Islamic Income and Innovation

Islamic Income and Innovation  

Playing Dividends and Growth the Shariah Way

Two new active Australian listed ETFs investing in Shariah  Compliant equities have very different objectives. One is about income investing for dividends, and the other is geared towards growth and innovation.

Hejaz High Income Active ETF (HJHI) targets high income distributions from equities, and does not specify any range of industrial sectors. Its benchmark is DJI Islamic Market Global Select Dividend Index, but its geographic weights can be very different. The index has 13% in Australian equities whereas HHIA can invest up to 40% in Australian equities. The index has 82% in non-Australian equities whereas HHIA can invest 60-95% into them. 

Hejaz High Innovation Active ETF (HHIF) targets capital growth, from sectors including technology, biotech and renewable energy. Its benchmark is MSCI ACWI IMI Innovation, but its geographic allocation is different: whereas the benchmark has zero in Australian equities, this product can invest between 5% and 40% into them. And whereas the benchmark has 95% in non-Australian equities, HHIF can invest between 60% and 95% outside the Australian market. 

Neither of these two new products yet has a factsheet, but Hejaz has five other ETFs that might give some feel for its approach. 

For instance, Hejaz Sukuk Active ETG launched in November 2023, investing in special types of Islamic financial instruments that aim to pay regular income like bonds, but are structured in ways consistent with Shariah Law. A track record of only a few months might not be long enough to get a feel for longer term returns, as it can take time to build up a portfolio.

In contrast, Hejaz Income fund, a corporate finance and property fund, has been live for over two years. It launched in January 2022, has annualized at 6.78%, beating its benchmark by 1.8% per year. 

In contrast, Hejaz Equities fund has underperformed the MSCI Islamic World index hedged to AUD by 14% since it launched in October 2022, more or less at the bottom of the bear market. This performance difference is not necessarily a concern for long term investors. The market recovery has been led by the US and by large cap US technology stocks, and many active managers have not been able to keep pace with the rally. 

Hejaz was founded in 2014 in Melbourne, Australia, and is also involved in Islamic mortgages and licensing a fee-based financial advice service. 

The growing suite of Hejaz ETFs shows how easily the ETF industry can create liquid, listed products to meet religious and ethical investment preferences and restrictions, which are accessible to investors of any size.

The largest centres for Islamic finance tend to be in Muslim countries. Iran is estimated to be the largest Islamic finance market, followed by Saudi Arabia and United Arab Emirates, but many other countries, including Australia, the US and UK, have Islamic finance products, including ETFs, catering for their local Muslim populations who choose to observe Shariah finance principles. 

For instance in the US, the Wahed FTSE USA Sharia ETF has ticker HLAL, abbreviating the term for Halal meat, slaughtered in accordance with Islamic principles.