A halal ETF holds only companies that comply with Muslim ethics. It tracks an Islamic index (MSCI Islamic, Dow Jones Islamic Market, FTSE Shariah…) whose constituents have been screened: prohibited sectors excluded, debt and interest ratios capped, non-compliant income capped and purified. It is one of the most accessible ways to diversify savings in a compliant manner — provided you check the screening methodology. Several are accessible from Switzerland.
The ETF (exchange-traded index fund) has become private investors' favourite tool: in a single line, you hold hundreds of companies, at low cost. But a conventional ETF — a standard MSCI World or S&P 500 — inevitably contains banks, alcohol companies or heavily indebted businesses, incompatible with Muslim ethics. There is a solution: halal ETFs. Here is how they work, and how to choose one.
What is a halal ETF?
A halal ETF (also called a “sharia” ETF, or an Islamic ETF) is an exchange-traded fund that tracks not a conventional index but an Islamic index: a screened version of a benchmark index, from which every non-compliant company has been removed. The result is a diversified basket of shares put through the criteria of Islamic finance, held in a single line, with generally low fees.
It therefore combines two advantages: the simplicity and diversification of an ETF on one side, compliance on the other. For many Muslim investors, it is the natural entry point to a compliant portfolio.
How does an ETF become compliant?
The compliance of a halal ETF rests on the index it tracks. The major index providers publish Islamic versions of their flagship indices, approved by a sharia supervisory board. The best known are:
- MSCI Islamic — the compliant version of the MSCI indices (MSCI World Islamic, MSCI Emerging Markets Islamic…).
- Dow Jones Islamic Market (DJIM) — one of the oldest families of Islamic indices.
- FTSE Shariah and S&P Shariah — the compliant versions of the FTSE and S&P indices.
To build these indices, every company goes through the double screen of Islamic finance: a sector screen (excluding alcohol, tobacco, gambling, weapons, pornography and interest-based finance), then a financial screen based on ratios (interest-bearing debt and interest-bearing cash capped, non-compliant income capped). The exact thresholds vary slightly from one provider to another, but the logic remains that of the AAOIFI standards.
Even once screened, the companies held may draw a small share of their income from non-compliant activities (interest, for example). Purification consists in estimating that share and giving it away, so as not to benefit from it. Some index providers publish an annual “purification ratio” that makes this calculation easier — a point not to be overlooked with an ETF.
The criteria to check before buying
Not all “halal” ETFs are alike. Before you invest, check:
- The index tracked and its methodology — which Islamic index, which screening thresholds, which sharia board supervises it.
- Purification — does the provider publish a purification ratio? How is it applied to your units?
- Domicile and format — a UCITS (European) ETF is generally better suited, and simpler for tax purposes, for a Swiss resident than an American ETF.
- The currency — many halal ETFs are denominated in USD; consider the currency risk against the CHF.
- The fees (TER) and the size of the fund — reasonable ongoing charges and assets large enough for liquidity.
- Distribution — does the ETF distribute dividends or accumulate them? This affects both purification and taxation.
Learning to choose a halal ETF?
What each of these points covers can be read in the fund documentation. The ALG Club programme teaches you to do that reading yourself — with no product to sell, and no personalised advice.
Discover the programmeBuying a halal ETF from Switzerland
The good news: several Sharia-compliant ETFs, in UCITS format, are accessible to investors resident in Switzerland through a broker or a bank. Some are even listed on SIX Swiss Exchange — that is the case, as an illustration and not a recommendation, of the iShares MSCI World Islamic UCITS ETF, which tracks the Islamic version of the MSCI World.
Access, then, is not the real obstacle. The real questions lie elsewhere: how to read the screening methodology of an Islamic index, what the trading currency of a fund involves, what its domicile changes, and how purification applies. That is the role of a strategy — not of a simple purchase.
Halal ETFs and overall strategy
A halal ETF is an excellent vehicle, but it is only one building block. A complete compliant approach brings together several elements: screened shares or ETFs for growth, gold or property as tangible assets, compliant pension planning, and investment discipline over time. To understand the overall logic, start with our guides on Islamic finance and on investing without riba, then test your current investments with our compliance check.
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.