After several financial crises in the western world, it is certain that greed and egoism will lead to misery and poverty. On the other side, Islamic Investments can make a difference so that all participants gain sustainable profit without exploiting anyone.
What is Islamic Finance?
„Do not devour another’s property wrongfully – unless it be by trade based on mutual consent.” Al-Nisa: 29
Islamic Finance operates under the potent mechanism of Islamic laws called Shariah. The philosophy behind that is to act ethically and sustainably when dealing with money. You should not try damage someone but have the bigger picture to improve people’s life. All business transactions are based on mutual interest so that risk and profit are shared equally. You don’t want to exploit or get exploited by your business partner. This includes a high transparency to create trust between the parties. De facto, halal are only assets that fulfill the following principles:
- Interest free (Riba)
- Avoiding uncertainty in transactions (Gharar)
- Trading with halal industry only
-> not involved in: gambling (Maysir), bets (Qimar), alcohol, prostitution/porn, tobacco, pork
Avoid Conventional Providers of Islamic Funds
Many providers of Islamic investments do offer products that might be convenient to Sharia Law, but do not accomplish the goal of increasing wealth. When analyzing those offers, we have found significant lacks of financial understanding. In particular, they try to sell investments in gold as a safe haven for wealth building. But every student who attended basic finance classes knows: GOLD IS NOT AN INVESTMENT!
Just think about it: Gold is just a metal and as much worth as people believe it is worth, but it’s not creating income like a company. It is not increasing value over time; the only reason why the gold price has grown slightly in the past is inflation. From 1981 to 2006, gold even lost value. Today it gained more attention because it increased its value during the financial crisis from 2007 to 2012 by more than 200% but this happened due to speculation and mass panic. Also, it lost again more than 40% of its value until 2016. To sum it: It is ok to own gold for a storage of value but it makes no sense to add the precious metal in your investment portfolio.
Start Investing Early
Financial assets have an exponential growth that people usually cannot comprehend before they mathematically compute the equation.
For example: If you invest 10.000€ in an asset with a yearly return of 8%, you would have 10.800€ after one year. After 10 years, your capital will more than double and increase to 21.589€. After 30 years, your capital will increase by more than 10 times, namely to 100.627€. Of course, this is just the average growth. In practice, you need to expect more up and downs due to the natural volatility of the stock market.
The earlier you start investing, the more you take advantage of this growth effect. So even if you don’t have a high salary yet, it is already worth to start investing, as this is already possible with just 50€ a month.
PS: Yes, this growth effect is Sharia conform, as it is not based on an interest payment but on natural growth of a company that increases its value exponentially in the long term. These companies pay dividends to the owners to share the profit.
How to invest in Islamic Assets?
As said, you should avoid full service providers of Sharia conform investment funds. We believe it makes more sense to take responsibility for your investments and buy the assets by yourself. But don’t worry, we will give you some ideas to make the best out of it. The idea is based on so-called ETFs that combine scientific principles with modern financial technology to allow you a highly profitable and Sharia conform investment opportunity.
What are ETFs?
Exchange Traded Funds are passively managed portfolios characterized by a high diversification of assets to minimize the investment risk. An Islamic ETFs collected a bundle of company stocks that are conform to Sharia Law. These stocks will not pay any interest but they will increase their market value in the future so that you can sell them for a higher price.
To avoid gambling with your private money, you don’t want to stake everything on one card (=company). Instead, the scientific principles of the modern portfolio theory implies that you invest in at least 20 different companies that interact in different industries and countries. This will make sure, that in case one company fails, your money is still safe.
Long Term Orientation
As Islamic ETFs are not based on speculation but on sustainable growth, you need to invest long term – approximately 10 years or longer are recommended. This does not mean you cannot touch your money in these years, but because every stock market has ups and downs, you don’t want to withdraw money during a recession. If you keep this in mind you will benefit by an average yearly growth around 7-9%.
If you want to go do deeper into this topic, check our post about investment basics.
An essential advantage of ETFs are the low management costs. For a usual (active managed) investment fund, you usually pay up to 3% yearly management fees and sometimes other costs being buried in the fine print. However, Islamic ETFs are not managed actively by a portfolio manager, since you decide when to buy or sell your assets. Because of that, ETFs only charge a yearly fee called TER (Total Expense Ratio) between 0,5% to 0,85% on the value of your invested capital.
Best Islamic ETFs
Due to the sustainable and ethical focus, Islamic investment funds have a more defensive nature and therefore demonstrated a lower volatility compared to conventional stock portfolios. Although Islamic ETfs ensure less risk, the performance is still remarkable. In the last ten years, the return was close to the benchmark of non-halal assets (see diagram).
Here you can see the benchmark comparison of the MSCI Islamic World and the normal MSCI World index in the last 10 years. Both performed very well since 2009 and had a similar growth development.
In 2018 there are three Islamic ETFs on the market that are based on conventional Index portfolios but exclude companies which are not Sharia conform:
- iShares MSCI World Islamic UCITS ETF (WKN: A0NA46)
- iShares MSCI Emerging Markets Islamic UCITS ETF (WKN: A0NA47)
- iShares MSCI USA Islamic UCITS ETF (WKN: A0NA48)
MSCI World Islamic
The MSCI Islamic World ETF is the safest and most diversified index fund. It includes stocks from 527 different companies in 23 different industrial countries. The ETF reached a powerful performance of 58% in 5 years, which correspond 9,6% per year.
MSCI Emerging Market Islamic
The MSCI Islamic Emerging Market is a more risky index but has a higher potential for big growth rates. This index is best practice when you want to diversify your portfolio with emerging market countries like China, India, Malaysia etc. In total, you would buy stocks from 260 companies in 24 countries.
For a risk averse investor it is recommended to limit the proportion of this asset to max. 25% of the total portfolio. Furthermore, it only has made a performance of 25% in the last 5 years (4,6% per year), but in the long term a much higher growth rate can be expected due to the higher growth potential of emerging markets.
MSCI USA Islamic ETF
Finally, there is the MSCI Islamic USA ETF including 157 company stocks in the US mainly interacting in the health, energy and IT industry. With a growth of 90% in 5 years (13,7% per year) this Islamic ETF has performed best. However, it does not have the very good diversification, as all companies are located in only one country. The ETF is recommended as the third choice after the MSCI Islamic World and MSCI Islamic Emerging Market index. Otherwise you can also include the MSCI USA Islamic when you want to take more risk for a potentially higher performance.
Where to buy Islamic ETFs?
Islamic ETFs are still relatively “exotic” and not many providers offer them. However, we have found a German broker with good conditions that allow to either buy ETFs for one time investment or a savings plan to invest a smaller sum every month. The registration and management of your brokerage account is free. You can already start investing with a sum of 50€ monthly.
Flatex Online Broker
Flatex is one of the leading security traders and has been honored as the best online broker in Germany for the 6th time in a row. “€uro am Sonntag”, a leading financial magazine, emphasized the cost effective offer which is best place for normal traders and savings plan customers. Our team has also tested Flatex for buying ETFs and can confirm the great review; especially the customer support made a good impression.
The mentioned Islamic ETFs are included in a special offer by Flatex. This means you only pay 1,50€ per order when buying ETFs in a savings plan, in which you invest money monthly. This a really great discount as most brokers ask for 5€-10€ per order!
Lump sum investment
If you have already saved a decent amount of money it is recommended to invest the full amount because the growth rate can work on a bigger sum from the beginning. Also you would save order costs because you just pay them once. Flatex has also a special offer in which you only pay 3,80€ order costs for the first year (5,90€ afterwards). So let’s say you invest 10.000€ you only pay 3.80€ order costs which corresponds 0,038%.
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Do you still have questions?
We are happy to answer your questions and look for individual solutions. Also if you are not from a country offering Euro as a currency, we will research an individual broker for you. Just use the contact form to send us an email.