2023-03-29 06:04:34 ET
Summary
- The Ramadan effect refers to the observation that in Islamic countries stock returns during Ramadan are higher and less volatile than during the rest of the year.
- HLAL is biggest US shariah-compliant ETF.
- The portfolio has a strong Quality-bias and is overweight Technology.
- Since inception, HLAL consistently created alpha.
Last week Ramadan started. Ramadan is the ninth month of the Islamic calendar and is observed by Muslims worldwide as a month of fasting, spiritual reflection, and increased devotion to worship and charitable acts. To Muslims, Ramadan is more than fasting. During the holy month, Muslims are encouraged to do good deeds, to be kind to one another, and support each other, which results in the sense of solidarity.
The upbeat mood during Ramadan leads to positive investor sentiment and has a positive valuation effect on equity markets in Islamic countries. This Ramadan effect leads to equity returns that are higher and less volatile than during the rest of the year.
The Wahed FTSE USA Shariah ETF ( HLAL ) is biggest US shariah-compliant ETF. Its quality and technology-bias makes it a safe bet for both Muslim and non-Muslim investors that want a lower risk exposure to technology stocks.
HLAL has consistently delivered alpha since its inception in 2019.
The Ramadan effect
The 2012 research paper “Fast Profits: Investor Sentiment and Stock Returns during Ramadan” shows that Ramadan positively affects investor psychology, as it promotes feelings of solidarity and social identity among Muslims, leading to optimistic beliefs that extend to investment decisions. The researchers investigated stock returns during Ramadan for 14 predominantly Muslim countries over the years 1989-2007. The results show that stock returns during Ramadan are almost nine times higher and less volatile than during the rest of the year.
A more recent research paper by the same researchers confirmed the presence of the Ramadan effect in 11 Muslim countries for the period 2009 to 2018.
Performance
Is there also a Ramadan-effect on the US stock market? The start of Ramadan is a good opportunity to check the performance of the two biggest so-called shariah-compliant ETFs: HLAL and the S&P 500 Sharia Industry Exclusions ETF ( SPUS ).
Both ETFs are outperforming the S&P 500.
Since the start of last year, the S&P lost more than 15%. The performance of SPUS is in line with that of the S&P 500, while HLAL is outperforming.
In the period between January 2020 and February 2023, both funds are outperforming the S&P 500 and have a higher risk-adjusted return.
The max drawdown of HLAL is lower than the S&P 500, while SPUS has a higher drawdown.
Our slight preference for HLAL above SPUS is confirmed by the slightly better long term trend.
Both funds have a similar expense ratio (0.5%) and dividend yield (1%).
HLAL
The HLAL-ticker refers to “halal”. During the holy month Muslims are urged to pursue “halal” (good deed) activities by forgetting past differences, forgiving, renewing both human and spiritual relationships.
HLAL invests only in so-called Shariah-compliant stocks which have characteristics which are consistent with Islamic principles as interpreted by subject-matter experts. The benchmark is the FTSE Shariah USA Index. The Index is constructed using an objective, rules-based methodology and is comprised of those companies included in the FTSE USA Index that are determined to be Shariah-compliant companies based on their business activities and certain financial ratios.
Companies that receive income in excess of 5% of their total revenue from Shariah-prohibited activities are removed from the list of companies eligible for inclusion in the Index. Examples of such activities include:
- Conventional finance (non-Islamic banking, finance and insurance, etc.);
- Alcohol production or sale;
- Pork-related products and non-halal food production, packaging, and processing or any other activity related to pork and non-halal food;
- Casino management, gambling, or adult entertainment;
- Tobacco manufacturing or sale; and
- Weapons, arms, and other defense manufacturing.
On top of that, only those companies that pass the following financial ratios are considered Shariah-compliant:
- Debt is less than one-third of total assets;
- Cash and interest-bearing items are less than one-third of total assets;
- Accounts receivable and cash are less than 50% of total assets; and
- Total interest and non-compliant activities income should not exceed 5% of total revenue.
Given those financial ratios, it comes as no surprise that the HLAL-portfolio has a strong quality-bias.
Together with Growth, Quality has the best long term trend of all equity factors.
HLAL has not only a quality bias, it’s also quite heavily exposed to Technology (and hence Growth).
Finance stocks are not shariah-compliant and hence there’s absolutely no Finance-exposure. As a consequence, HLAL is 10% underweight Finance compared to the S&P 500. Quite handy when there’s a banking crisis. To compensate for the underweight in Finance, HLAL is more than 10% overweight Technology.
The result is an exposure of more than 40% in Technology.
Technology is performing well and is one of the equity sectors with the best long term trend.
The Shariah-compliant companies are weighted according to their market capitalization. This results in high weights for Apple ( AAPL ) and Microsoft ( MSFT ).
The quality and technology bias has resulted in a nice outperformance. The last 12 months the alpha amounted to more than 3%.
Also the past years HLAL consistently delivered alpha.
Over the past 3 years HLAL ranks in the third percentile of the (competitive) “Large Blend” Morningstar category!
We can only say: well done!
Wahed itself doesn’t offer much valuation info about HLAL.
Quality has its price of course. The valuation of HLAL is in line with those of the “Large Blend” Morningstar category.
Figure 16: Valuation Morningstar
Conclusion
The Wahed FTSE USA Shariah ETF is biggest US shariah-compliant ETF. HLAL has consistently delivered alpha since its inception in 2019.
Its Quality and Technology-bias makes it a safe bet for both Muslim and non-Muslim investors that want a lower risk exposure to quality and technology stocks.
For further details see:
HLAL: Profit From The Ramadan Effect