At IslamicFinanceGuru about a quarter of our audience is from the USA and Canada. And many of our American and Canadian audience have been asking us to properly cover the USA & Canada halal investment options available to them.
This an article for you guys. We have picked through the investment options, the tax issues, the alphabet soup of pension vehicles, and considered the Islamic aspects.
What is Halal Investing?
Halal Investing, or sharia-compliant investing is something all Muslims must adhere to when investing their money.
Really simply, there are a few things to avoid:
- Interest (riba), high levels of uncertainty (gharar), or gambling (maysir)
- Obviously problematic industries (e.g. pork product manufacturers, alcohol companies, and casinos)
- High levels of debt on a company’s balance sheet (above 33% debt to total assets is not allowed)
What this means is that most sharia-compliant companies, funds or products will involve a sharia scholar to review and sign off that everything is in fact sharia-compliant. This is particularly the case for funds that invest in public equities.
If you decide to invest in stocks and shares directly yourself, you will also need to adhere to sharia-screening requirements. We have created a course on this here which helps you conduct these screens for yourself.
You can also use free apps like Islamicly and Zoya. In our experience of these apps, the best way to use them is as an initial check – they are great for that. Once you’re ready for a deep-dive into a company, then we would always conduct a manual screen as there are almost always nuances that only a human can pick up. But inshAllah we hope one day these apps become so good that you can definitively rely on them.
Remember, mainstream investments can also be perfectly sharia-compliant – and of course they don’t necessarily have a sharia-certified label attached to them. For example, a property investment that doesn’t use any bank debt will be permissible but might not be labelled as such.
If you have any specific questions on what is halal investing, feel free to ask our resident Islamic finance muftis on our Fatwa Forum.
What Investment options are halal and which ones are haram
Here’s a table summarising what asset classes are haram or halal
|Product||Halal or Haram||Notes|
|Stocks and Shares||Halal||But only those that meet sharia-screening requirements|
|Funds & Mutual funds||Halal||But only those that meet sharia-screening requirements|
|Sukuk (Islamic bonds)||Halal|
|Islamic Savings Accounts||Halal||Usually only offered by Islamic banks/home purchase providers|
|Forex||Haram||See the detailed fatwa here|
|Property||Halal||But not when you use haram loans to fund it|
|Crowdfunding||Halal||It does depend on the product being crowdfunded but in principle the method of crowdfunding is perfectly fine|
|Exchange Traded Funds (ETFs)||Halal||But only those that actually hold underlying stock – not those that synthetically create the same effect using derivative instruments.|
|Gold||Halal||But only where you will either end up holding the gold directly or where you invest through a company that holds that gold for you.|
|Forwards & futures||Haram||According to the majority anyway. However, some scholars view futures as permissible.|
|Options||Haram||But there can be sharia-compliant alternatives (but not really in the USA)|
|Startup Investing (venture capital investing)||Halal||But obviously not startups that are engaged in haram sectors|
What are your stocks and shares options?
Stocks and shares form the basis of most portfolios. The reason is because stocks and shares allow you to invest across a diverse range of an economy. From healthcare, to tech, to logistics. Stocks, therefore, unlike other assets, are very different to each other in terms of their risk profile.
There are two main ways in which you can invest in stocks:
- DIY investing
- Get someone to do it for you
Within option (2) there are two routes as well. You can get a cheap roboadvisor solution that gives you prepackaged portfolios or you can go for a more expensive individualised advice solution and get your own bespoke portfolio created suited to your wealth, needs, and risk appetite.
There has been a massive price war in the USA which has mean that trade fees are now $0 for a whole range of stockbrokers. In the UK we are still paying up to £10 per stock trade so this makes me cry a little bit inside. Take advantage of this guys!
Large brokerage houses include Charles Schwab, TD Ameritrade and Fidelity. Then you have a whole bunch of newcomers too, including Robinhood, M1 Finance* and others. The advantage of the newcomers is they typically have more user-friendly and slicker interfaces so you can buy and sell quickly and easily.
The Canadian stockmarket looks like its facing some disruption but there isn’t as many players and they charge a bit more than the US (which is not hard – given they charge nothing!). Big players include Questrade, Qtrade Investor, Interactive Brokers, CIBC and TD Direct Investing. This is a great comparison of your options.
So you have a nice shiny broker account set up. Now what?
Now, you do the following:
- Work out your investment strategy. This means lots of reading around and researching online. You should of course subscribe to our mailing list. Here are two articles we’ve written to get you started:
- Make sure you understand how to screen for halal stocks. Check out our course here.
- Do some practice trading using your broker’s practice account
- Start doing actual trades with your money but in small amounts to get the hang out
- Develop your own investment strategy and style and get into it!
USA Advised Investing Options
DIY Investing is right for some people, but many people just want to give their money to someone who is an expert in this area and let them manage it for them. For Muslims there are two main routes to go down in the USA:
- Investment managers/Funds
WahedInvest is the big sharia-compliant roboadvisor globally. It originated in the USA and its offering there is its cheapest and most mature offering. We have done detailed review of their offering here.
In short they are a great option if you really don’t want the hassle of doing any research into stocks and shares and investing (and even reading this far into an article like this one has broken you out into a sweat).
They will charge you between 0.49% and 0.79% depending on how much you invest with them for this.
They also have a FTSE USA Sharia ETF which is one of the only halal index ETF currently available in the USA. You can buy this via your online broker (you don’t have to go via Wahed). What this means is that if you buy this “fund” you are essentially invested a little bit across the entire range of the US market (but only the halal stocks).
Index funds are great because they’re super diversified and basically just track the market. Over time they tend to perform as well as (if not better than) managed funds.
Having said all that, the Wahed Index ETF is really only relevant for you if you are going down the DIY route – as you won’t want to put all your wealth into this ETF. You want exposure to other asset classes (such a sukuk, property, global equities) which this ETF won’t give you.
ShariaPortfolio is also another option. They offer a roboadvisory solution starting at a minimum investment of $1000. Their website says that they offer a flat management fee “which ranges between 0.40 percent to 1.50 percent per year, depending on the amount of assets being managed and the type of service provided.”
They don’t charge on a per-trade basis.
They also offer the standard range of various tax-wrappers on their website:
I would definitely explore this option more carefully, but I suspect, for most people, the Wahed experience is smoother and cheaper as roboadvisory isn’t a focus for ShariaPortfolio like it is for Wahed. More on ShariaPortfolio below.
However do note that Sharia Portfolio also offer their own 2 sharia-compliant ETFs: The SP Funds S&P 500 Sharia Industry Exclusions ETF and the SP Funds Dow Jones Global Sukuk ETF. This is a great addition to the halal ETF market.
A new ETF that has also joined the mix is Falah Russell-IdealRatings U.S. Large Cap ETF (FIA). This is the Islamic version of the Russell 1000 index. It is another US-stock-focused ETF.
Finally, there is Wealthsimple, which is a Canadian roboadvisor that has recently entered the fray. They offer a sharia-compliant equity-only portfolio as part of their platform. They charge the same fees for this portfolio as for their standard portfolios: 0.5% up to $100,000, and 0.4% over $100,000.
Wealthsimple doesn’t actually offer an ETF or buy in underlying funds. Rather, they directly buy 50 US stocks designed to give you a general exposure to the US market.
You can compare between all these ETFs and products on our investment comparison engine here.
Then you have the advised or managed funds. The difference between these guys and the index/tracker ETFs we were just discussing, is that these guys actually actively manage their funds and pick stocks that they think will do well rather than just passively track the stock market.
Amana Funds is the most well-known and established Islamic fund range available in the USA today. It offers four main funds which you can choose between depending on your risk appetite, aims and time horizons. You can buy these funds via your stockbroker. You don’t need to go through Amana for this. You can buy these funds through M1 Finance* and other large brokers.
They charge fees of between 0.88%-1.31% annually.
Azzad Funds is similar to Amana. They have 2 mutual funds which you can invest in via a stockbroker. They also offer 9 separately managed accounts that you can invest into via their “wrap program” which has a minimum investment of $500,000. The Azzad products are mainstream fund strategies run by mainstream fund managers, but with Azzad’s sharia screen tool reducing down the mainstream fund’s choices and getting rid of the impermissible stocks.
Iman Funds is similar to Amana and Azzad in that it too offers a mutual fund product that is purchasable through your stockbroker.
ShariaPortfolio does a few things. First, they offer their own ETFs and roboadvisory option as discussed above. Second, they offer bespoke portfolio management advice (which they get paid for through charging an advice fee rather than commission on any sale), and third they have some B2B type products for employers and financial advisors too.
For someone looking for bespoke financial advice, these guys look like the best option available in the USA right now. But if you’re happy to crack on without the advice, you can choose from any or all of the funds listed above.
You can compare between all these funds, their returns and fees on our investment comparison engine here.
Wealthsimple* is the native Canadian roboadvisor. They offer a sharia-compliant equity-only portfolio as part of their platform. They charge the same fees for this portfolio as for their standard portfolios: 0.5% up to $100,000, and 0.4% over $100,000.
Wealthsimple doesn’t actually offer an ETF or buy in underlying funds. Rather, they directly buy 50 US stocks designed to give you a general exposure to the US market.
Shariaportfolio have also launched a Canadian offering. You can get started with $1000 and the costs are 0.5% per annum. This is in line with what people like Wealthsimple are charging and a little cheaper than what Wahed charge.
The Global Iman Fund is the most-established Islamic mutual fund in Canada. Over the last 3 years it has made a return of 11.56% – which makes sense as it tracks a hundred of the larger US companies so essentially just mirrors the overall US economy.
You can buy this fund through a large range of providers provided in the link above.
You can also purchase shares in Ansar Financial and Development Corporation (AFD:CN), which is a sharia-compliant property company that does commercial developments as well as home finance (and, I understand, car finance – though I can’t see any direct website on this).
Ansar sound like a pretty successful company, have issued 3% dividends recently, but I have to say, their websites leave a lot to be desired. Not easy to navigate and of a quality that doesn’t inspire much confidence.
Finally, you have Manzil, a new entrant the market. They offer home financing too, but they also have an investment product (which funds their home financing). You can get started with a few dollars if you like, and annual account fees can be as low as 0.38%. Their website is well-designed and easy -to-navigate.
What are your property investing options?
From an initial look into this space, it appears that halal property investment opportunities are not that well-developed in the USA.
Bena Capital seems like a very interesting company – though it appears to be targeted at the more affluent end of the investor spectrum. It has previously raised multimillion dollar funds but is not currently taking on further capital.
Another option is to go for Real Estate Investment trusts. These are publicly traded companies that invest in property and pass dividends back to their investors. Typically though, many REITs will use haram debt to finance their portfolio. But there are a few ways you can get into REITS:
- Azzad Fund offer a REIT portfolio – but minimum investment is $500k
- You can search for zero-leverage REITs. This website screen allows you to list all of these in one place. If you add in that you want a REIT that has grown by 5% or more in the last year you get some great REITs to pick through. Azzad Fund have invested in a few of these as part of their portfolio.
The other option to get into property investing is to DIY it. You can buy your own property, either in cash or by using a halal financing option (here is one I found from an initial search) and then rent it out, or fix it up and sell it on. Do subscribe to our website as we will be doing a lot more coverage of this investment area in coming months inshAllah.
What other investment opportunities are out there?
On our halal investment comparison engine we have a bunch of investment options that are available to a global audience.
There are some that are specific to certain countries, e.g. Sarwa is specific to the UAE, however most of the companies listed on there accept overseas (including USA and Canada) investors. Here are some of the options available that definitely cater for US and Canadian investors (and we have heard good feedback from our US/Canadian investors on people who have used them):
Can you invest abroad as an American or Canadian?
You can invest abroad as an American or Canadian and many people successfully do so. A few things to note though:
- Any foreign income typically needs to be declared in your annual tax return (though, where there is a tax treaty with the country you have invested in, you might be able to avoid double taxation to the extent that is a relevant consideration)
- Don’t invest in mutual funds and/or publicly traded companies via an overseas broker as an American. Just stick to US brokers (like the many we have mentioned above) as it’ll avoid any taxation issues later.
- Where you are investing in a company where you control it (i.e. you have more than just a small stake in it) then you need to be particularly careful and research the particular tax position there.
USA: What is a IRA, 401(k), Roth IRA and what to go for
There is an absolute myriad of investment acronyms that are thrown around in the USA. Here is a quick hit list to demystify the main ones for you.
IRA, 401k and Roth IRA
An individual retirement account (IRA) is a tax-beneficial investment pot designed to save for retirement. Your money avoids tax on the way in, but it is taxed on the way out.
There’s a few different types of IRAs you can choose from.
The traditional IRA is the most commonly-used retirement account used today in the USA. Some of the key features include:
- $6000 can be contributed tax-free, and an extra $1000 if you are 50 or over.
- The contributions are usually taken off from your gross income, meaning that you reduce your taxable income (and pay less income tax).
- Investment earnings are not taxed while they remain in the IRA.
- When you retire and withdraw your investments, your will be taxed at the time on the relevant tax rate applicable. So if you pay a high rate of tax now, the IRA is a good option to save up money tax-free, and then withdraw it carefully during retirement (when you’ll be on a lower tax band).
The Roth IRA is different to the traditional IRA in that any money you put into the Roth IRA is not tax-deductible – so you don’t get a tax break on your annual tax return initially.
However, any withdrawals in retirement are tax free. So if you are currently on a low tax band but expect you will save up a lot and have a high income tax band at retirement, then this option is a clever one to go for.
Here are a few key features:
- You can contribute up to $6000 (or $7000 if aged 50 or over).
- If you earn over a $206k as a couple or over $139k as an individual, then you will need to use a backdoor Roth IRA to get access to this. Basically you need to open a normal IRA then convert to a Roth IRA and do some fancy tax administration and paperwork and you’re all set. This is all legal too.
- You can take contributions out of your Roth IRA at any time. But you can’t take out earnings on those contributions without taxes and penalties kicking in.
This is a Simplified Employee Pension IRA. As the name suggests, an employer will be running this IRA (and they benefit from a tax perspective for running this for their employees). From an employee’s tax perspective, earnings are not taxed and can grow, but distributions at retirement are taxed.
Key features include:
- You can contribute up to the lesser of 25% of the your salary, or $57,000.
- The employer has to contribute to your SEP IRA too.
- Contributions can vary depending on the business cashflow though
- An employee needs to have worked for the employer at least 3 of the last 5 years and have earned $600 in compensation during that year to be part of the SEP IRA.
- Sole proprietors can also open an SEP IRA for themselves (which is quite a good tax haven oftentimes).
The Savings Incentive Match plan for Employees, or Simple IRA, is most relevant for small companies and self-employed individuals and allows salary deferral as a way to contribute (unlike the SEP IRA). It is very similar from a practical perspective to an employer-sponsored 401(k), and from a tax perspective very similar to a traditional IRA.
Key features include:
- You can contribute up to $13,500.
- Employers typically are required to contribute 3% matching contribution or a fixed contribution of 2% based on the employee’s contribution.
- To qualify you need to have earned at least $5000 in any two previous years and expect to earn that in that year.
- For 50 and overs, you can save an extra $3000.
- You can roll our money from the SIMPLE IRA into a traditional IRA after 2 years of being on the SIMPLE IRA plan.
Self-directed IRAs can come in a traditional IRA or Roth IRA format. But the key difference here is, with a self-directed IRA you can hold a much wider range of investments in this wrapper. For example, you can hold real estate, startups, privately-held companies, gold etc.
Key points to note include:
- You can’t hold life insurance in it or certain other assets – make sure you check the latest eligible asset list.
- You will need a trustee or custodian to deal with this type of IRA.
- If you hold property in such an IRA, then you need to be super careful in keeping a distance to that property from an economic perspective (e.g. mowing a lawn of a property could constitute “self-dealing” and attract tax penalties.
A 401(k) is a very well-known retirement account. There are two main types of 401(k): traditional and Roth.
With a traditional 401(k), you get a tax-break on the way in but when you take the money out you get taxed on the tax rate you are on then.
With a Roth version, you don’t get tax breaks on the way in, but you get tax-free withdrawals on the other end.
Key features include:
- You can contribute up to $19,500, or $26,0000 if you are 50 or over.
- You can contribute to both a 401(k) and an IRA in the same year if you like.
- A 401(k) is not like a self-directed investment and is heavily managed – so you will be limited in your investment options to the provider of the scheme. And there are fees too.
- You can transfer your 401(k) into an IRA if you leave your job.
401(k) vs IRA
So what’s the big difference between a 401(k) and an IRA?
Well an IRA is a privately offered account most of the time, so you have to go to a broker or bank or specialist provider to set one up – and you typically have access to a wider range of investments.
With a 401(k) you will be able to contribute a lot more into it tax-free (which is good) but your investment choices will be restricted.
So what do you do?
Well, if your employer offer a 401(k) where they will match your contribution you’d be silly not to take that free money on offer. Take that money. Then you should use the IRA limits to your advantage (with a lot more scope on where you invest your money). Then, if you still want to invest, you should typically invest via your 401(k) again to benefit from the pre-tax benefits.
If your employer doesn’t offer a matched 401(k), then avoid the fees and restrictions of a 401(k) and open an IRA and max that out. Only then should you contribute to your 401(k) to benefit from the pre-tax benefits.
Canada: What is a RRSP, TFSA, RESP, LIRA, RRIF
The Registered Retirement Savings Plan (RRSP) is a savings wrapper for employees and self-employed people. You put money in before it is taxed from your salary (so no tax to pay on the way in) and then you get taxed on it as you withdraw in retirement at the relevant tax band you are on at that point.
You can put up to $27,320 or 18% of your salary (whichever is less) into the RRSP.
The TFSA doesn’t give you the tax deduction aspect of the RRSP, but it does give you the same ability to grow your investments tax-free. People will typically use a TFSA to save up for shorter term goals (i.e. they won’t use it for retirement saving typically).
From a tax perspective, you’ll broadly end up at the same position but the key factor when comparing with a RRSP is the flexibility you get in being able to withdraw whenever for whatever, while for the RRSP you can only really withdraw for your first home, retirement, or something calling the lifelong learning plan.
The Registered Education Savings Plan is an investment wrapper designed to save for your children’s education. Any money that sits in this wrapper grows tax free.
Crucially, the government also tops up your investments with up to $7,200 over the lifetime of the plan. That is free money you should definitely get hold of if you can.
The locked-in retirement account (LIRA) or locked-in retirement savings plan (LRSP) are two investment wrappers designed to hold pensions for people who were previously registered pension plan members, their former spouses, or surviving spouses.
These funds are typically locked up and can only become available to the holder on retirement or conversion to another pension instrument (e.g. an annuity).
The Registered Retirement Income Fund (RRIF) is a government-run program that gives you a stable retirement income. Essentially it functions as an annuity where you take your RRSP money (that you saved up) and buy yourself a steady income by putting your money into the RRIF.
So there you have it guys – a whistle-stop tour of halal investing opportunities in the USA and Canada. I hope it has been of benefit.
If you think I have missed some great options that you have come across, then please do comment below or drop me a line via our contact us page.
We are extremely supportive of our American and Canadian Muslim communities getting access to great halal investment opportunities so keen to support any upcoming businesses who start providing such services.