By Utbah Masud
As Muslims in America fast and pray through the days of Dhulhijjah, many of us will also be purifying our savings and accumulated wealth by giving zakat. Now is as good a time as any to discuss some of the portfolio investment options available to Muslims in the United States where they can seek income and capital appreciation via investing in the stock markets. But before we delve into a description of these options, let’s discuss why a Muslim would want to invest their hard-earned dollars instead of keeping them in a savings account.
The first reason you would want to invest your money is to seek a halal form of capital appreciation, something that cannot be done by keeping it in a savings account. Most scholars are of the opinion that you cannot derive benefit from the interest amount that the bank shares with you on your savings since that money is backed by impermissible interest-based transactions. Therefore, to seek capital appreciation, we’re forced to employ our savings elsewhere. Secondly, as most of us are aware, the American economic and monetary system is designed such that your money loses value over time, meaning you will be able to buy less of something (e.g. halal meat) with the same amount of money X number of years from now than you can with it today. Therefore, if you are trying to save money for a large expense at some point in the future – Hajj, retirement, higher education for you children, etc. – it will be akin to aiming at a moving target since the value of those expenditures appreciates at a multiple of the general inflation in consumer expenditure such as groceries, rent, etc. Both of these reasons force us to seek other avenues for our extra non-rainy day funds.
The next question is if the money is to be invested, why should it be invested in the stock exchange instead of businesses that people are more familiar with such as real estate, halal restaurant, etc.? It is true that if invested wisely, those options can not only allow to you benefit your local economy, but can also be more profitable in the long-run as compared to investing in the stock market. However, there are two risks associated investing in hard businesses such as real estate and/or restaurants.
First, most likely you will be unable to become a passive investor in these ventures. You will have to actively supervise your investments or pay someone else to do so, thus reducing your profit intake. If you have an 8-5 job that you’d like to keep, you will be faced with the hard decision whether or not to keep it. Also, going into a business without having sufficient knowledge or prior experience can be a recipe for disaster, resulting in you losing all you invested capital, not to mention your time and effort.
The second reason to invest in the stock market is the liquid nature of the investment. Hard assets such as real estate are very illiquid, meaning that they cannot be readily converted into cash. Let’s suppose you are confronted with a sudden large expenditure such as (Allah forbid) an emergency medical procedure, or a large repair expense on the house because of a natural disaster, you will be stuck if you need money beyond your non-rainy day funds. You will have to either borrow money whether by halal means (relatives, friends, family) or haram ones (banks), or you will be forced to spot sell your business asset most likely at a great loss to its resale value were you selling it during normal circumstances. The investments in the stock market can be readily converted into cash. Depending on whether you invest in individual stocks or mutual funds, you can retrieve the exact cash value of your investments in a time ranging from instantaneously to three days.
Finally, before we delve into the details of the actual halal stock investment options available to Muslims in the United States, I have to put out a few disclaimers. This article is intended to disseminate information only and is not an invitation to invest in all or any of the investment vehicles mentioned below. You should never invest in something without an understanding of the investment risks (this goes for any investment, not just the stock market).
For Muslims looking to invest in the stock market in the United States, here are the available options:
Amana Mutual Funds
Let’s start with the big dog. Amana is offered by Saturna Capital, an investment company based in Bellingham, WA. They operate two Islamic funds:
- Amana Income Fund (symbol: AMANX), and
- Amana Growth Fund (AMAGX)
The two funds differ in their focus: AMANX focuses on providing regular income by investing mostly in stocks that frequently share their profits with the investors in the form of dividends, such as Microsoft (MSFT), Pfizer (PFE) and 3M (MMM). AMAGX focuses on long-term capital appreciation by investing in companies whose stock prices will likely go up in value substantially in the future. Examples of these companies include Apple (AAPL), Cisco (CSCO) and Intuit (INTU).
In my experience, most Muslims who are interested in stock investing are already familiar with Amana funds. This is understandable, since they are not only the largest in the field, but also have been around the longest as well – AMANX traces its root back to 1986 making it not only the oldest Sharia-compliant mutual fund in the States, but one of the oldest ones in the entire world.
Full Disclosure: I have personally invested in AMAGX.
Azzad Mutual Funds
Although they haven’t been around as long as Amana (and are definitely not as big), Azzad funds also offer options that are unique in this space. They are operated by Azzad Asset Management out of Washington, DC. Their two funds are:
- Azzad Ethical Fund (ADJEX), and
- Azzad Wise Capital Fund (WISEX)
Like Amana, the two Azzad funds differ in their focus. ADJEX invests primarily in what are called ‘mid-cap’ companies which are not as large as mega-corporations yet like Apple and Microsoft and have room to grow, making the fund more growth-focused. WISEX, on the other hand is focused on income and capital preservation and invests primarily in dividend stocks and sukuk – Sharia-compliant fixed income securities (how do those work, we’ll touch more on sukuk in a future article inshAllah).
Full Disclosure: I have personally invested in ADJEX.
Iman Fund (IMANX)
Iman fund is offered by Allied Asset Advisors, Inc. out of Oak Brook, IL and is affiliated with North American Islamic Trust (NAIT) which owns more than 60% of the Fund and consequently, the voting rights. Iman Fund’s style and focus are similar to the Amana Growth Fund (AMAGX) in that it invests mainly in large-cap companies (such as Apple (AAPL)) and seeks long-term capital appreciation instead of regular income.
Falah Russell-IdealRatings U.S. Large Cap ETF (FIA)
This is the new kid on the block. If you have been active in the stock market, you’ll know that the hottest trend for investors currently is to invest in Exchange-Traded Funds (ETFs) rather than mutual funds or individual stocks. This is because ETFs combine the best of both worlds: they give you the diversification of mutual funds with the tradability of individual stocks. Diversification implies that instead of selecting a few companies whose stock prices will go up or that will provide consistent income in the fund manager’s opinion, ETFs are backed by investments in the entire universe of stocks that comply with the ET’s goals. In case of FIA, the stock universe consists of the largest public companies that pass the Sharia-compliance screenings.
Tradability implies that you can buy/sell an ETF share throughout the day when the stock markets are open (you can also short-sell them or buy them on margin: both practices are impermissible in Sharia). Tradability is not a feature in mutual funds since you have to wait at least 24 hours to cash out your invested money.
Another reason that makes ETFs attractive to investors is the adage: most investors cannot beat the market consistently in the long-run. Several studies over the years have proven this fact over and over again (examples are here and here). ETFs take care of this issue by allowing you to invest in the market.
Finally, the best part about investing in FIA is that the fund has actually published its entire list of holdings online for anyone to see, which you can do here.
FIA is operated by Falah Capital, an asset management firm out of Seattle, WA.
InshAllah, my next article will focus on the Sharia-compliance screens that fund managers use to screen for Sharia-compliant stocks. I will attempt to highlight the process on how those screens came about, what are the underlying fiqh principles behind them and an overview of some associated issues.
Utbah Masud lives in Wichita, KS and works as an Engineer at an aircraft company. He is an MBA student and has a deep interest in Sharia-compliant investments and finance. He can be contacted at firstname.lastname@example.org.