Is an ETF fund shariah compliant or not
Question:
I would like to know if EFT (Exchange traded funds) are allowed in Islam and how do I without any financial Background know which investments are halal to invest in?
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. An ETF may subsist of a number of assets including that of securities, bonds, commodities and other commercial paper. An ETF is an exchange traded fund listed as a security and traded on an exchange. There are a number of different ETF structures such as bond ETF’s, stock ETF’s, inverse ETF’s, CLO ETF’s, CDO ETF’s and commodity ETF’s.
In general, since ETF funds consist don’t necessarily track Shariah compliant assets such as stocks and commodities, the underlying terms and conditions may be non-shariah compliant, most ETF structures exercise conventional leverage and some form of currency hedging in the form of currency swaps and derivatives, exchange traded funds (ETF) are impermissible in general. For example, in the case of an inverse ETF fund, the financial construct of the fund is premised on derivatives and short selling transactions with derivatives which are impermissible or in the case of a CLO ETF fund, the fund structure is premised on that of a collateralized loan obligation (CLO) which essentially represents commercial interest based paper which is impermissible also. We however advise that you seek shariah guidance from an expert shariah scholar in reviewing such structures before deciding to invest in such financial solutions.
You can learn more on this subject by downloading a copy of my book called “Your Brief Guide to Islamic Finance” via the website: www.shariahbusiness.com. This book is a series of lectures and notes delivered to various students of Islamic Finance, banking and economics and the forward has been documented by great luminary scholars including our respected Hazrat Mufti Ebrahim Desai Saheb Rahmatullahi Alayhi.
You can also listen to a weekly programme called “Shariah Compliant Business Campaign” which addresses contemporary business matters on Channel Islam International to learn more here: http://ciiradio.com/listen-live/
You are welcome to contact us directly at the Darul Iftaa for any advice to provide specific guidance on reviewing specific financial solutions and products at: https://www.shariahbusiness.com/about-us/ask-a-question/
and Allah Ta'ala Knows Best
(Mufti) Ismail Desai
Chairman of Shariah Board and Fatwa Committee
Darul Iftaa, Durban, South Africa
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