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

Singapore Property Outlook

Singapore property market is always very interesting. There is a high degree of speculation and much of excess liquidity would always find their way into properties there.

Thanks to its clear cut policies and very stable currency, Singapore properties attract investors from HK, Brunei, Indonesia and Malaysia as well. Hence, when it is hot, it is very hot. When it is not it can go south very quickly.

Its a very brutal market place. One that is not so dependent on "employment" as a main factor - i.e. if you have jobs, you still can make the installment payments. In Singapore, the dominant factor in properties has to be speculative element. The investors that buy 2 or 3 lots per launch. For them, the jobs factor is not in calculation but rather more important to predict the flow of capital. Prices of private homes have fallen for the first time in four-and-a-half years. This marks the end to the property boom that started since 2004.

Consultants say prices are likely to keep falling well into next year. Overall prices of private homes slipped 1.8 per cent, after flattening out in the second quarter. Consultants called it a turning point after almost a year of deadlock between buyers and sellers. Citigroup analyst Wendy Koh predicts that high-end home prices will fall by 25 per cent, the mid-end by 15 per cent and mass market by 5 to 10 per cent.

On the jobs front, Singapore has been the strongest beneficiary of hedge funds setting up shop there. Thanks to proactive measures, many hedge funds have chosen Singapore as their base. The pollution in HK has also seen some relocations from HK to Singapore. The number of expatriates, in particular from India, have also boosted inherent property demand. The events over the last few weeks would have put a halt to many of the expatriate postings. The more severe effects have been from those linked to hedge funds.

A cursory glance would reveal that more than 50% have closed shop over the last few months, no kidding. More are likely to close due to a huge loss in assets under management, poor performance and redemptions. The fact that Singapore dollar has held up the best among major currencies will only cause many of those affected by the crisis to sell Singapore property first to get cold very hard cash. I mean, who would want to sell their OZ properties now if they were a foreign investor?

The last 4 years have seen the Singapore mid-high end market being beneficiary to the enbloc sale phenomenon. Older condominiums were sold enbloc for premiums (to prevailing market prices) from 50%-100%. This freed up a loy of capital and saw much of the seller buying back into the private high end market with their windfalls. The first 3 years were very profitable for these players as they could buy and sell for a quick 30% gain after just a few months. As usual, greed takes over and you will find the same buyer now having 2-4 such properties for speculation (they'd call it investments). How fast can you scale down to protect your capital? First out best dressed.

The other related problem is the ruling that you can pay 10% deposit and nothing till the property is completed. Well, that sounded like a great idea before. Now a lot of properties will be completed in 2009 and 2010 and even 2011. If you have that, you are like holding a call option until the property is completed. The danger is that many would still be able to make the installments but would you be happy to make the payments if your property by then had sunk by 20% in value? First out best dressed again.

Evidence that more downside is to come: a blogger went to a couple of launches and was given the aggressive sales pitch. As long as you can put down 30% as deposit, they can arrange for a line of credit amounting to your yearly income. Hint, hint! You know where this is going. Its almost like maxing out your credit card on cash advance to put as down payment, something's gotta give. Desperate times call for desperate measures.

Naturally, there will be a lot of those who will come in to defend that property prices won't fall by that much, and that things are different in Singapore. I would like to remind all that we are going through a massive de-leveraging process globally. There is a huge aversion to leverage and credit, and the first asset to get de-leveraged will always be property to individual investors. But you say that Asian players are not that affected by the US subprime and CDS crisis. Really?? Asian markets have already tried to factor in the massive downswing. Asian markets have actually fallen more than the US markets dollar for dollar, and if you take in the dollar effect, the market cap loss is even higher. As you all know, Asian economies are tied very closely to their stockmarkets. Many have been able to avert the large losses as there was plenty of time to scale down your stock holdings, almost all could see the correction before it actually happened. Safe to say that the huge wipeout in market values over the last 6 months have been on institutional investors and die-hard traders only. Most of the individual investors have largely been unhurt.

Having said that, most of the rich individuals with substantial equity portfolio have seen their value being decimated. Though they may still have cash and not reached pauper status yet. Their net worth may have shrunk by 50%, just ask Lee Shin Cheng or Lim Kok Thay. Try and sell them a few Sails condo, they would wave you off as being stupid,.... unless it was at least 30% cheaper.

It is very hard to write negatively about properties, even for consultants, journalists and analysts, as most have properties of their own, and would be loathed to write anything bad about it. So, beware of those who try to mount a defensive argument.

p/s photos: Ema Fujisawa