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Shariah Compliant Exchange Traded Funds (i-ETFs)

Islamic Capital Market

Shariah Compliant Exchange Traded Funds (i-ETFs)

An Exchange Traded Fund (ETF) is an innovative financial product that exhibits the best of open-ended fund and listed stock features. In the Securities Commission Malaysia’s Exchange-Traded Funds Guidelines , ETF is defined as “a listed index-tracking fund structured as a unit trust scheme or any other approved structures whose primary objective is to achieve the returns that correspond to the performance of a particular index”. To put it simply, ETF is actually unit trust listed and traded on a stock exchange. It is passively-managed in general as ETF aims to replicate the performance of a particular market index, either by investing all (full replication) or substantially all (strategic sampling) in the constituent securities.

What is i-ETF ?

Unlike conventional ETF that has the liberty to track any benchmark index regardless of the Shariah status of the component stocks, an i-ETF tracks only benchmark index where the index constituents are Shariah compliant companies. Apart from that, the management of i-ETF has to strictly observe the Shariah principles and Islamic investment guidelines. The operation of i-ETF is also overseen by a Shariah board, committee or advisor who would conduct Shariah compliant audits and reviews from time to time.

A fund shall undergo a comprehensive Shariah screening exercise before it can be qualified as an i-ETF . The screening of the index constituents are done in accordance to the methodology prescribed by the Shariah board, committee or advisor of the index provider, the regulatory body and the fund itself. To ensure continuous Shariah compliance, the Shariah screening is undertaken at the time of investment decision and subsequently throughout the investment period. The aforementioned periodic monitoring for Shariah compliance do takes into account any corporate actions like merger and acquisition, delisting or bankruptcy. The i-ETF is consequently purified from time to time by identifying, separating and donating to charity any Shariah non-compliant income.

How to invest in i-ETF ?

Just like stocks, i-ETF can be bought and sold through stockbrokers. At present, there are six (6) i-ETFs listed and traded on the Exchange

Why invest in i-ETF ?

  1. Diversified Exposure

    Through one unit of i-ETF , investors get immediate exposure to the companies that constitute the tracked index.

  2. Cost effectiveness

    As the fund is passively managed, the management fee is considerably low. This makes i-ETF an economical long run investment.

  3. Simplicity

    i-ETF is listed on Bursa Malaysia's Main Market just like stocks; trading of i-ETF units is done on its current market price in a single transaction. Investors may do it online or through their stockbrokers.

  4. Transparency

    i-ETF price is readily available on real time basis throughout the trading day. Other comprehensive and updated information pertaining the i-ETF, such as daily fund value and quarterly manager report, can be obtained from the fund manager’s website.