ETF: Understanding the Shari’ah 40 ETF

In ETF Blog, Latest by Kristia van Heerden

Aligning profitability with ethics is a sticky problem. Since businesses don’t seem to get it right, it’s not that surprising that ethical ETF choices are limited. Over the years the local industry has seen some attempts at ethics-driven ETFs. However, Absa’s Shari’ah-compliant Top 40 (share code: NFSH40) product has been the only one that has delivered on both ethics and performance. 

This ETF follows the tenets of Islam, but the investment philosophy will be appealing to anyone concerned about the impact of their investment capital. Says Len Jordaan of Index and Structured Solutions at Absa, “This ETF is based on a FTSE/ JSE index. FTSE employ an advisory panel [Yasaar Limited] that assesses the underlying companies and determines whether they are Shari’ah compliant.” 

In the case of the NFSH40, compliance means not investing in “companies that provide financial services, deal in alcohol, certain food products, tobacco and weapons”. The ETF uses the normal Top 40 index as a starting universe and systematically excludes companies that are not compliant. The Shari’ah basket relies heavily on companies in the basic materials sector – mostly mines. You can also expect consumer goods, telecommunications companies, pharmaceutical companies and companies providing industrial services. Of course, even within the allowed sectors, companies are only included when they adhere to the Shari’ah requirements. 

Tip: We discuss Shari’ah-compliant investment products in this episode of The Fat Wallet Show

With its predilection for mining, the performance of this ETF can mimic that of the resources index. You can expect periods of outperformance when there’s a run on resources. This ETF has fewer constituents representing fewer sectors, naturally adding a level of volatility higher than that of an ordinary broad-market index. Considering that sometimes leads to periods of out-performance, that might not be such a bad thing.

ETF name NewFunds Shari’ah Top 40
JSE code NFSH40
ETF issuer Absa
Issue date 6 April 2009
Total investment cost 0.42%
ETF Benchmark FTSE/JSE Shari’ah Top 40 Index
Tax-free savings account Investment allowed
ETF major holdings Shariah Top 40 ETF
Market cap R45m
Performance 1 year -6.0%
Performance 3 years -4.8%
Performance 5 years -21.7%
Performance 10 years +10.5%
Dividend yield 4.6%

*May 2020

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