Halal Funds that are not advertised as Halal

[limegreen]

Salam everyone,

I am pretty new to Islamic investments and I wanted to know what the best options for index funds [Available in US] that are halal but not advertised as such. I've looked through the halal options such as SPUS, UMMA, AMAGX and etc. I am currently invested in few of them but I'm getting tired of the expense ratio, the relatively okay performances, and asset allocations. I am not looking for something actively managed as it can get pricey b/c I am still a student so my range is anywhere below 1K. I have heard from another thread that Vanguard Social Index Fund is a great alternative but it's not within my budget. Any knowledge helps. Thanks.

 

[cautiouslittlehope]

@limegreen Waaleikum assalam!

While it's true that shariah-compliant ETFs and funds are expensive, you are better off using those products from shariah perspective. They will take care of all the adjustments when certain companies become no longer shariah-compliant.

VFTAX, the Social Index, is full of non-compliant companies. For example, you can see many bank stocks like JPM, Citi, and Morgan Stanley in that fund.

If you are young and just getting started, go with SPUS. You can think about your diversification and asset allocation problems when you have sufficient net worth, inshaAllah.

 

[limegreen]

@cautiouslittlehope I understand but I am just not that happy with how even the shariah-compliant funds manage their assets. For example most of them don’t perform that well relative to their peers and then they also require higher expense ratio. I’m better of creating my own portfolio it feels like :/

 

[cautiouslittlehope]

@limegreen Performance is highly sensitive to chosen starting and ending points. I have looked at shariah-compliant funds and ETF performance over different periods and am still optimistic about their future performance: https://capitalminaret.com/review-of-amana-income-and-growth-mutual-funds/

 

[realdocs950]

@cautiouslittlehope This is good analysis thanks for sharing.

 

[limegreen]

@cautiouslittlehope This is a solid analysis, but passive funds always outperform actively managed.

 

[realdocs950]

@limegreen I haven't re-checked recently but, from memory, Amana Growth fund has had pretty good results over the years, a long established track-record as well as huge AUM.

This should be taken into consideration with regards to risk and liquidity in the event of a downturn and how resilient those newer shariah-compliant funds may be in comparison.

In terms of fees, all Shariah-compliant funds will naturally have higher fees because more work is required to manage them.

The funds need to be reviewed every quarter or less, to confirm their financial ratios remain shariah-compliant and any purification from haram income if necessary and if the fund offers that.

The race to the bottom in terms of fees in terms of "haram" ETFs is primarily due to competition. The shariah-compliant funds are relatively new and therefore there isn't a huge range to choose from but insha'Allah with time, this will change and more funds will come out for us to choose from and hopefully fees will subsequently fall.

I think if you do feel strongly about it, you can indeed go ahead and create your own "fund" so to speak.

You would want to learn about what makes a stock shariah-compliant, how concentrated or diversified you would want it to be based on risk-tolerance, how much purification you would need to do as well as what stocks you think will outperform both long and short term and how you would rebalance, if any, in changing economic conditions. It sounds like alot and it can be difficult, but it is do-able.

 

[limegreen]

@realdocs950 I personally am not a big fan of Amana Growth. I don’t think it’s bad that they’re asking for a higher expense ratio but they are asking for about 1% when the industry typically asks for anything less than 0.5%. Yes we can say that they put “more work” but that’s just too much. iA in the future we have more options.

 

[realdocs950]

@limegreen I do get that. But fees are only one part of the equation. Returns and track-record do matter too.

For instance, based on 10-year returns, the S&P 500 annualised return over that period and popular tracking ETFs like VTI is ~12%.

Amana growth fund over the same period of time had an annualised return of ~15%.

The outperformance of Amana Growth Fund more than made up for the fee difference.

Using the 10-year return figures, if you had invested $1000 every month for 25 years into VTI/S&P 500 with an expense ratio of 0.05%, you end up with $1.7m.

Investing the same amount with Amana Growth Fund over the same period of time but with an expense ratio of 1%, you end up with $2.37m.

Hopefully I have my maths right lol but it is something to consider.

 

[limegreen]

@realdocs950 I agree Fees are only part of the equation, however, is it fair to only benchmark Amana with funds that are not actively managed as well. The Etfs mentioned both on the link and your own are not actively managed so I wouldn’t know what the returns would be if it was.

 

[realdocs950]

@limegreen Sorry I don't understand what you mean.

 

[limegreen]

@realdocs950 VTI and S&P500 ETFs tracks investment performances of other index and use passive investment strategies. There isn’t an active portfolio manager like Amana Growth has. I think it would’ve been beneficial if they included other big name funds that are being actively managed and comparing their returns relative to there’s.

I genuinely believe that passive funds are a lot better for regular investors like myself and hope a muslim company can create one in the future iA.

 

[cardcaptorsakura]

@limegreen Salam,

Brother respectfully I am not sure what you are talking about! SPUS is passively managed and has performed better than the index. The fee is 0.6% and is reasonable. In order for these funds to lower their fees, they need to be a few billions in aum and you cannot compare a vanguard with billions and billions of assets under management to the smaller halal funds. Running an ETF ia an expensive business and at 1% fee with 50 million in assets under management, you just start to break-even as an ETF provider...Since they have to pay S&P to construct a special index with a shariah board, their expense is higher. If you want to spend time and effort researching individual stocks, then do so to pay lower fees but there will be no guarantee you do better then them and at your low $$ amount invested, you are better off focusing on your studies.

 

[limegreen]

@cardcaptorsakura Salam. Respectfully, I did mention that I am new to Halal investing so I'm not really sure why you have to be so passive with your comments about "better off focusing on my studies" and "no guarantee you do better than them". I meant my last sentence as a metaphor, not as I would actually create my own portfolio. I was asking about alternative options and I can also be upset about a high expense ratio. I agree with your statements that I shouldn't have compared them to other funds who have larger AUM.

 

[cardcaptorsakura]

@limegreen Wa alykom assalam, I am not trying to put you down...you may be a beginner but you rebuked every knowledgable reply with erroneous statements and other may be misled -- when you say Amana or SPUS underperformed. They did not. If Amana fund outperforms by 2% its benchmark but charges .4% more than other comparable funds, what is the issue (even without going into the extra cost of shariah compliance) -- muslim investors are still better off. Even if a shariah fund u underperforms a bit, investors are better off being invested since we cannot invest in non shariah compliant index ETFs. Lastly, if I have 5k to invest, I could not care less about .5% difference, my goal is to be invested and focus of my studies or generating revenue in my career to be able to invest more and then when I have more money I can maybe pick stocks and in most cases if 95% of active fund managers underperform in 10 years then probability if you will as well. All the best brother.

 

[limegreen]

@cardcaptorsakura I have never in any of my replies have said they underperformed. I did say they don’t “perform as well as their peers.” Also, if my rebuttal of a fund on a reddit page influences someone’s investing decision, am I really the problem? this page is for asking questions and such.
Secondly, If we were to continue with that logic, if Amana fund outperforms by 2% then I’m going home with only a 1% return which is not something that I want. In my original post, I have said that I am already invested in a few halal funds and want to branch out into a cheaper expense ratio one so I can keep more of my return. Lastly, not everyone’s investment goals are the same. If you are happy with halal funds that you are invested in then Alhamdulilah brother and hope you continue to prosper in your career and studies. I myself have different investment goals and want to better understand the scope of how things work, it doesn’t mean I am wasting my time. We’re all entitled to how we want to spend our time and money.

 

[cardcaptorsakura]

@limegreen Amanah growth has a 5 star rating on morning star and beats its category by a mile or two and it's index and benchmark...it has performed much better than its peers. A cheaper fund doesnt mean a better fund. Some hedge funds are worth 2/20 fees and others dont. Finally, you can do whatever you want brother with your time. Let's move on. Alluhamu barik and wish you the best insha'Allah.

 

[aprile]

@limegreen Problem with it not being actively managed, is that since it doesn’t use any of the 5 methodologies for shariah compliancy, at any time the ETF could be made haram, and you wouldn’t know unless you check yourself.

 

[limegreen]

@aprile I’ve never though about that but that’s true.

 

[goobiebean]

@limegreen I'm based in the UK and don't know of any shariah specific funds outside of a few provided by Fidelity.

If anyone can point me to any that would be much appreciated

If only we had a fund similar to SPUS