As an Islamic trader, can you trade ETFs?
It is a question that we get asked a lot, and it does not have a simple answer. While some Islamic scholars argue that trading ETFs is permissible, others argue it is not. Ultimately, it is up to the individual Muslim trader to decide for themselves.
What are ETFs?
You can trade ETFs on a stock exchange and buy or sell them just like typical stocks. It is a type of investment product that tracks the performance of an underlying asset. ETFs are traded on stock exchanges and can be bought and sold just like any other stock.
To help you make an informed decision, we’ve put together a brief overview of the critical arguments for and against trading ETFs from an Islamic perspective.
The Argument For Trading ETFs
Some Islamic scholars argue that trading ETFs is permissible because:
They provide exposure to a diversified portfolio of assets
By trading ETFs, you can gain exposure to a diversified portfolio of assets without investing in individual securities. It can be beneficial from an Islamic perspective, as it helps reduce risk.
They are not leveraged.
ETFs are not leveraged, meaning that you do not borrow money to trade them. It is also crucial from an Islamic perspective, as it adheres to the principles of Shariah law.
They are transparent and have low fees.
ETFs are very transparent and have low fees compared to other investment products. It is another crucial factor from an Islamic perspective, as it helps ensure that traders are not taken advantage of.
The Argument Against Trading ETFs
On the other hand, some Islamic scholars argue that trading ETFs is not permissible because
They are based on speculation.
ETFs are based on speculation, which is forbidden in Islam. It is because it can lead to excessive risk-taking and financial instability.
They may be used to exploit loopholes in Shariah law.
Some people argue that ETFs can be used to exploit loopholes in Shariah law. For example, they could be used to invest in companies that produce alcohol or pork products, which are forbidden in Islam.
They can be challenging to understand
ETFs can be difficult to understand, particularly for novice traders. It could lead to losses for Muslim traders who do not fully understand their work.
What are recommended ETFs for Muslims?
SPDR S&P 500 ETF Trust (SPY)
It is one of the most popular ETFs on the market, and it offers exposure to the S&P 500 index. The S&P 500 is a globally tracked index which includes 500 of the largest US companies.
Vanguard FTSE All-World ex-US ETF (VEU)
This ETF offers exposure to over 2,000 international stocks, making it an excellent choice for Muslim traders who want to invest in global markets.
iShares Core S&P Small-Cap ETF (IJR)
This ETF tracks the performance of the S&P SmallCap 600 index, which consists of small US companies. If you are an investor who want to take advantage of the potential growth of small businesses, It’s an excellent option.
Vanguard FTSE Emerging Markets ETF (VWO)
This ETF offers exposure to over 1,000 emerging market companies, making it a great way to diversify your portfolio.
iShares MSCI EAFE ETF (EFA)
The iShares ETF tracks the performance of large and mid-size companies in developed international markets. It’s an excellent choice for Muslim investors who want to diversify their portfolios outside of the US.
These are just a few examples of recommended ETFs for Muslims. There are many other options available, so be sure to do your research before making any decisions.
So, what is the verdict?
As you can see, there is no clear consensus on whether or not trading ETFs is permissible from an Islamic perspective. Ultimately, it is up to the individual Muslim trader to decide for themselves. If you are unsure, it’s recommended to speak to a qualified Islamic scholar before making any decisions.