Low-Cost Brokers Compared: T212, M1 Finance, DEGIRO and others – IslamicFinanceGuru

You want to start investing. But with all the different brokerages out there, you’re confused about where to start. Well look no further, we have everything you want to know before you dive in.

(Please be aware, investment involves the risk of loss). 

In this article we’ll compare the following brokers:

• Trading 212,
• M1 Finance
• FlatexDEGIRO
• Robinhood
• Freetrade.io

We’ll look at:

1. Why they are low cost
2. Sharia compliance
3. Useability
4. Islamic funds covered

Do check our Halal Sock Investing 101 Guide first to give a good understanding of stock investing. Also check our UK Stockbroker Comparison | Sharia Analysis article, which has a detailed comparison and shares our personal experiences too.

Let’s start by looking at how they cost so little to use and the reasons why.

1. Why they are low cost

Commission-free and low-cost brokers will usually make money from fees, foreign exchange fees, spreads and other services they provide.

For example, brokers will lend the money that is in your account to make interest, making returns on there. As this activity does not directly affect your relationship with the stockbroker and you don’t know if and when it happens, this does not make all stock investing haram. Phew.

Furthermore, brokerages may also receive fees from a third party. This is the through the method known as Payment for Order Flow (PFOF), which is a key source of revenue. Smaller brokerage firms really benefit from this (however, FlatexDEGIRO do not engage in payment for order flow). 

This happens when a brokerage firm executes an order and receives a fee/commission from either the client who made the order and/or the counterparty the trade is then executed with (i.e. the market maker or wholesaler).

Through a PFOF, brokers execute an order from investors. Investors will pay the brokerage firm an ask price. They then pass them to a wholesaler. The price that the wholesaler is able to locate and execute is called the bid spread.

The wholesaler who process them shares profits by executing the purchase or sale of a stock at publicly quoted prices, in turn paying brokerage firms for directing the trade through them.

The wholesaler could buy the stock at a lower price than what the investor asked for. If so, the wholesaler could keep some of the profit for finding the lower price. It could also share the profits with the brokerage for sharing the order with them.

The brokerage can do a number of things with this payment, including keeping it all for themselves.

That is PFOF in a nutshell.

A side point – these payments have been criticised as they could create a conflict of interest between firms and clients. This is because they incentivise the firm to execute its clients’ orders with counterparties based on their willingness to pay commissions.

So yes these brokers are charging low or no fees, but they are still making significant profits.

Now you know what makes them low cost – let’s begin comparing.

2. Sharia compliance

As we mentioned, brokers will lend the money that is in your account to make interest, making returns on there. We at IFG believe this is acceptable as this is not directly related to us and unfortunately this is how brokerages operate.

However, some of the accounts offered on the brokerage platforms are halal, whilst others are haram. You may be given the option of a cash account, a margin account or an account that involves CFDs (Contract For Differences).

Margin accounts allow you to borrow money (with interest) from the broker to make trades – this is of course haram so stick to the cash account. Any account involving CFDs are also haram as they enable profiting from price movement without ever owning the underlying assets.

ISAs that are offered on brokerage platforms are acceptable. We would recommend these as brokerage accounts are subject to Capital Gains Tax (on profits over £12,300 a year) and Dividend tax (on dividend profits over £2,000 a year).

We would also recommend these if you’re thinking of investing regularly and think you’ll exceed those thresholds in terms of profits. ISA accounts offer tax-free returns – making them highly attractive.

For example, on Trading 212, the ISA account is most preferable. This is because on their invest account, they will loan out some of the shares which hold you hold your behalf, and they will earn interest on that. Share lending only happens on their invest account. They also have a CFD option which is haram.

Another example, M1 Plus, which is M1 Finance’s premium option would be inadvisable. This is because customers will earn 1% interest on their cash balances. So if you can avoid that, you should.

3. Useability

Different brokers will of course have different offerings.

Trading 212 offers over 3,000 shares and ETF’s, with companies listed in the UK, US, Netherlands, Germany, Switzerland and Spain. They also offer crypto on their CFD accounts, which are not Sharia-compliant. They do have an ISA account option which is free to use.

Freetrade on the other hand only offers shares from the UK and US. Their minimum trade value is £2. Their Plus account generates 3% interest on cash, so avoid that. However, they have a General Investment account which is interest-free and free to use. Their ISA costs £3 a month.

FlatexDEGIRO does not have an ISA account option, unfortunately. They have more of a European focus in their offerings. FlatexDEGIRO is a broker with a full banking licence.

In the Netherlands, investment firms are not allowed to hold the money of clients. So they have set up to hold it in a Money Market Fund, to realise a return that is equal to the market interest rate with as low risk as possible.

The main objective of a Money Market Fund is to minimise risk. You must ensure you purify any interest earned and make sure you don’t tick the box where they allow your shares to be loaned for short-selling.

With Entro, There are no obvious issues. However, keep away from their CFD and forex offering as that is haram. Also don’t leverage or short-sell shares as that too is typically seen as impermissible.

M1 Finance and Robinhood are more US-focused. Neither are available in the UK, and Robinhood’s global expansion looks like it’s on hold. Robinhood allows users to invest in crypto commission-free, however, this is limited to certain areas in the US.

4. Islamic Funds covered

Equity funds are a great way to invest your money and diversify in lots of stocks. They allow you to purchase a large selection of stocks within one fund, in one transaction. This can be done through a broker.

You can compare some funds on our Halal Investment Platform.

Below is a list of Sharia-Compliant Funds we’re aware of. Note these are not all available on every broker.

The full list

The following is a full list of the sharia-compliant funds that we know about:

• HSBC Islamic Global Equity Index (Mainly Developed Markets Stocks Mutual Fund)
• Schroders Islamic Global Equity Fund (Mainly Developed Markets Stocks Mutual Fund)
• ISWD ISDW (Developed Markets ETF)
• ISUS (US Markets Stocks ETF)
• ISDE (Emerging Markets Stocks ETF)
• AMAP AMAL (Mainly Developed Markets ETF)
• BNP Paribas Islamic Hilal Income (Sukuk Fixed Income)
• SGLP SGLD (Gold)
• Oasis Crescent – has a number of stocks, Sukuk fixed income and property funds.

Specifically, for US investors:

• AMAGX, AMANX (Large Cap Mutual Fund run by Amana) ADJEX (Mid Cap Mutual Fund run by Azzad)
• AMDWX (International Mutual Fund run by Amana) AMAPX (Fixed Income run by Amana)
• WISEX (Fixed Income run by Azzad)
• HLAL (NASDAQ ETF)
• SPUS (S&P ETF)
• SPSK (Sukuk Fixed Income) SPRE (Property REIT)

List by brokers

The following funds are available on Hargreaves Lansdown:

1. HSBC Islamic Global Equity Index AC
2. iShares MSCI Emerging Markets Islamic USD
3. iShares MSCI USA Islamic
4. iShares MSCI World Islamic

AJ Bell offers:

• iShares MSCI World Islamic ETF USD – LSE:ISDW
• iShares MSCI World Islamic ETF USD Dist GBP – LSE:ISWD
• iShares MSCI USA Islamic ETF USD Dist GBP – LSE:ISUS
• iShares MSCI USA Islamic ETF USD Dist LSE:ISDU
• iShares MSCI EM Islamic ETF USD Dist – LSE:ISDE

Following are also available, but may have minimum investment amount and/or one-off entry charge:

• Aberdeen Standard Islamic Glbl Eq A GBP – FUND:B1CHMW1
• BNP Paribas Islamic Hilal Income P – FUND:BYTBKW3
• HSBC Islamic Global Equity Index BD GBP – FUND:BJLVT96

Trading 212 has the following:

• ISDE – iShares MSCI EM Islamic UCITS ETF USD (Dist)
• ISUS – iShares MSCI USA Islamic UCITS ETF USD (Dist)
• ISDU – iShares MSCI USA Islamic UCITS ETF USD (Dist)
• ISWD – iShares MSCI World Islamic UCITS ETF GBX (Dist)

Freetrade currently has:

• iShares MSCI World Islamic ETF
• iShares MSCI USA Islamic ETF

FlatexDEGIRO has:

• Dow Jones Islamic Market Index

(Please be aware, investment involves the risk of loss).

If you can’t see an ETF on a platform you use, some brokers have systems in place for users to request their availability. Also, let us know if we’ve missed any that you know of and we’ll add them on.

Conclusion

Choosing an online stock broker can be a headache but is essential to your investing journey. Consider a roboadvisor like Wahed Invest if you want complete ease and a hands-off approach.

Whatever way you choose, it’s crucial that you sharia screen any stock you invest in. See our Apple screening as an example.

Don’t forget to read our Halal Sock Investing 101 Guide. Also check our UK Stockbroker Comparison | Sharia Analysis article, which has a detailed comparison and sharing our personal experiences too.

let us know if we’ve missed any funds that you know of and we’ll add them to the article.

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