SP Funds launches Sharia-compliant equity and bond ETFs

Publisher: ETF Strategy

SP Funds, a Washington-based asset manager specializing in Sharia-compliant investing, has introduced its first ETFs: the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS US) and the SP Funds Dow Jones Global Sukuk ETF (SPSK US).

SP Funds debuts with Sharia-compliant equity and fixed income ETFs

SP Funds has debuted with Sharia-compliant equity and fixed income ETFs. (Photo © Dane Hillard)

The funds, which have listed on NYSE Arca, have been brought to market in collaboration with private-label ETF platform, Tidal ETF Services.

They provide exposure to US large-cap equities that have been screened for Sharia compliance and sukuk bonds issued globally, respectively.

Sharia equities

The SP Funds S&P 500 Sharia Industry Exclusions ETF is linked to the S&P 500 Sharia Industry Exclusions Index which screens the S&P 500 according to guidelines from the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

The methodology examines constituents’ business activities and accounting metrics to remove firms that do not comply with Sharia principles.

The business activity screen excludes companies deriving more than 5% of their revenue from alcohol, gambling, weapons, tobacco, adult entertainment, pork products, credit cards, cinemas and broadcasting, and interest-based loans.

Companies permissible under the activity test must them comply with a series of balance sheet and income statement screens. These include debt less than 33% of equity; accounts receivable less than 49% of equity; and cash and interest-bearing securities less than 33% of equity.

The constituents of the S&P 500 that remain are then weighted by float-adjusted market cap, with the index reconstituted and rebalanced on a monthly basis.

Naushad Virji, CEO of SP Funds, commented, “We designed our initial equity ETF not only for investors who might be looking for halal exposure, but for any investor who looks at their portfolio through a value-focused lens as well as those who seek to avoid over-levered enterprises which can encounter serious turbulence in choppy markets.”

Compared to the S&P 500, the Sharia-compliant index has 230 constituents and increased exposure to the information technology (33.2% vs. 23.2%) and healthcare (18.6% vs. 14.2%) sectors. It has also eliminated all exposure to stocks from the financials sector which accounts for a 13.0% weight in the S&P 500.

Its largest single holdings are Apple and Microsoft with weights of 8.6% and 8.4%, respectively, notably higher than the firms’ weights of 4.6% and 4.5% in the S&P 500.

The fund comes with an expense ratio of 0.49%, slightly cheaper than the rival Wahed FTSE USA Shariah ETF (HLAL US), which launched in July 2019 and charges 0.50%. This fund tracks the FTSE USA Shariah Index which screens the FTSE USA Index universe of large and mid-cap equities according to Sharia principles. Screening is undertaken by Sharia consultant Yasaar Research.

Sukuks

The SP Funds Dow Jones Global Sukuk ETF tracks the Dow Jones Sukuk Total Return (ex-Reinvestment) Index and is the first ETF to provide targeted exposure to sukuks.

Sukuks are bonds that conform with Islamic finance laws that prohibit interest. Unlike conventional bonds where the issuer has a contractual obligation to pay bondholders on specified dates, sukuks entitle holders to a share of ownership, and therefore revenues, of the underlying assets.

To be eligible for inclusion in the index, sukuks must be denominated in US dollars, have an investment-grade credit rating, an outstanding issue size of at least $200 million, and a minimum time to maturity of one year. Constituents are weighted by market value outstanding, and the index is reconstituted and rebalanced on a monthly basis.

The index is currently comprised of 85 constituents with a yield to maturity of 2.8% and a modified duration of 4.9 years.

Virji said, “The global sukuk marketplace is very robust but to this point there had not been an ETF solution for investors looking to add this type of exposure to their income-focused portfolios. We’re very pleased to be first to market with this approach.

“Not only is this a diversifier in terms of the underlying holdings in SPSK, but the fund is also designed to provide investors with decreased exposure to duration risk and interest rate risk, important considerations as investors are finding it ever more difficult to access yield from the traditional sources.”

The fund comes with an expense ratio of 0.65%.