A guide to halal investing in Canada

Many mainstream investments are forbidden because they contradict Islamic or Sharia Law. For observant Muslims, the desire to save for retirement and plan for financial goals is still present, but these goals must be met using different products and strategies. In this article, Money.ca explains how halal investing bridges this gap.

In recent years, many financial companies in Canada started offering Sharia-compliant products and portfolio options. This is significant, as these Sharia-compliant products and accounts help the more than one million Muslims living and working in Canada.

What is halal investing?

Halal means "permissible," so halal investing means "permissible investing." Some observant Muslims prefer to invest in a way that does not contradict their ethical or religious values, as laid out in Sharia Law.

Halal investing ethics include:

• No receiving interest: You cannot receive interest from fixed-income investments, and you also can't invest in a business whose main profit comes from interest, such as a bank.
• No highly speculative stocks: This rules out buying highly leveraged stocks, day trading, short-selling, options, futures, and other complex and risky investment techniques that could be considered gambling.
• Sharing in profit and loss: Investors cannot simply lend money to a business (like with bonds); they must also be part-owners and exposed to business risks (as is the case with stocks).
• Cannot profit off activities forbidden by Sharia Law: This includes companies whose core business includes alcohol, tobacco, gambling, pork, pornography and weapons.

The principles are subject to nuanced interpretation. Not all Islamic scholars agree on the specifics, making it challenging to construct a DIY halal portfolio. Instead, many Muslims rely on large, independent organizations advised by Islamic scholars who review companies and investments to ensure they are in line with Sharia.

The pros and cons of halal investing

Pros

• Can tilt a portfolio in favour of growth, which is suitable for young, buy-and-hold investors
• Naturally avoids high-risk investments
• Plenty of blue-chip companies to choose from
• Socially responsible investing
• More options every year

Cons

• Difficult to find suitable fixed-income investments
• Hard to invest in real estate
• Investors may simply avoid investing and keep their funds in cash
• Some of the best blue-chip companies on the TSX are heavily interest-based, so investors must depend more on American stock exchanges
• Not environmentally conscious (halal permits investing in fossil fuel companies, for example)

Why halal investing isn't the easiest in Canada

The difficulty is that these restrictions eliminate so many common Canadian investments. The following would be considered haram, or "forbidden" to those who seek to be Sharia-compliant:

• GICs
• Bonds
• Options and futures
• Preferred shares
• Big Five bank stocks
• Mortgage funds
• Cannabis stocks
• Stocks on the TSX VentureExchange

As you can see, both the very low-risk and the highest-risk investments are not eligible for consideration.

Is halal investing a risky business?

Due to Sharia compliance, most halal investors are over-dependent on equities; however, the equities that meet halal requirements are often with companies with relatively low levels of debt and low dependence on debt instruments. As a result, many mainstream, publicly traded companies are halal compliant. (Even if non-Sharia compliant investors used more advanced investing strategies, such as option trading, this wouldn't prevent the firm from passing Sharia-compliant standards.)

As it turns out, the over dependence on equities that comes with halal investing strategies does not translate into more risk. In fact, recent studies show that ultra-conservative investors who avoid investing in equities have significantly more risk when it comes to investing returns and diversification. That's because equities are an exceptional hedge against inflation — the primary reason for a reduction in purchasing power (how a dollar buys you less, over time).

The standard advice to diversify your investment portfolio also applies to Sharia-compliant investors. Given the reliance on stocks, halal investors should pay attention to diversification within asset classes as well as across sectors. In plain speak, that means holding stocks for different companies within various industries and paying attention to your portfolio's geographical split.

It also means that halal investing suits both new investors and seasoned traders, as well as aggressive or conservative investors.

What happens when halal investors approach retirement?

In general, investors will start to rebalance their investment portfolios as they near retirement, going heavier on fixed-income products, such as bonds and guaranteed investment certificates (GICs). Halal investors cannot use these products but can use allowable fixed-income products, like Sukuk bonds or real estate partnerships. Alternatively, these investors may choose to focus on dividend-paying stocks.

Sukuk investments: Like bonds, but halal

For more conservative investors, there is always the option to invest in a Sukuk, which is essentially an Islamic bond. Like non-Sharia compliant bonds, Suckuk products are rated by credit agencies, have a maturity date, and payout regular income. Unlike non-Sharia compliant bonds, when investors use Suckuk products they are not lending money and receiving interest income. Instead, the investor is purchasing a part-ownership in a project and receiving distribution of the profit. Sukuk are popular in Asia and the Middle East although harder to find in Canada. You'd have to see a specialized financial planner at a bank or an investment firm to purchase Sukuk investments.

Another option is buying a Sukuk exchange-traded fund (ETF) like the SPSK Dow Jones Global Sukuk ETF (NASDAQ:SPSK). Since it isn't available through the Toronto Stock Exchange, you'll need to account for currency fluctuations, currency exchange costs and withholding tax, just like any other USD ETF.

Where to find Canadian halal investments

Despite the restrictions, there are still plenty of options to start investing in funds, stocks, exchange-traded funds (ETFs) and other products that align with halal and Sharia Law.

Wealthsimple halal investing fund

Wealthsimple introduced a simple and low-cost way for any halal investor to grow their money. This is probably the most exciting product to hit the market in decades for halal investors. It cuts down barriers, enabling anyone to purchase a diversified portfolio of stocks without having to transfer money into USD and without having to do any research themselves. You can even hold the investment inside a TFSA or a registered retirement savings plan (RRSP).

Unlike other Wealthsimple automated portfolios, there are no ETFs – just 50 global stocks. All companies are screened by a third-party committee of Sharia scholars to ensure they are compliant.

Wealthsimple charges a fee of 0.5% for the first $100,00 invested and 0.4% for over $100,000.

Stock-picking compliant companies

Halal investors also have another simple, low-cost option of opening a brokerage account and replicating Sharia-compliant funds by buying and holding halal-approved stocks. Keep in mind, however, you will have to screen stocks according to the following rules:

• No more than 5% of the company's revenue can come from haram sources
• Must have less than 33% total debt compared to their market capitalization in the last year
• Must have more than 45% accounts receivable as compared to their total assets in the last year

One way to get around doing all this research is to replicate the Wealthsimple halal portfolio. Another option is to replicate the stocks included in the Dow Jones Islamic Market Titans 100 Index (TSX:DJI100X). This index includes halal-compliant stocks, including household names like:

• Canadian National Railway (TSX:CNR)
• BP (NYSE:BP)
• Intel (TSX:INTC.NE)
• Johnson & Johnson (NYSE:JNJ)
• Pfizer (NYSE:PFE)
• Exxon Mobil (NYSE:XOM)
• Suncor (TSX:SU)
• Apple (NASDAQ:AAPL)
• Microsoft (NASDAQ:MSFT)
• Google (TSX:GOOG.NE)
• Facebook (NYSE:META)
• Nike (NYSE:NKE)

Halal ETFs or mutual funds

Investors can also purchase a halal ETF or mutual fund and hold it in their RRSP or TFSA. Most mutual funds come with high fees in Canada, which can really eat into your returns. One of the most popular halal mutual funds is the Global Iman Fund (TSX:IMANX). Unfortunately, its high management fee of 2.80% is excessive, particularly when the fund replicates and tracks its benchmark fund: the Dow Jones Islamic Market Titans 100 Index (INDEXDJX:IMXL). To save on fees you can replicate this fund by purchasing the top holdings using your online, discount brokerage account. Use the Money guide to find a trading platform to find a brokerage account that suits your goals and budget.

To save on fees with less work you can also buy a halal ETF. A popular one is the S&P 500 Sharia Industry Exclusions ETF (INDEXSP:SPSIEUP) with a management expense ratio (MER) of 0.45%. This ETF invests in all the permissible companies included in the S&P 500.

Purchase precious metals

Another lawful investment is gold or silver, whether the precious metal itself or an ETF that tracks the value (just make sure you're not investing in gold or silver futures). To alleviate market risk, most investors keep this asset to no more than 5% of the value of your portfolio. Here are two of the most popular precious metal ETFs:

• iShares Silver Trust (NYSE:SLV): MER of 0.5%
• iShares Gold Trust (NYSE:IAU): MER of 0.25%

Halal mortgages for investment properties in Canada

While Sharia-compliant homebuyers and investors cannot hold a conventional mortgage — because it's an interest-based debt— there are ways to invest in real estate. You can invest in a Shariah-compliant real estate investment trusts (REITs), like the Ansar Financial (CSE:AFD) and Development Corporation (CSE:AFDC) which invests in properties in Alberta, or you can partner up and pay for a property in cash.

Is halal investing just for Muslims?

While halal investing is based on specific religious principles, this investment strategy is definitely not just for Muslims. Investors who want to avoid supporting companies that contradict their values, such as companies involved in pornography or alcohol, will also appreciate the approach of halal investing products and strategies. To be Sharia-compliant takes a lot of time, energy and knowledge, but to observant Muslims — and those committed to investing based on their values — it's worth it.

— with files from Romana King