Shariah-compliant investment is increasingly attracting attention in recent years. Numerous investment vehicles emerged in compliance with Shariah rules. Long-only passive funds are especially popular in this area. BlackRock launched the first Shari'ah-compliant Exchange Traded Funds (ETFs): iShares MSCI World Islamic UCITS ETF which tracks the performance of the MSCI World Islamic Index on the London Stock Exchange. Since its launch in 2007, the NAV has reached USD 347.5M.
This ETF is attractive in many ways and can be used as a handy benchmark, investable universe or building block for Shariah-compliant investors. The developed markets (US in particular) focused ETF is an ideal compensation to TYC’s universe which is Greater China-focused for a global investor.
The underlying index: MSCI World Islamic Index reflects Sharia investment principles and is designed to measure the performance of the large and mid-cap segments of the 23 Developed Markets (DM) countries that are relevant for Islamic investors. The index, with 350 constituents, applies stringent screens to exclude securities based on two types of criteria: business activities and financial ratios derived from total assets.
The methodology for the MSCI Global Islamic Indexes is largely in line with the AAOIFI rules that TYC Finance applied. More specifically, the methodology follows Sharia investment principles and does not allow investment in companies that are directly active in, or derive more than 5% of their revenues from such business activities as alcohol, tobacco, pork-related products, conventional financial services, defense/weapons, gambling, or adult entertainment.
In addition, the MSCI Global Islamic Indexes do not allow investment in companies deriving significant income from interest or companies that have excessive leverage. MSCI uses three financial ratios to screen for such companies: 1) total debt over total assets; 2) the sum of a company's cash and interest-bearing securities over total assets, and 3) the sum of a company’s accounts receivables and cash over total assets. None of these financial ratios may exceed 33.33%.
Finally, suppose a company derives part of its total income from interest income and/or from prohibited activities. In that case, Sharia investment principles state that this proportion must be deducted from the dividends paid out to shareholders and given to charity. MSCI therefore applies a dividend adjustment factor to all reinvested dividends.
The ETF is reasonably diversified with a slight bias on the health care sector(25.89%). Energy, Information Technology, and Materials take 18.57%, 15.01%, and 14.12% respectively.
Country-wise, the ETF is highly US-focused with 58.55% weight.
Regarding performance, the ETF is very close to the MSCI world with a deviation within 200 bps in the past five years. This may indicate the Islamic ETF/Index well captured the world equity market performance without compromising the Shariah rule.
Purification is another important consideration for Islamic Investors. The shariah-compliant companies may have unavoidable within-threshold non-compliant components such as small amounts of interest-bearing income. It's the responsibility of Islamic investors to purify these components from their profit. It won't always be easy to estimate the purification amount but this ETF provides accurate and detailed purification data that the investor can refer to.
