What makes an ETF halal?

A halal ETF only holds companies that follow the principles of Islamic finance, known as Sharia. An independent Sharia board reviews the index behind the ETF and screens out anything that does not comply. Two sorts of screens apply.

The first is a sector screen. Companies are excluded if they earn meaningful revenue from activities forbidden under Sharia. This covers:

• conventional banks, insurers and other businesses that rely on interest ("riba")
• alcohol and tobacco
• gambling
• pork and non-halal food
• weapons and defence
• adult entertainment

The second is a financial screen. Even a company in an allowed sector is excluded if it carries too much debt or earns too much of its income from interest. The exact thresholds depend on the index provider, but the idea is the same: avoid businesses that depend heavily on borrowing.

These screens have a big effect on what ends up in the fund. Conventional banks make up a large part of a normal world index, and they are almost entirely removed. The freed-up space tends to go to technology and healthcare companies, which usually pass both screens. That tilt is a big reason halal ETFs have performed the way they have.

Do halal ETFs sacrifice returns?

This is the question most people care about. The honest answer, based on recent history, is no.

We compared a halal world ETF, Invesco's IGDA, against IWDA, the most popular regular MSCI World ETF among Belgian investors. Here is how the indices they track have performed, in euros.

Over the last five years the halal index edged ahead. Over the last year it was well in front. Since 2017, the earliest date in our data, IGDA has grown by 14.03% per year on average, turning €10,000 into just over €34,000.

One caveat worth knowing: IGDA only launched in January 2022, so the earliest part of its line is based on the Dow Jones Islamic index it now tracks.

The reason comes back to those screens. By excluding banks, the index ends up heavier in technology. And technology has been the standout sector of the past decade. When tech runs hot, a halal ETF that leans into it tends to shine.

That same tilt is a double-edged sword. A fund concentrated in technology can fall harder when tech falls out of favour. IGDA dropped nearly 20% in 2022, a rougher year than a plain world ETF like IWDA had. So a halal ETF is not guaranteed to win. What the numbers show is simpler and more reassuring: investing in line with your faith does not automatically mean giving up returns.

How to choose the best halal ETF as a Belgian investor

A handful of things separate a good halal ETF from a mediocre one.

• Accumulating or distributing. An accumulating ETF reinvests dividends for you. A distributing ETF pays them out. For a Belgian investor building wealth over the long term, accumulating is usually the better choice. You avoid the 30% Belgian tax on dividends and your money keeps compounding.
• Ongoing cost (TER). The total expense ratio is the yearly fee. Halal ETFs cost a little more than plain world trackers because the screening adds work, but the difference is small.
• Fund size. A larger fund is less likely to be closed down and is usually easier to trade. Both of the main halal world ETFs are comfortably above €900 million.
• What the index covers. Most halal world ETFs track developed markets only. They leave out emerging markets like China and India. That is worth knowing if you want exposure to the whole global economy.

The best halal ETFs for Belgians

For a Belgian investor who wants a single, globally diversified halal ETF, two funds stand out.

Invesco Dow Jones Islamic Global Developed Markets (IGDA)

This fund (ISIN IE000UOXRAM8) tracks the Dow Jones Islamic Market Developed Markets index, the same index we used in the performance comparison above. It fully replicates the index, meaning it actually buys the underlying shares.

Historically it has performed very well, returning 14.03% per year since 2017:

Its biggest advantage for Belgians is that it is accumulating. Dividends are reinvested automatically, so you sidestep the 30% dividend tax and let compounding do its work. The trade-off is a slightly higher fee of 0.40% per year. For a long-term buy-and-hold investor, the tax saving usually outweighs the extra cost.

iShares MSCI World Islamic (IUSD)

This fund (ISIN IE00B27YCN58) tracks the MSCI World Islamic index and has been around since 2007. It holds close to 400 companies, with roughly 40% in technology and about 60% in the United States. It is the only ETF tracking this particular index.

At 0.30% it is a touch cheaper than the Invesco fund, and it is the larger of the two. The catch is that it is distributing. It pays dividends out twice a year, which are taxable in Belgium. If you would rather not deal with that, the accumulating Invesco fund is the more tax-efficient option.

Beyond these two, there are region-specific halal ETFs if you want to build your own mix, such as the iShares MSCI USA Islamic and the iShares MSCI EM Islamic for emerging markets.

How to buy a halal ETF

Halal ETFs are bought the same way as any other ETF: through a broker. You open an account, deposit money, search for the fund by its ISIN, and place an order.

Several brokers available to Belgians let you buy these funds, including DEGIRO, Bolero and MEXEM. Fees and available funds differ, so it is worth checking that your broker lists the specific halal ETF you want before you sign up.

Keep the Belgian tax rules in mind too. You will have to pay the Belgian transaction tax (TOB) when you buy or sell, and dividends from a distributing fund are taxed at 30%. You will also have to pay 10% capital gains tax when you decide to sell, if you have made a profit.

A simple way to invest, with one honest caveat

We built Curvo to take the hassle out of investing. You answer a few questions, get matched with a globally diversified portfolio of index funds, and invest automatically every month. No choosing between thousands of ETFs, no rebalancing, no tax admin.

We should be upfront, though. Curvo's portfolios are built for broad diversification and follow a sustainability screen, but they are not Sharia-compliant. If full halal compliance is a strict requirement for you, buying a dedicated halal ETF through a broker is the right route, and this article should help you do that well.

If your priority is simple, ethical, low-effort investing and strict Sharia screening is not a hard rule, Curvo may still be a good fit.

The bottom line on halal ETFs for Belgians

Investing in line with your faith no longer means settling for less. Over the past few years a global halal ETF has matched, and at times beaten, a regular world tracker. The reason is a tilt towards technology, which also means a bumpier ride in bad years.

For most Belgian investors, the accumulating Invesco Dow Jones Islamic fund (IGDA) is the most practical choice, thanks to its tax treatment. The iShares MSCI World Islamic fund (IUSD) is a solid, cheaper alternative if you do not mind receiving dividends.

Whichever you pick, the wider lesson holds. You can build long-term wealth on your own terms, and a halal ETF makes that possible without compromising on returns.