What is Halal Investment?
Halal simply means “permitted,” so halal investing means “permitted investment.” Some devout Muslims prefer to invest in ways that do not violate their ethical or religious values as outlined in Sharia law.
Halal investment ethics include:
- No interest received: You can't earn interest on fixed income investments, nor can you invest in businesses whose main profit is interest, like banks.
- No highly speculative stocks: This eliminates the use of highly leveraged stock purchases, day trading, short selling, options, futures, and other complex and risky investment techniques that may be considered gambling.
- Profit and Loss Sharing: Investors cannot simply lend money to a company (as they do with bonds), but must also become part owners of the company and be exposed to the business risks (as they do with stocks).
- You cannot profit from activities prohibited by Sharia law. This includes companies whose primary business is alcohol, tobacco, gambling, pork, pornography, and weapons.
The principles are subject to nuanced interpretation, and not all Islamic scholars agree on the details, making it difficult to put together a halal portfolio on your own. Instead, many Muslims turn to large independent organizations, advised by Islamic scholars, to review companies and investments for compliance with Sharia law.
The Pros and Cons of Halal Investments
Strong Points
- This is advantageous for young buy-and-hold investors as it allows them to tilt their portfolio in favor of growth.
- Naturally, high-risk investments are avoided.
- Many excellent companies to choose from
- Socially responsible investment
- More options every year
Cons
- Good fixed income investments are hard to find
- Real estate investment is difficult
- Investors may shy away from investing and hold their funds in cash.
- Several of the TSX's blue-chip companies are interest-based, meaning investors have to rely more on the American stock exchange.
- Not being environmentally conscious (e.g., Halal certification allows investment in fossil fuel companies)
Why halal investing in Canada is not easy
The problem is that these restrictions eliminate many investments that are commonly made in Canada. The following are considered haram, or “forbidden,” by those seeking to comply with Sharia law:
- GIC (Global Investment Trust)
- Bonds
- Options and Futures
- Preferred Stock
- 5 Biggest Bank Stocks
- Mortgage Funding
- Cannabis strains
- TSX Venture Exchange Shares
As you can see, both very low risk and the riskiest investments are off the table.
Is Halal investing a risky business?
Due to Sharia compliance, most halal investors are overly reliant on equity. However, equity that meets halal requirements is often invested in companies that have a relatively low reliance on debt and debt securities. As a result, many mainstream listed companies are halal compliant. (Even if non-Sharia compliant investors adopt more advanced investment strategies such as options trading, this does not cause a company to fail to meet Sharia compliant standards.)
Ultimately, over-reliance on stocks for halal investing does not lead to increased risk. In fact, recent studies have shown that ultra-conservative investors who avoid stocks are significantly more at risk when it comes to investment returns and diversification. This is because stocks are a good hedge against inflation, which is the main cause of erosion of purchasing power (less what a dollar can buy over time).
The standard advice to diversify investment portfolios also applies to Sharia-compliant investors. Given their reliance on equities, halal investors should pay attention to diversifying within asset classes and across sectors. In simple terms, this means holding shares in different companies in different industries and paying attention to the geographic split of the portfolio.
It also means that halal investing is suitable for both new investors and experienced traders, and for both aggressive and conservative investors.
What happens as halal investors approach retirement?
Typically, investors start rebalancing their investment portfolios as they approach retirement, focusing on fixed income instruments such as bonds and guaranteed investment certificates (GICs). Halal investors cannot use these instruments, but they can use permitted fixed income instruments such as: Sukuk Bonds and real estate partnerships. Alternatively, investors can choose to focus on dividend-paying stocks.
Sukuk investment: like bonds but halal
For more conservative investors, there is always the option of investing in sukuk, which is an Islamic bond. Like bonds, sukuk have a maturity date, are rated by major credit agencies, and pay regular income. However, unlike bonds, investors do not lend money and receive interest income. Instead, investors buy partial ownership of a project and receive distributions from the profits. They are popular in Asia and the Middle East, but are hard to find in Canada. To buy sukuk investments, you will need to consult with a professional financial planner from a bank or investment company. Another option is to buy a sukuk exchange-traded fund (ETF), such as the SPSK Dow Jones Global Sukuk ETF (NASDAQ: SPSK). It is not available on the Toronto Stock Exchange, so like any USD ETF, you will need to consider currency fluctuations, exchange costs, and withholding taxes.
Explore Halal Investment Opportunities in Canada
Despite these restrictions, there are still plenty of options to start investing in halal and Sharia-compliant funds, stocks, exchange-traded funds (ETFs) and other products.
Wealthsimple Halal Investment Fund
Wealthsimple has introduced a simple, low-cost way for Halal investors to grow their money. This is perhaps the most attractive product for Halal investors in decades. The product removes barriers, allowing anyone to buy a diversified stock portfolio without having to transfer money to USD or do their own research. You can also hold your investments within a TFSA or Registered Retirement Savings Plan (RRSP).
Unlike Wealthsimple's other automated portfolios, there are no ETFs, just 50 global stocks. All companies are vetted by a third-party panel of Shariah scholars to ensure they are compliant.
Wealthsimple charges a 0.5% fee on the first $100,000 invested and a 0.4% fee on investments over $100,000.
Stock Selection Compliance Company
Halal investors also have the option of opening a brokerage account and choosing stocks themselves. The difficult part is that they must select stocks according to the following rules:
- More than 5% of a company's revenues must not come from haram sources
- Total debt should be less than 33% compared to market capitalization over the past year.
- Accounts receivable must be at least 45% of total assets for the past year
One way to avoid all this scrutiny is to replicate Wealthsimple's Halal portfolio. Another option is to replicate the stocks included in the Dow Jones Islamic Market Titans 100 Index (TSX:DJI100X), which contains Halal-compliant stocks including well-known names such as:
- Canadian National Railway (TSX:CNR)
- BP (NYSE:BP)
- Intel (TSX:INTC.NE)
- Johnson & Johnson (NYSE:JNJ)
- Pfizer (NYSE:PFE)
- Exxon Mobil Corp. (NYSE:XOM)
- Suncor (TSX:SU)
- Apple (NASDAQ:AAPL)
- Microsoft (NASDAQ:MSFT)
- Google (TSX:GOOG.NE)
- Facebook (NYSE:META)
- Nike (NYSE:NKE)
Halal ETFs or Mutual Funds
Investors can also buy halal ETFs or mutual funds and hold them in their RRSPs or TFSAs. In Canada, most mutual funds charge high fees that can eat into your returns considerably. One of the most popular halal mutual funds is the Global Iman Fund (TSX:IMANX). Unfortunately, this mutual fund has a very high management fee of 2.80%, especially if it only uses the Dow Jones Islamic Market Titans 100 Index (INDEXDJX:IMXL) as its benchmark. To save on fees, you can easily replicate this mutual fund by purchasing its top holdings in an online discount brokerage account. money A guide to finding a trading platform that suits your goals and budget.
To save on fees without the hassle, you can also buy a Halal ETF. A popular ETF is the S&P 500 Sharia Industry Exclusions ETF (INDEXSP:SPSIEUP), which has a management expense ratio (MER) of 0.45%. It invests in all licensed companies included in the S&P 500.
Buy precious metals
Legitimate investments include gold and silver, either the precious metals themselves or ETFs that track their value (but be careful not to invest in gold or silver futures). To mitigate market risk, most investors keep this asset at 5% or less of their portfolio value. Here are two of the most popular precious metals ETFs:
- iShares Silver Trust (NYSE:SLV): MER 0.5%
- iShares Gold Trust (NYSE:IAU): MER 0.25%
Halal Mortgages for Investment Properties in Canada
Sharia-compliant home buyers and investors can't get a traditional mortgage because it's interest-based debt, but there are ways to invest in real estate. They can invest in Sharia-compliant real estate investment trusts (REITs) like Ansar Financial (CSE:AFD) and Development Corporation (CSE:AFDC), which invest in Alberta real estate, or they can partner up to buy real estate with cash.
Is Halal investing just for Muslims?
Although halal investing is based on certain religious principles, this investment strategy is not exclusive to Muslims. Investors who want to avoid supporting companies that go against their values, such as those involved in pornography or alcohol, will also appreciate the approach of halal investment products and strategies. Sharia compliance requires a lot of time, energy, and knowledge, but it is well worth it for observant Muslims and those committed to investing based on their values.
— With files from Romana King
