Sharia-Compliant ETFs: A Guide for Passive Investors Outside the US

If you aim to adopt the powerful, passive "Bogleheads" strategy—investing in low-cost, globally diversified index funds—while honoring your Islamic values, you’ve come to the right place.

This guide will walk you through the essential criteria for selecting a good ETF and then present the necessary compromises and actionable options available in the market today.

Important Note on Audience

This article is not intended for US tax persons (US citizens, Green Card holders, or US residents). If you are a US tax person, the principles are the same, but you will need to invest in US domiciled funds instead of the UCITS ETFs described in this article.

My sister visiting the Sheikh Zayed Mosque in Abu Dhabi. Though I am not muslim, I have reverence for the religion.

Part 1: The Ideal Investment—Bogleheads Criteria

Before applying the Sharia filter, we must define what makes an ETF a successful long-term investment:

1. Low Fees (The Only Guarantee)

Decreasing fees is the only guaranteed way to maximize returns, because fees are guaranteed while market returns are not.

• Low Expense Ratio: This is the annual percentage the fund management company charges. While US investors can find ratios as low as 0.02%, international investors generally aim for funds with a total expense ratio (TER) under 0.25%.

  
  

• Irish Domicile (Crucial for Non-US Investors): For non-US residents investing in US-domiciled ETFs create exposure to the US Estate Tax on assets over 60,000. Irish-domiciled ETFs (often trading as UCITS funds on European exchanges) eliminate this risk, protecting your inheritance from a country to which you have no tax ties. Additionally, Irish-domiciled funds benefit from a reduced tax on dividends (15% instead of 30%) due to their tax treaty with the US.

  
  

2. High Diversification (The Only Free Lunch)

As Nobel laureate Harry Markowitz stated, "Diversification is the only free lunch in investing." To passively track the whole world market (and capture maximum returns with minimum risk), we want investments that are highly diversified across:

• Geography: Including Developed Markets (DM) for stability and Emerging Markets (EM) for greater potential growth.

  
  

• Sectors: Avoiding concentration risk that can plague individual sectors (like the 2008 mortgage crisis or the dot com bust).

  
  

• Company Size (Cap): Including small, mid, and large-cap companies to capture the high growth potential found in smaller firms.

  
  

Part 2: The Sharia Filter and the Compromise

To be Sharia-compliant, investments must adhere to the principles of Islamic law. To my understanding, there are two types of things you need to look out for:

1. Riba: While what exactly counts as Riba is debated, it’s widely interpreted to mean earning or paying interest. This means a sharia compliant portfolio needs to avoid conventional bonds and the financial industry.

   
   

2. Haram industries:  Alcohol, tobacco, gambling, pork products, weapons, or adult entertainment.

   
   

Perfectly eliminating everything haram from your portfolio (and your life!) is impossible. Almost all companies use loans to finance their operations, so there will always be Riba on some level in a portfolio. Most publicly traded companies operate in many different sectors. Apple, for example, has an entertainment arm that includes some haram music and video content. Even many sharia-compliant funds include companies like Apple. There is always a compromise. It’s not about perfection, it’s about finding a workable compromise.

The Trade-Off

The number of Sharia-compliant ETFs is extremely limited. This forces an immediate compromise on the Bogleheads ideal:

• Higher Fees: While most global ETFs are under 0.25%, specialized Sharia-compliant ETFs usually have expense ratios between 0.30% and 0.40%.

  
  

• Lower Diversification: They track specific, highly screened indices, resulting in fewer stocks (often just a few hundred) and fewer sectors, which increases risk, particularly when it concentrates your assets into a single sector like tech.

  
  

• Lower Trading Volume: This can make buying and selling slightly more difficult or expensive.

  
  

Due to these constraints, many Muslim investors find they must choose between maximal financial prudence (low fees, high diversification) and maximal religious compliance (board-approved screening).

Part 3: Three Actionable Paths for Global Investors

Your personal path will depend on where you draw the line between financial strategy and religious requirements. You essentially have three levels of compromise to choose from:

Option	Sharia Compliance	Financial Characteristics	Key Action
Path 1	Lowest (Excludes bonds only)	Highest diversification, lowest fees, highest expected long-term return.	Buy a regular world ETF
Path 2	Medium (Ethically Screened)	Excellent diversification, low fees, broad ethical exclusions but still includes the financial industry.	Buy an Ethically Screened ETF
Path 3	Highest (Scholar Approved)	Lowest diversification, reasonable fees for a niche product, least exposure to prohibited industries.	Buy a Sharia Compliant ETF

Path 1: The Regular World Index Fund

• Action: Simply invest in a standard, globally diversified, equity UCITS ETF (like those tracking the MSCI World or FTSE All-World index) and accept that some holdings violate Sharia principles. VWRA is a common example of this type of fund.

  
  

• Pro: This offers the highest returns, lowest fees, and greatest safety through diversification

  
  

• Con: The least compliant with sharia values.

  
  

Path 2: The Ethical Middle Ground (SRI/ESG)

For many, this is the most balanced approach. Socially Responsible Investing (SRI) or Environmental, Social, and Governance (ESG) funds automatically screen out holdings based on ethical or ESG filters. Some of them screen out many of the industries prohibited by Sharia law. Not all SRI or ESG funds are suitable. However, there is one that stands out from a sharia lens:

• Vanguard ESG Global All Cap UCITS ETF (V3AA)

  • Pros: Globally diversified. 5,724 holdings, TER 0.24%. Tracks the FTSE Global All Cap Choice index which excludes alcohol, tobacco, gambling, pornography, weapons, and also fossil fuels and includes developed and emerging markets as well as small, medium and large cap companies.

  • Con: It is not certified by a Sharia board, and does not exclude the financial industry.

    
    

Path 3: The Board-Approved Sharia ETF

This path is the closest you can get to truly ethical Islamic investing, approved by a board of Sharia scholars. You will be trading diversification and low fees for less compromise on your values. However, it’s still not a perfectly pure investment, that’s impossible in a globally connected society.

Crucial Drawback: High Concentration. Due to the screening methodology (excluding high-debt financial and industrial firms), these funds are naturally and heavily concentrated in US large-cap technology. This concentration can dramatically increase volatility.

• Fund Options (Irish Domiciled UCITS):

Ticker	Fund Name (Index)	Dividend Handling	Holdings	TER	Comments
IGDA	Invesco DJ Islamic Developed Markets	Accumulating	1,528	0.40%	Highest US/Tech Concentration (75% US, 40% Tech).
ISDW	iShares MSCI World Islamic	Distributing	393	0.30%	More balanced World exposure. Larger fund size.
HIWO	HSBC MSCI World Islamic ESG	Accumulating	341	0.30%	Smallest fund (low AUM/liquidity risk).
ISDE	iShares MSCI EM Islamic	Distributing	384	0.35%	Emerging Markets focus. Use as a compliment.

The Diversification Solution

If you choose this path, you should start with a Developed Markets fund like ISWD (better balance of world exposure and larger more established fund). Once you are comfortable investing and your portfolio is large enough to justify the increased trading fees, you can pair this with ISDE at about 10% of your equity portfolio to regain some much-needed emerging markets diversification and counteract the developed market tilt.

Final Thought: Consistency Over Scrutiny

The number of Sharia-compliant options is small, and the compromises are real. You could spend month searching for a 100% compliant investment and end up never starting to invest at all. That’s a greater tragedy in my mind. I want to live in a world where ethically minded people have the economic freedom to do good in the world with their money and their time. If ethically minded people don’t invest, they will have less time, and fewer economic resources to do good in the world.

Remember that every aspect of life involves compromise. When you buy an Apple computer you’re also funding their bottom line. When you take out a car loan or use a credit card you’re also engaging with Riba. I encourage you to apply the same level of scrutiny to your investments as you do to your consumer purchases. Over the course of your life you’re likely giving MORE money to the companies you buy goods and services from than you will through your investments. For most of us, our consumer choices make a bigger impact than our choice of ETF.

There are arguments to be made for muslim investors to take any of these three paths. Choose the path that aligns best with your conscience and your long-term financial goals. As your wealth grows you will have more freedom with your time and your money to make a positive impact in the world. Imagine a world where the good people were the ones with time and money.

Ready to Build Your Personalized Halal Portfolio?

This guide gives you the foundational knowledge, but implementing it can feel complex—especially setting up and navigating a brokerage account, deciding on a long term strategy, and settling on your personal "line in the sand" for compliance.

Take the next step by scheduling a discovery call and let's implement your personalized, Sharia-compliant, low-cost portfolio together.