By Hanniz Lam

We first discussed what ETFs were last year.

ETF stands for Exchange-Traded Fund. ETFs allow investors to put their money into a grouping of stocks, commodities, currencies (or even crypto-currencies) and earn money from that particular sector of diversified stocks.

Investors like ETFs because they can put their money into a category of stocks rather than a single stock, which lets you spread out your risk. (If one of the companies in the ETF you buy fails, there’s still a good chance some of the others will succeed!)

According to Bursa’s website, ETFs are open-ended index-tracking funds or trusts. They track indices, commodities or baskets of assets, just like an open-ended investment fund, but are listed and traded in real time on a stock exchange.

Today, we’ll be exploring Shariah compliant ETFs or Islamic ETFs (i-ETF).

Islamic ETFs adhere to shariah principles and avoid investing in anything related to gambling, alcohol, entertainment, weapons and defence, non-halal food, tobacco and conventional financial services, with the exception of those by Islamic financial institutions.

For an ETF to be shariah-compliant, it can only invest in financial instruments that are shariah-compliant, such as equities and fixed-income instruments, like sukuk or other Islamic financial instruments approved by the authorities.

Islamic ETFs have to be managed in accordance with shariah principles and Islamic investment guidelines. Their operations are overseen by a shariah committee or adviser who conducts audits and reviews from time to time.

Before it can qualify as an Islamic ETF , a fund undergoes comprehensive industry and financial ratio screenings.

Less risky?

There are some who think Islamic ETFs are less risky than conventional ones. During the 2008 global financial crisis, Islamic ETFs exhibited lower volatility, owing to their lack of exposure to conventional financial services and highly leveraged companies.

Shahrul Amry Abdul Malek, Bursa Malaysia’s executive vice-president of market development and securities market, says risk depends on the type of ETF. “If we compare an Islamic ETF that tracks small caps with a conventional bond ETF, the latter is usually less volatile. It depends on the composition of the ETF,” he says.

Potential

Islamic ETFs offer benefits such as diversification, lower costs, transparency and trading flexibility. Investors can also gain immediate exposure to an asset class, sector or geographical region.

An ETF as a good alternative for investors who wish to effectively diversify their investment portfolio as the transaction costs of trading ETFs are lower than those of unit trusts.

Sometimes, it is not easy for investors to buy 20 or 30 stocks to diversify their portfolio effectively. Through ETFs, they can have a wide exposure, and they need not manage and track these stocks on their own.

Just like stocks, i-ETF can be bought and sold through stockbrokers. At present, there are six (6) i-ETFs listed and traded on the Exchange

Why invest in i-ETF ?
Diversified Exposure
Through one unit of i-ETF , investors get immediate exposure to the companies that constitute the tracked index.

Cost effectiveness
As the fund is passively managed, the management fee is considerably low. This makes i-ETF an economical long run investment.

Simplicity
i-ETF is listed on Bursa Malaysia’s Main Market just like stocks; trading of i-ETF units is done on its current market price in a single transaction. Investors may do it online or through their stockbrokers.

Transparency
i-ETF price is readily available on real time basis throughout the trading day. Other comprehensive and updated information pertaining the i-ETF, such as daily fund value and quarterly manager report, can be obtained from the fund manager’s website.

Where to go:
i) if you do not already have a stockbroking account, browse the Bursa Malaysia
website and pick a suitable brokerage firm.
iI) Open a share trading account which will give your a CDS account number
iii) Deposit funds into the share trading account and start investing!

Below are some of the global shariah-compliant ETFs you can invest in.

syariah compliant ETFs