Last month, Canada got its first-ever listed Islamic Exchange Traded Fund, a welcome addition to the country’s emerging Shariah-compliant financial sector. While an Islamic finance provider points out that the passive equity-based halal ETF sector is starting to become crowded, the other side of the story is that they are feeding increasing demand.
Toronto-based Wealthsimple’s Shariah World Equity Index ETF joins SP Funds Dow Jones Global Sukuk ETF, SP Funds S&P 500 Sharia Industry Exclusions ETF, Wahed Invest’s FTSE Shariah ETF as well as SP Funds S&P Global REIT Shariah ETF. Additionally, depending on the broker, Canadians can also buy BlackRock's iShares suite of Islamic ETFs. Other Islamic ETFs available include Almalia Sanlam Active Shariah Global Equity UCITS ETF.
Ben Reeves, Wealthsimple chief investment officer, highlighted the competitive advantage of his company’s new Islamic product. “[It is] the only one offering a globally diversified set of stocks available to Canadians, and the only one that uses quantitative risk management techniques to address some of the issues investors run into with market cap weighted equities,” Reeves told Salaam Gateway.
The CEO of Toronto-based Manzil that offers Islamic financing and investing solutions welcomes the new ETF but said other products are needed.
“Canadian dollar-hedged ETF, active and income-focused strategies, along with sector-focused strategies is what is now required in the North American marketplace and would see very high adoption early on if they were to be introduced," Mohamad Sawwaf told Salaam Gateway.
Similarly, an investment advisor at RBC Wealth Management, the private banking arm of the Royal Bank of Canada, agrees more local currency ETFs are needed.
“Even though [Wealthsimple’s Islamic ETF] is available in Canadian dollars, one of the drawbacks of holding global equity products or a sukuk ETF (fixed income) is that these would be denominated or the underlying asset is held in a non-Canadian dollar currency and [there is ] the foreign exchange risk,” said Sameer Azam.
While more and different Islamic financial products would be welcomed by Shariah-sensitive investors in Canada to better diversify their portfolios, the introduction of the new product shows that predominantly conventional financial institutions like Wealthsimple are committed to expanding their Islamic portfolio as they see a demand for it.
“We have offered passive Shariah investing at Wealthsimple since 2017, and we noticed that the product had a great reception from the community, said Reeves. “However, as investors, we noted that our existing offering was not as diversified as we wanted it to be, so this product is an evolution of our experience in managing Shariah-compliant portfolios.”
Erik Sloane, chief revenue officer at NEO Exchange that is hosting Wealthsimple’s Islamic ETF, said the new product demonstrates the demand for this new asset class in Canada.
“It also enhances the Islamic retail asset universe which is still quite small and seen as niche,” said Sloane.
WEALTHSIMPLE’S LISTED ISLAMIC ETF
The Wealthsimple Shariah World Equity Index ETF aims to replicate the performance of the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index.
The Index consists of equity securities in developed markets which are Shariah-compliant and are characterised as having the highest combination of quality and low volatility multi-factor scores.
The fund’s management fee is 0.50% of its net asset value (annual rate). Mackenzie Investments is the fund’s trustee, manager and portfolio manager.
Reeves highlighted that many and perhaps most Shariah mandates serve institutional investors but his company wanted to reach the retail market.
“For our mission, it’s important to us that our products reach individuals who typically wouldn’t have access to this quality or type of investment product,” he explained.
RBC Wealth Management’s Azam also pointed out that the new ETF will allow investors, especially the younger demographic, to get started investing, and in a Shariah-compliant manner.
Shariah advisory firm Ratings Intelligence Partners, conducted the review and certified Wealthsimple’s ETF as halal at its launch and will conduct regular bi-annual audits.
Reeves acknowledged that the ETF infrastructure in Canada is not set up to offer Shariah-compliant products without modifications.
Dr. Mushtaq Shah, CEO of Ratings Intelligence Partners said resolving Shariah conflicts were not very difficult and with the support of Wealthsimple’s ETF management, they were reasonably assured that adequate structural and operational processes are put in place to achieve Shariah compliance.
He noted that the Shariah compliance certification issued to Wealthsimple Shariah World Equity Index ETF, is a reflection of the ETF Management's commitment to launching a Shariah-compliant product for the Canadian market.
“While resolving and putting in place all these Shariah controls, we found the ETF management to be very receptive and eager to structure a Shariah-compliant product which greatly helped us in getting the assurances we required from a Shariah perspective,” said Dr. Shah.
Wealthsimple will screen stocks on a quarterly basis, purification ratios will be calculated quarterly, and the ETF operations will be subject to a semi-annual audit.
MORE ISLAMIC PRODUCTS FOR CANADA
Although Wealthsimple has activities in overseas markets including the U.S. and the UK, Reeves said the company will focus this ETF in Canada at the moment.
“We’ll look at global expansion opportunities when the time is right, and when we can really focus on it,” he said.
Wealthsimple may expand its Islamic product offering within Canada, said Reeves.
This is a welcome signal for NEO Exchange’s Sloane, who said they are “interested in exploring more Islamic products that may be looking to raise assets from Canadians”.
One direction that RBC’s Azam would like to see Islamic financial products move toward is the intersection with the ethical space.
“A big part of realising the potential of the Islamic economy in Canada will be through education and improving financial literacy. This will be particularly important for investors especially in areas of tax, wealth management and saving.
“At the same time, the industry needs to do more to engage and raise awareness among non-Muslims who are seeking ethical alternatives. We need to show that story,” said Azam.
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