Are ETFs Halal: A Complete Guide for Muslim Investors

“Are ETFs halal?” is a question that every Muslim investor want to know. One of the most common ways to invest in the stock market is through exchange-traded funds (ETFs). They have also long been regarded as one of the best investments for mediocre investors.

This article will talk about ETFs and cover the following topic:

  • What are ETFs?
  • Are ETFs halal?

What are ETFs?

Exchange-traded funds (ETFs) are funds traded on a stock exchange (such as the Nasdaq or the London Stock Exchange). A fund consists of a pool of money from various investors allocated for a specific investment purpose. An ETF (exchange-traded fund) is a collection of securities that you can buy for one price. ETF lets you buy large basket stocks or bonds in one purchase. In other words, you can buy and sell individual stocks or corporate or government bonds without having to buy all the components one by one, and more often. ETFs have lower fees compared to the other funds. Depending on the type of ETF you are trading with, the levels of risk also may vary. As we mentioned, ETF is buying many stocks at a time, so probably you are interested in the difference between them.

Note: Conventional bonds or ETFs that invest in them are not permissible for Muslim investors to invest in.

Are ETFs halal?

This depends on what the funds consist of. The easiest way to find them is by looking at ETFs that have been certified as Sharia-compliant by scholars. Otherwise, you’d have to do a manual check.

Other ETFs can also be halal. However, it would be best if you did your own research before starting investing: you should make a list of all the individual assets in the fund. If the assets align with Shariah’s perspective, then the fund is halal. There might be a case in which there are some companies that earn small amount of their income prohibited businesses. However, ETFs can still be allowed, as long as you do purification by donating the percentage of earnings from the non-Shariah compliant activities to the charity.

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