Wednesday, July 08, 2009

Faith Based ETFs - First Shariah Compliant ETF In The US

In April, FaithShares Advisors filed with SEC to launch a line of ETFs targeted at religions investors. While "socially responsible ETFs" and clean energy ETFs are nothing new, FaithShares proposed to narrow the scope of socially responsible investing significantly by offering funds focusing on specific denominations, including:

  • Baptist Values Fund
  • Catholic Values Fund
  • Christian Values Fund
  • Lutheran Values Fund
  • Methodist Values Fund

Although many were skeptical at the time that religious ETFs would be a viable opportunity, it appears that they are now becoming a reality, as Javelin Exchange Traded Shares (JETS), a new ETF company, launched its first fund. The Dow Jones Islamic Market International Index Fund (JVS) seeks performance that corresponds to a benchmark index that measures investment return on “Shari’ah compliant securities.”

The provider, Javelin Exchange Traded Funds, a brand-new independent ETF firm, started building the firm from scratch about 18 months ago. It’s nice to see amid the ETF industry’s consolidation new firms entering the market.

Just two days before July 4 — was there any symbolism in that date? — Javelin entered the market with the launch of its first ETF, the Dow Jones Islamic Market International Index Fund. The fund trades on the NYSE Arca and tracks the Dow Jones Islamic Market Titans 100 Index, a float-adjusted, market capitalization-weighted index consisting of 100 large foreign companies. The companies represent 23 countries and 18 currencies. Among country allocations, at the end of May, the United Kingdom posted the largest at 21.04% of the index, followed by Canada (10.71%), Japan (9.83%) and France (9.82%). The ETF charges a management fee of 0.68%.

In terms of portfolio creation, religious-based funds draw a significant amount of money from people who realize the need to invest in stocks, but don’t want their investment assets to fund activities outside their religious beliefs. Investors can find funds for Presbyterians and Catholics as well as Muslims. The beauty of these funds is that the fund providers vet their portfolio holdings for strict adherence to religious law so you don’t have to. Hence, if you’re a believer, you can still go to Heaven holding these portfolios. Not surprising then, most seem to follow a socially responsible investing strategy.

So, what kind of industries fall off the Muslim buy list? Anything forbidden by the Koran is screened out of the fund, such as alcohol, gambling, pornography and pork products. In addition, Shariah law objects to the borrowing or lending of money with interest. This knocks most, if not all, financial stocks, off the portfolio screen. According to Javelin, the index’s largest sector weighting as of May 29 was oil & gas, followed by basic materials, health care, technology and telecommunications.

“With over seven million Muslims in the U.S, we were surprised to discover that the investment needs of this vital population were not being met,” said Javelin President and Founder Brent Firth in a written statement.

Well, that’s not entirely true.

Amana Mutual Funds and Azzed Asset Management currently run funds according to Sharia law. Because of the Koran’s prohibition on moneylenders, Islamic-based mutual funds have significantly outperformed the broader market. The Amana Trust Income (AMANX), at $691 million the largest mutual fund that follows the Koran, has consistently beaten the S&P 500 for six out of the last seven years, with the other year falling below the index by just 0.1%. In 2007, when the bubble popped, Amana posted a gain of 14.1% compared with the 5.5% return from the S&P 500. And while Amana couldn’t avoid a loss last year — it’s a stock fund after all — its 2008 loss of 23.5% outperformed the S&P 500 by 13.5 percentage points, according to Morningstar.

There’s even a Halal index fund, the Iman K (IMANX), which follows the Dow Jones Islamic Index. That, however, posted a 40% plunge last year, compared to the 37% loss on the S&P 500.

But there hasn’t been an ETF Muslims could feel confident investing in. With an expense ratio nearly 50% lower than the Halal mutual funds, Muslims can now take advantage of the ETF’s benefits.

This, however, may be the year Islamic-based funds fall behind the broader market. During a recession, people do what makes them feel good and that means drinking, smoking, porn, gambling and overeating many pork-based products. In addition, with the financial stocks beaten down so badly they have a lot of upside. I must add, that so far this year, the Muslim mutual funds are still beating the S&P 500.

In addition, the new Islamic ETF doesn’t hold any U.S. stocks, so it won’t be able to directly benefit from any recovery in the U.S. economy.

“We went for an international fund because the mutual funds held domestic stocks and this was a unique market which didn’t have a fund tracking it,” says Javelin spokesman Charles Tennes. He adds Javelin may do an Islamic fund with domestic stocks in the future, but that’s not in the firm’s immediate plans.

p/s photos: Ema Fujisawa

1 comment:

RAD said...

Dear Dali

I almost fell off laughing when I read this.

'During a recession, people do what makes them feel good and that means drinking, smoking, porn, gambling and overeating many pork-based products'

You do have a tremendous gift for gab

Can you share with us how you honed your writing skills?

S. Radhakrishnan