A Guide to Investing with Islamic Principles
This guide is tailored towards young Muslim men and women starting their careers, but the advice can apply to anyone.
When I started my first internship, it was the first time I made a substantial amount of money, and I didn’t know what to do with it. It would be irresponsible of me to just spend it, and I also learned that holding money in cash isn’t good because inflation would just decrease its value over time. So, I didn’t know what else to do.
My friend, Brian Pho, taught me about investing in Exchange-Traded Funds (ETFs). ETFs are basically a collection of stocks all rolled into one ticker. This is safer than buying a single company stock because even giants (like Nortel or BlackBerry) can collapse, but it’s going to be armageddon if the entire economy collapses. At that point, money will have no value and only resources will matter.
Mutual funds are similar and are usually pitched to you by your local bank. They are a collection of stocks and bonds, which offer a guaranteed payout. Bonds are essentially debt instruments: companies or governments borrow your money and agree to pay a fixed percentage return over time, which is guaranteed. While this can provide stability, the return is considered interest (Riba).
Why Mutual Funds Are Not Shariah-Compliant
As a Muslim, I couldn’t purchase traditional mutual funds from my bank because of Riba (interest). Muslims are not allowed to partake in paying or receiving interest. Because mutual funds contain bonds (which inherently involve interest payments), they are not permissible in Islam. Bonds are essentially banks/companies taking out loans from you. They borrow your money and agree to pay you a fixed % return, which is interest. This is why traditional mutual funds are not compliant with Islamic principles.
A simple rule of thumb is that if something is garunteed (there is no risk), then it is probably not halal. Other common terms that your bank might try to sell you no are GICs (Guaranteed Investment Certificates) and HISA (High-Interest Savings Accounts).
Why S&P 500 Is Not Shariah-Compliant
Another common suggestion you might hear is to invest in the S&P 500, a collection of the 500 biggest public companies in the United States. It has historically had very good returns over the long run. However, as a Muslim, I cannot invest in this because it contains some companies that are not Shariah-compliant.
Some examples of companies in the S&P 500 that are not Shariah-compliant include:
- JP Morgan Chase (banking, interest-based revenue)
- Altria Group (tobacco)
- Anheuser-Busch (alcohol)
- Las Vegas Sands (gambling)
These companies are involved in businesses prohibited in Islam, such as tobacco, alcohol, banks (due to interest), and gambling.
Halal Alternatives
There is, however, SPUS, which is a collection of all S&P 500 companies minus the non-Shariah-compliant ones, catered specifically for Muslim investors.
During my research, I came across Wealthsimple, which offers managed portfolios that are Shariah-compliant and tailored towards Muslims. They published a great article about their Halal Portfolio, which you can check out here.
I’m glad Wealthsimple recognized the growing Muslim demographic in Canada and created a portfolio to serve our needs. I have another blog post outlining how to purchase your first halal ETF (WSHR) on WealthSimple.
If you are interested in purchasing SPUS and other USD stocks/ETFs, I have another blog post outlining how to convert CAD to USD very cheaply on Questrade. Note this is a little bit more advanced and requires a bit more work.
Future Topics to Cover
- TFSA vs RRSP vs FHSA vs Non-Registered Accounts.
- Crypto: Should you have exposure to it?