and 26 at the end of 2022. Islamic ETF assets under management (AuM) reached US$3.25 billion in Q1 2024, expanding about 100-fold over a five-year period — AuM stood at US$326 million at the end of 2018.  

The growth takes place against a backdrop of strong global equities performance as slowing inflation and the possibility of lower interest rates improved market sentiments. In Q1 2024, the S&P Global BMI leaped by 7.8%, driven by developed markets, with the S&P 500 up 10.6%, a new record high. More notably, Islamic indices beat their conventional equivalents. The S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index outperformed their respective counterparts by 0.8 percentage points and 0.6 percentage points respectively. Over the past decade, the S&P Global BMI Shariah outperformed its conventional benchmark in five-year rolling returns nearly 75% of the time.

Table 1: Q1 comparative regional equity returns

BenchmarkShariah (%)Conventional (%)Difference (percentage points)
S&P Global BMI8.67.80.8
DJIM World8.680.6
S&P 50011.110.60.5
DJIM Developed Markets9.38.70.6
DJIM World Emerging Markets1.72.1-0.4
S&P Pan Arab Composite2.43.2-0.8
Source: S&P Dow Jones Indices

The outperformance boils down largely to larger exposure to information technology stocks.

“We believe Shariah compliant exposures will continue to perform in line with their unscreened counterparts, providing a similar risk return profile without the exposure to Shariah non-compliant companies. Overweight positions in technology will likely boost performance in an environment where technology stocks continue to perform globally,” Sefian Kasem, the global head of ETF and indexing investment specialists at HSBC Global Asset Management, explained to IFN Investor.

Sefian noted that while lower exposure to financial stocks has been a drag on performance as interest rates have risen, the situation could reverse if the Federal Reserve and other central banks begin to cut rates.

“Over the medium to long term, we believe the exclusion of companies involved in Shariah non-compliant sectors such as gambling, alcohol, tobacco, adult entertainment and others will lead to a more stable performance given the possible volatility associated with these sectors. Financial screening which limits investments in highly leveraged companies should also mitigate volatility during more turbulent macroeconomic periods,” added Sefian.

The outperformance of Islamic indices, supported by the mainstreaming of Shariah compliant finance and a growing Muslim population, has lured investors and product issuers.

HSBC Asset Management is among the big names to have strengthened their Islamic ETF business in the past year. It rolled out five Islamic ETFs including Europe’s first Sukuk ETF. BlackRock followed suit with an emerging market Sukuk ETF. Canada’s SP Funds introduced two new Halal ETFs while Australia’s Hejaz Financial Services listed a Sukuk ETF, adding to its other two Islamic ETFs. More recently, we saw the listing of Pakistan’s second Halal ETF as well as two Islamic ETFs in Saudi Arabia. Sefian believes Shariah compliant ETFs will continue to grow in popularity in markets they are currently available in, and also potentially in new markets.


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