KembaraXtra-Islamic Finance-Islamic Capital Market- Exchange-Traded Funds (Islamic ETFs)

• Islamic Exchange-Traded Funds (Islamic ETFs) are Shari’ah-compliant investment funds that are traded on stock exchanges, just like ordinary shares.


• An Islamic ETF pools money from many investors and invests it only in assets that comply with Shari’ah principles.


• The purpose of Islamic ETFs is to provide investors with diversified, ethical, and Shari’ah-compliant investment exposure.



Key Characteristics of Islamic ETFs

• Shari’ah Compliance
– Investments exclude companies involved in prohibited activities such as:

• interest-based financial services
• alcohol, gambling, pork, tobacco, and unethical entertainment
  – Financial ratios (e.g. debt and interest income levels) are screened according to Shari’ah standards.

• Index-Tracking Nature
– Most Islamic ETFs track Islamic stock indexes, such as Islamic market indices.
– The ETF aims to replicate the performance of the selected Shari’ah-compliant index.


• Exchange-Traded
– Islamic ETFs are bought and sold on stock exchanges throughout the trading day.
– Prices fluctuate based on market demand and supply, similar to ordinary shares.


• Diversification
– By investing in a basket of Shari’ah-compliant securities, Islamic ETFs reduce company-specific risk.


• Transparency
– The underlying assets and index composition are publicly disclosed.
– Investors can clearly see where their money is invested.


• Liquidity
– Islamic ETFs offer easy entry and exit, as they can be traded during market hours.

Types of Islamic ETFs


• Equity-based Islamic ETFs – invest in Shari’ah-compliant stocks
• Sukuk-based Islamic ETFs – invest in Islamic bonds (Sukuk)
• Sector-specific Islamic ETFs – focus on specific halal sectors
• Geographic Islamic ETFs – focus on Shari’ah-compliant companies in certain regions



Simple Example

• An investor buys units of an Islamic ETF that tracks a Shari’ah-compliant equity index.
• The ETF holds shares of multiple halal companies.
• The investor benefits from:

• price appreciation
• dividends (if distributed)
  • All returns are generated without violating Shari’ah principles.

One-Line Exam Answer

Islamic exchange-traded funds are Shari’ah-compliant investment funds traded on stock exchanges that track Islamic indexes or portfolios while adhering to Islamic ethical and financial principles.