Are halal ETFs really halal?

The question “are halal ETFs halal?” comes up again and again on forums. An Islamic ETF holds hundreds of large companies, and almost all of them have bank deposits, borrowings and interest income. How could such a fund be halal? The answer most often shared fits in three words: “haram is haram”. It has the merit of being clear, but it does not reflect the debate among scholars, which is long-standing and well documented.

This guide sets out the two opinions, their arguments and their sources, followed by the points that depend on the fund itself. It does not settle the matter for you. The answer to “are halal ETFs halal or haram?” depends on a religious choice that is yours to make, and the scholar you consult can help you make it.

Why does the question arise?

A listed company operates within a financial system based on interest. It deposits its cash with banks, borrows to invest and sometimes receives financial income. A company whose activity is entirely lawful (making telephones, selling medicines, building roads) therefore almost always earns a little riba, even though this is not its line of business.

For a shareholder, the question has two parts. Can you become a co-owner of a company that engages in riba, even marginally? And what should you do with the part of the dividend that comes from it? Contemporary scholars have answered in two different ways.

First opinion: prohibition in principle

The International Islamic Fiqh Academy, a body of the Organisation of Islamic Cooperation, examined the question at its seventh session, held in Jeddah in May 1992. Its Resolution No. 63 (1/7) distinguishes three cases. Setting up or holding shares in a company with lawful activities is permitted. Taking part in a company whose main purpose is prohibited (a conventional bank, an alcohol producer) is not, and on this there is no disagreement. For the intermediate case, the resolution states that the principle is the prohibition of taking part in companies that sometimes carry out prohibited transactions such as riba, even if their main activity is lawful.

For the scholars who follow this opinion, the shareholder is a co-owner and therefore a party to the company's transactions, including its borrowing and deposits at interest. A threshold, however low, does not change the nature of the transaction. The consequence is direct: almost no large listed company passes this screen, and none of the Islamic ETFs that exist today meets this criterion.

Second opinion: conditional tolerance

Other scholars, including the bodies that drafted the standards of AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions, based in Bahrain), allow the purchase of shares in these companies under certain conditions. AAOIFI Sharia Standard No. 21 on financial papers sets ceilings: the company's interest-bearing borrowings and its interest-bearing deposits must each stay at or below 30% of its market capitalisation, and its non-compliant income at or below 5% of its revenue. Above these limits, the share is excluded. Below them, the investment is permitted on condition that the part of the income that comes from non-compliant activities is purified.

The arguments put forward are the rule that the greater part takes the ruling of the whole; the general difficulty of avoiding this kind of income in today's economy (what jurists call ʿumūm al-balwā); the fact that a small shareholder does not decide the company's financial policy; and purification, which ensures that the unlawful income is not kept. This is the opinion applied by the Sharia committees of the MSCI Islamic, Dow Jones Islamic Market, S&P Shariah and FTSE Shariah indices, and therefore by all the halal ETFs on the market.

What should you check in the fund itself?

If you follow the second opinion, the index alone is not enough: the way the fund is managed matters as well. Four points can be checked in the prospectus and the factsheet of the ETF.

• Replication. A physically replicating ETF buys the shares that make up the index. A synthetic ETF holds a different basket and exchanges its performance for that of the index through a swap with a bank: this contract is not compatible with Islamic finance, whatever the index. The Islamic ETFs in UCITS format listed in our halal ETF guide all use physical replication, or active management with direct purchase of the securities.
• Securities lending. Many ETFs lend part of their shares in return for a fee and collateral, which raises the question of riba and of collateral placed at interest. Look at the securities lending section of the fund's factsheet or prospectus: an Islamic fund should not engage in it.
• Removing companies that are no longer compliant. The index is reviewed at regular intervals, so a company that breaches a threshold between two reviews stays in the fund for a few weeks. The methodologies include buffers to avoid constant movements in and out. Sharia committees accept this, on condition that the income for that period is purified.
• Purification. Some funds purify their dividends themselves; others leave the calculation to the investor. Since 2026, the Islamic ETFs of iShares and HSBC have purified their dividends themselves; Wahed publishes an amount per share, and the accumulating class of the Invesco Dow Jones Islamic leaves the calculation to the investor. The method is explained in detail in our guide to purifying your dividends.

Is your securities account compliant too?

A compliant ETF does not make the account that holds it compliant. Several brokers pay interest on uninvested cash. This income is riba, to be refused where possible or given away in full (see our guide to bank interest). A margin account, which lets you buy on credit, is excluded. The lending of your own securities by the broker, often switched on by default in the general terms and conditions, can usually be switched off on request.

Compliance therefore depends on three levels: the index, the fund and the account. A halal ETF bought on a margin account, with securities lending switched on and interest collected on the cash balance, does not meet the conditions of the second opinion.

If you follow the strict opinion

For those who follow the Fiqh Academy, the question “are halal ETFs halal?” is settled: its opinion closes the door on the Islamic ETFs available today and on most listed shares. Other investments remain open to them: physically held gold, property bought without an interest-bearing loan, sukuk whose structure is sound, direct stakes in businesses that have no debt and no deposits at interest, and the partnership contracts presented in our guide to Islamic contracts. Such a portfolio is less liquid and harder to diversify, but it is consistent with the opinion followed.

Between the two opinions, some investors apply lower thresholds than the indices do, by choosing halal stocks with little debt themselves. This takes more time, but it brings the portfolio closer to the first opinion without making it identical.

How can you decide for yourself?

Three questions can help you answer “are halal ETFs halal?” for yourself. Which opinion do you usually follow on matters of transactions, and which scholar do you consult? Are you prepared to purify the non-compliant part of the income carefully, every year? Do the fund and the account you have in mind meet the technical conditions described above? If the answer to any one of these questions is no, a halal ETF is not the right solution for you, and there is no failure in that: other compliant investments exist.

Our position is simple. We present both opinions honestly, we explain to those who follow the second one how to apply it correctly, and we do not issue fatwas. The question “are halal ETFs halal?” remains a matter of conscience, to be put to a competent religious authority.

This content is provided for educational purposes and does not constitute a fatwa: as questions of compliance involve differences between schools of jurisprudence, it is for each person to refer to a competent religious authority for their own situation. Nor does it constitute a recommendation to buy or sell, or investment advice within the meaning of the LSFin.