Religion Meets Profit Generation in a Slew of New Faith-Based ETFs
(Bloomberg Businessweek) -- As much as Samim Abedi loved his job as part of the team that managed Google’s corporate investment portfolio, he couldn’t always square the work with his Muslim faith. He worried that some of the companies whose securities he traded had ties to alcohol or tobacco or gambling.
So he quit to join Wahed Invest, which in July 2019 launched the first exchange-traded fund in the U.S. that’s compliant with Sharia, Islam’s religious law. It’s one of eight ETFs introduced in the U.S. last year that incorporate faith-based principles, raising the total to 11. More are coming: In June, money manager Global X filed to launch a bond fund aligned to Catholic values. “We’re all trying to solve the same question,” says Abedi, the global head of portfolio management for Wahed. “How do we invest our wealth in ways that align with our ethics?”
Religion-based funds can differ on what they consider ethical. A stock fund that caters to Catholics shuns companies that sell weapons or exploit child labor. Several ETFs for Muslims steer clear of anything related to interest-based finance, which the religion frowns upon. Those funds invest in a Sharia-compliant alternative to bonds called sukuk, which provide regular payments that are considered profit-sharing rather than interest.
The surge in religious ETF offerings has come alongside the boom in responsible investing, often referred to by the shorthand ESG, for environmental, social, and governance. Global assets in ETFs under the ESG category have almost doubled in the past year, now reaching more than $110 billion, according to data compiled by Bloomberg. There’s about $1.9 billion globally in equity-focused religious and exclusionary ETFs. That’s tiny, compared to the more than $6 trillion in overall ETF assets, but money managers think there’s a big untapped market. “We felt like it was a prime opportunity to go into a business where there really isn’t much competition at the moment,” says Naushad Virji, chief executive officer of SP Funds, another ETF operator, about the Muslim investing space.
Abedi’s fund, Wahed FTSE USA Shariah ETF, trades under the ticker HLAL, a nod to halal, an Arabic word for permissible. It tracks an index compiled by the FTSE Russell, which works with a board of experts that determines each company is compliant. “They’re not just rules for the sake of being difficult,” says Abedi. Similarly, the SP Funds S&P 500 Sharia Industry Exclusions ETF follows a version of the S&P 500 index which has been screened for religious objections. (SP Funds and S&P Dow Jones Indices, which created the index and licenses its use, are unrelated companies.)
Defining ESG stocks in general is fraught—different companies have different understandings of the rules their clients want to follow. Religious beliefs add layers of complexity, and disagreement can be strong even within religious groups. “This is a much-disputed area. What constitutes ethical investing?” says Luke Bretherton, professor of theological ethics at the Duke Divinity School.
Wahed’s ETF, for instance, doesn’t own banks or companies that get revenue from the sale of alcohol or pork products. Yet some of its top holdings, such as Tesla Inc., carry a lot of interest-bearing debt. And while makers or sellers of weapons are shunned by indexes tracked by the Wahed and SP Funds, some Muslim-based indexes allow those companies.
At Timothy Plan, which since 1994 has managed what it calls “biblically-oriented” mutual funds, companies that manufacture firearms are acceptable. But it won’t hold Target Corp. because of, among other reasons, the retailer’s policy allowing people to use bathrooms that correspond to their gender identity. According to founder Arthur Ally, shares of Walt Disney Co. are also out in part because the company produces entertainment showcasing “unbiblical” married lifestyles. “We refuse to invest in companies that are pursuing an unholy agenda,” Ally says. The company created four ETFs last year after requests from financial advisers. The biggest has about $142 million in assets, according to the firm's website.
Generally, ETFs need to cross the threshold of about $50 million in assets to become a breakeven business for a money manager. The six-month-old SP Funds equity ETF has attracted about $25 million since its debut. Wahed’s ETF has seen inflows of about $35 million since its July 2019 launch. Abedi says Wahed has “ambitious internal sales targets” as it markets to investors of all faiths, who may also appreciate screens against gambling, tobacco, or weapons. The core goal, though, is to be true to Islam. There are, after all, more than 3.45 million Muslims in the U.S. “A lot of firms have shied away from catering to the Muslim community more properly,” he says. “We’ve really embraced it.”
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