A halal ETF - also known as a Sharia-compliant ETF - gives you a way to invest while following Islamic finance principles. These investment funds are becoming increasingly popular among Muslim investors who want a way to invest that matches their outlook. Our guide to Islamic trading for beginners explains the importance of the terms riba, maysir, and gharar.
By taking into account these crucial aspects, you can look at the top halal trading strategies available. The good news is that many investment options comply perfectly with Sharia law. You can also trade other commodities, such as gold as a Muslim. However, to get started, we need to examine what makes an ETF halal.
A halal ETF is different from conventional ETFs in the way it excludes certain industries and activities to meet Sharia requirements. This guide will look at how halal ETFs work and how you can start trading them effectively using an ActivTrades Islamic account.
What Is a Sharia-Compliant ETF?
To fully understand a Sharia ETF, we need to look at its compliance standards. This means looking in more detail at those points covered in the previous section.
- Riba: A Sharia-compliant ETF has to avoid interest to meet this requirement. This is because lending with interest to gain wealth is considered haram rather than halal. It’s also important that we look at whether the companies the ETF is based on include interests as part of their overall business revenue.
- Maysir: The need to avoid gambling or excessive speculation is another important element that makes an ETH Sharia-compliant. This refers to the investment itself and also the company’s activities.
- Gharar: Excessive uncertainty also needs to be avoided in order for a fund to make it onto the Sharia-compliant ETFs list.
- Islamic investments always need to avoid haram sectors and industries, such as alcohol and gambling.
- The debt ratio limits for underlying companies need to meet Sharia requirements.
All of this means that you can invest in our Sharia-compliant ETFs with confidence. They have been thoroughly screened and selected to ensure that they meet all of these important areas that define ethical investments.
How Does a Halal ETF Work and What Makes It Compliant?
The practical aspects of halal ETFs are where the points that we just looked at are put into practice. This starts by excluding any prohibited industries from the list. As well as obvious industries like gambling and alcohol, it’s also important to look more deeply at companies that may gain a large percentage of their earnings from interests and other prohibited areas.
The purification of mixed income needs to be considered, where applicable. This is typically needed when a small percentage of a company’s revenue comes from some sort of prohibited activity. The ETF may pass the screening process if the percentage is lower than 5%, but the dividends that arise from the prohibited activities need to be purified for the investment to meet Sharia principles.
The list of Sharia-compliant ETF industries is still extensive, but differs from conventional ETFs as it tends to focus on industries such as technology and healthcare. The screening process varies from regular ETFs, since we need to look in greater depth at how a company operates. This is where the role of Sharia supervisory boards comes in, as they help to ensure that an ETF is halal.
Best Halal ETFs to Consider
Islamic investors around the planet can choose from a selection of the best halal ETFs. Factors such as performance benchmarks and dividend considerations are taken into account when assessing the best halal ETF options, such as the following:
- iShares MSCI World Islamic
- Wahed FTSE USA Shariah ETF
- SP Funds Dow Jones Global Sukuk ETF
When checking for halal ETFs to invest in, you should always check which are listed as Sharia-compliant. This will bring back highly-rated options such as a Vanguard halal ETF or a halal NASDAQ ETF, which have all been thoroughly screened as part of a careful selection process.
Look for a halal ETFs list that covers a good variety of options that interest you. Once you see the list of ETFs that are available to you and match your Islamic finance principles, it’s a question of choosing from the best-performing halal ETFs, by looking for one that you feel suits you best.
How to Trade Halal ETFs on ActivTrades
To get started with a halal ETF, you should open an Islamic account with ActivTrades. This is a swap-free account, which means that there is no interest, so it’s suitable for anyone looking for a halal approach to ETF trading.
You can start your investment journey using either the MetaTrader or ActivTrader platforms. They both offer a simple, intuitive approach where you can make your investments without any fuss, with fast and smooth trade execution.
The MetaTrader options are MT4 and MT5, which are both industry leaders that include a large number of assets and charts to help you make decisions.
With ActivTrader, you get access to seven leading asset classes. This is our next-generation platform, with a slick, professional look that makes it ideal for beginners and professionals alike.
You can access the halal ETFs market via CFDs (contracts for difference). This provides a highly flexible approach, where you can aim to benefit from the price movements of your chosen Sharia-compliant ETF. It’s an easily accessible way of entering the ETF market without buying the underlying assets. Be sure to carry out your own research and consider the level of risk that you’re comfortable with before proceeding.
Halal ETF FAQs
Is an ETF Halal or Haram?
To understand if an ETF is halal or haram, we need to know more about the companies it covers and what industries they’re involved in. This is why you should look for a Sharia-compliant ETF list where you can be certain that each of the funds listed has been screened and is suitable for Islamic investors.
What is a Halal Dividend ETF?
This type of Halal ETF invests in companies that pay dividends on their shares. These are typically passively managed, based on the idea that the dividend will help the fund to grow over time without many trades or changes being needed.
Are Leveraged ETFs and CFDs Based on ETFs Halal?
In general terms, interest and excessive uncertainty are haram, but when these investments take place in a Sharia-compliant setting, they are considered halal. This is why it’s important to look for Sharia-certified ETFs that are guaranteed to be suitable for those investors with Islamic principles.
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