Halal Index Funds Explained for Muslim Investors

Halal index funds are a type of investment that aligns with Islamic principles, allowing Muslim investors to grow their wealth while adhering to their faith.

These funds exclude companies involved in haram activities, such as pork production and liquor manufacturing.

Investors can choose from various halal index funds, each tracking a specific market index, like the MSCI ACWI Islamic Index.

The MSCI ACWI Islamic Index includes over 2,400 companies, but excludes those involved in tobacco, gaming, and other non-halal industries.

By investing in halal index funds, Muslim investors can diversify their portfolios and potentially achieve long-term financial goals.

Halal index funds are a type of investment that allows Muslims to invest in the stock market while adhering to Islamic principles.

These funds are designed to exclude companies involved in industries such as pork, alcohol, and gambling, which are considered haram, or forbidden, in Islam.

Halal index funds track a specific market index, such as the Dow Jones Islamic Market Index, which screens out companies that don't meet Islamic standards.

This approach provides a convenient and diversified way to invest in the stock market, with the added benefit of aligning with one's faith.

The Dow Jones Islamic Market Index, for example, excludes companies with debt levels exceeding 33% of their market capitalization, as well as those involved in industries like tobacco and conventional finance.

Investing in halal funds can be a straightforward process. There are several options available, including Shariah-compliant ETFs and mutual funds.

These funds typically have expense ratios between 0.40% and 0.65%, making them relatively cost-effective for halal investing. Some popular options include the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS), Wahed FTSE USA Shariah ETF (HLAL), and iShares MSCI World Islamic UCITS ETF (ISWD/ISDW).

To ensure that your investments comply with Islamic principles, look for funds that have been certified as Sharia-compliant. This can provide peace of mind and help you make informed investment decisions.

Here are some popular halal index funds to consider:

Investing in halal funds can seem daunting, but it's actually quite straightforward.

You have three main avenues to consider when looking to invest in halal index funds.

One of the most common options is to invest through a shariah-compliant brokerage firm.

These firms have a team of experts who carefully select and monitor the funds to ensure they meet Islamic finance principles.

You can also invest through a robo-advisor that offers halal investment options.

Some popular robo-advisors specialize in Islamic finance and can help you create a diversified portfolio.

Lastly, you can invest directly in a halal index fund through a mutual fund or exchange-traded fund (ETF).

Zoya makes halal investing easy by helping you build and monitor a shariah compliant investment portfolio with confidence and clarity.

With Zoya, you can create a portfolio that aligns with your values and financial goals.

Zoya's user-friendly interface allows you to easily build and manage your investment portfolio.

This app helps you make informed decisions about your investments, giving you peace of mind.

Shariah-compliant funds are a great way to invest in the stock market while adhering to Islamic principles. These funds typically have expense ratios between 0.40% and 0.65%, making them relatively cost-effective.

The simplest option is through ETFs that track an index of Shariah-compliant stocks. Popular options include the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS), Wahed FTSE USA Shariah ETF (HLAL), and iShares MSCI World Islamic UCITS ETF (ISWD/ISDW).

Some popular Shariah-compliant ETFs include the Wahed FTSE USA Sharia ETF (HLAL), which invests in common large-cap and mid-cap US stocks, and the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS), which filters out non-compliant S&P companies.

To understand what makes a fund, let's break it down. A Shariah-compliant fund is one that meets the specific requirements of Shariah compliance at both the fund and individual stock level.

The fund structure is key, as it must avoid leverage, margin trading, and short-selling. These strategies rely on financial mechanisms like interest-based transactions or speculative risk, which are prohibited.

To ensure compliance, the fund must regularly monitor its holdings. This involves checking if companies in the fund are screened for their business activities and financial practices.

Companies in the fund must be screened for their business activities and financial practices. This includes avoiding prohibited industries and ensuring key financial ratios relating to debt and interest remain within acceptable limits.

The fund must also document the screening process clearly, and calculate purification amounts if non-compliant companies are found.

Shariah-compliant mutual funds are a great option for those looking to invest in a way that aligns with Islamic principles. These funds are actively managed, which means they involve higher fees, but offer professional oversight.

Some examples of Shariah-compliant mutual funds include the Amana Growth Fund (AMAGX), the Azzad Ethical Fund (ADJEX), and the Iman Fund (IMANX). These funds are designed to provide long-term growth of capital while adhering to Islamic principles.

The Amana Growth Fund, for instance, seeks to invest in common stocks that meet the Islamic principles of Shariah compliance. The fund avoids bonds and other fixed-income securities, which are considered haram (forbidden) in Islamic finance. The Azzad Ethical Fund, on the other hand, focuses on investing in companies that promote environmental sustainability and social responsibility, while also adhering to Shariah principles.

It's worth noting that Shariah-compliant mutual funds are not as numerous as Shariah-compliant ETFs, but they do offer a viable option for those looking for actively managed funds.

To ensure that your halal index fund meets Islamic finance principles, it's essential to understand the screening criteria. These criteria include avoiding prohibited industries such as alcohol, gambling, and pork-related products.

Prohibited income sources like interest (riba) are also a no-go. A halal index fund should not hold debt securities or invest in companies that derive significant income from interest.

Debt levels are also a consideration, with a common threshold being that a company's debt should not exceed 33% of its total market capitalization.

Some online platforms like Musaffa, Islamicly, and Zoya can help you screen stocks and ETFs to determine if they are halal. These platforms can also calculate the required level of purification if a small percentage of an ETF's assets are invested in a prohibited area.

You can also choose to build your own index-like portfolio using individual stocks, which offers maximum control over your investments.

Customing your investment portfolio can be a great way to take control of your finances. You can choose exactly which stocks to include, giving you the flexibility to tailor your investments to your specific goals and risk tolerance.

With custom or direct indexing, you can build a diversified basket of Shariah-compliant stocks that mirrors your preferred market exposure. This approach offers maximum control over your investments.

Adjusting weightings as needed allows you to fine-tune your portfolio to suit changing market conditions or your personal financial situation. You can also monitor Shariah compliance in real-time, giving you peace of mind that your investments align with your values.

Rebalancing on your own schedule gives you the power to make informed decisions about your portfolio, rather than being tied to a predetermined schedule.

To invest in halal index funds, you need to adhere to Islamic finance principles that prohibit certain types of income and business activities.

The main criteria for index funds to be considered halal include avoiding companies involved in activities forbidden by Islamic law, such as alcohol, gambling, and pork-related products.

Prohibited industries include conventional financial services, like banking and insurance that earn interest.

Interest (riba) is also prohibited in Islam, which means a halal index fund should not hold debt securities or invest in companies that derive significant income from interest.

Companies within the fund must maintain a low level of debt, with a common threshold of 33% of its total market capitalization.

The proportion of interest-bearing cash or securities within a company's assets should be minimal, typically set at around 33% or lower.

The level of receivables and liquid assets of a company should also be considered, with some standards suggesting that receivables should not exceed 49% of the company's total assets.

Any minor income that may come from prohibited sources, despite stringent screening, must be purified by calculating and donating such income to charity.

Here are the main criteria for index funds to be considered halal in a concise list:

Halal index funds offer a convenient and cost-effective way to invest in the stock market. They allow you to buy and sell shares at real-time market prices, giving you flexibility in your investment strategy.

ETFs, which are a type of halal index fund, have lower fees compared to mutual funds. The average expense ratio for an index ETF was 0.16% in 2022, while an actively managed mutual fund had an average expense ratio of 0.66%.

Halal index funds save time and money by allowing you to invest in a diversified portfolio with a single transaction, eliminating the need to pay multiple broker fees for individual stocks.

ETFs offer several benefits that make them an attractive investment option. Unlike mutual funds, ETFs can be bought and sold at real-time market prices, making them highly liquid.

This flexibility allows you to trade them as if they were stocks, giving you the freedom to be a long-term investor or someone who makes rapid and frequent transactions.

ETFs also tend to have lower fees, with an average expense ratio of 0.16% in 2022 for index ETFs, compared to 0.66% for actively managed mutual funds.

The returns of Sharia-compliant ETFs can vary significantly. The table shows the returns of all Sharia-compliant ETFs in comparison.

Here's a breakdown of the returns for each ETF:

The reference date for the comparison is also important, as it can affect the results. For example, the 2025 return for the HANetf Saturna Al-Kawthar Global Focused Equity UCITS ETF Acc was 2.38%, while the 2025 return for the iShares MSCI USA Islamic UCITS ETF was 0.62%.

Here's a comparison of the 2025 returns for each ETF:

Keep in mind that past performance is not a guarantee of future results.

So, you're interested in finding and choosing a halal index fund. First, let's talk about how to find these funds. Halal index funds are often listed on Islamic finance websites and databases.

You can also check with your financial advisor or a halal investing expert for recommendations. They can help you identify funds that meet your investment goals and values.

The MSCI Islamic Index is a widely recognized benchmark for Islamic investments, which can be a good starting point for your search. It screens out companies involved in haram activities.

Some popular Islamic index funds include the iShares MSCI USA Islamic Index Fund and the Vanguard FTSE Islamic World ex US Index Fund. These funds typically have a broad portfolio of stocks from around the world.

It's essential to review the fund's prospectus and investment policy to ensure it aligns with your values and investment goals. Look for funds that follow the Shariah principles and have a clear screening process for haram activities.