Australia’s first Sharia-compliant ETFs listed: Here’s what you need to know 

The new Islamic finance products offer an investment option to ethically conscious investors.

A Melbourne-based fund manager has launched Australia's first Sharia-compliant exchange traded funds on the ASX, opening up a fresh growth avenue in the country's rapidly expanding $135 billion ETF market.

Hejaz Financial Services launched 2 funds on Monday – the Hejaz Equities Fund (ASX:ISLM) and Hejaz Property Fund (ASX:HJZP). Units in both start trading on the ASX at midday.

The 2 funds will provide Australian Muslims as well as other ethically conscious investors greater access and choice of investment options in a popular investing format.

In accordance with their Sharia-compliant status, both funds will not invest in activities considered morally or socially injurious and in companies that primarily operate in such sectors, such as tobacco, gambling, adult entertainment, conventional banking and insurance, pork and weapons.

"While Islamic ETF products are widely available overseas, this will be the first time Islamic finance products are listed on the ASX," Hejaz COO Muzzammil Dhedhy said.

"We are taking an important step towards our goal of providing high-performing, ethical financial products to Australian Muslims."

The fund manager plans to launch a third ETF before the end of the year, providing retail investors access to the Hejaz Income Fund, which it said is Australia's highest-returning Islamic Income Fund.

ESG focus

The launch comes when a growing number of investors focus on sustainable investments, particularly because of the long-term environmental benefits of such investing.

A recent Global Investor Study by investment management firm Schroders found that 73% of investors who classify themselves as having "expert" investment knowledge believe investing sustainably is the only way to ensure profitability in the long term.

Australian investors are allocating a third of their investment portfolios to sustainable funds, the study found, which is in line with global results of about 30%.

These changing investor requirements have helped drive investments in the Islamic funds market, which grew over 300% over the last decade to reach $200 billion in assets under management globally.

Sharia-compliant investing refers to ethical investment in products, companies and industries that align with Islamic beliefs. To be classed as Sharia-compliant, all investments must undergo mandatory ethical screening using the rules set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Hejaz said both its newly launched funds are aimed at creating a positive impact and building wealth for members without negatively impacting society.

What do you actually own?

The Hejaz Equities Fund ETF will provide exposure to a diversified global equities portfolio of Sharia-compliant investments. It invests primarily in developed markets around the world, namely Europe, North America and selected Asian markets, including Australia.

The Fund aims to achieve a total return equal to movements in the MSCI World Islamic Index benchmark. It targets a 15% p.a. return net of fees and has $70 million under management. The minimum initial investment is pegged at $10,000.

Top sector-wise holdings include materials, consumer discretionary, health care and information technology.

The Hejaz Property Fund ETF applies an ethical overlay to invest in globally listed REITs. Sharia investment principles are applied as negative screens to exclude investment assets based on the nature of their business activities and their failure to meet financial thresholds relating to debt, liquidity and income.

The Fund targets a 10% p.a. return net of fees and is benchmarked to the MSCI World REITs Index. It has $10 million under management and the minimum initial investment is pegged at $5,000.

Top sector-wise holdings include Industrial REITs, Office REITs, retail REITs and residential REITs.

Equity Trustees has been appointed Responsible Entity (RE) for the 2 ETFs while Macquarie Securities Limited is involved in the launch as the market-making agent.

Is it a good investment?

The 2 Sharia-compliant ETFs offer new investment options for beginners and experienced investors alike who are looking for a balance between financial and environmental, social and governance (ESG) goals.

The Funds are targeted towards longer-term investors, with a minimum suggested timeframe for holding investments of 5 years. Both carry a medium-to-high risk.

While the initial investment outlay is high at $10,000 and $5,000 respectively, unit holders have assured of liquidity and can redeem funds daily.

On the downside, both of the ETFs have a higher management fee compared to some competitors. Cheap benchmarking ETFs can be as low as 0.1%.

The Equity Fund has a management fee of 1.89% p.a. plus a performance fee of 20.08% of the excess return over the benchmark. There are no entry or exit fees.

The Property Fund has a management fee of 1.50% p.a. plus a performance fee of 20.1% of the excess return over the benchmark. There are no entry or exit fees either.

However, what you are getting for this fee is an actively managed fund that can align with your ESG goals or religious beliefs.