Publisher: FA Financial Advisor

A pair of index-tracking exchange-traded funds based on Islamic principles debuted in the latter part of this month, adding to the small but growing roster of faith-based funds.

The products are sponsored by SP Funds, an asset management firm in Bellevue, Wash., that adheres to guidelines set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based nonprofit entity that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions.

Sharia is the body of Islamic law governing religious rituals and daily life based on the Quran and the teachings of Muhammad. It has certain restrictions regarding finance and commercial activities. 

The SP Funds Dow Jones Global Sukuk ETF (SPSK) that launched on Monday provides targeted exposure to sukuks, which are bond-like products structured to avoid the Islamic prohibition on interest.

That follows the December 18 debut of the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS) that invests in S&P 500 companies that meet AAOIFI guidelines. 

The SPSK product holds 85 U.S. dollar-denominated investment-grade sukuks that have an outstanding issue size of at least $200 million and a minimum one year to maturity. These sukuks represent investments in seven foreign countries, and have an average weighted maturity of 5.92 years.

As per fund literature, sukuks are unlike conventional bonds in that they’re based on various contracts to create financial obligations and the returns to investors are considered to be profit sharing, not interest. Issuers of sukuks may include international financial institutions, foreign governments and foreign government agencies.

The fund’s expense ratio is 0.65%.

Meanwhile, the SPUS equity fund excludes companies engaged in the following activities: alcohol; gambling; defense/weapons; tobacco; adult entertainment; pork products; credit cards; music, cinema and broadcasting; interest-based businesses; and highly leveraged businesses.

The underlying S&P 500 Shariah Index had 248 constituents when the fund launched. According to the prospectus, the fund is deemed to be non-diversified because “it may invest a greater percentage of its assets in the securities of a single issuer or a small number of issuers than if it was a diversified fund.”