ETFs, explained: what they are, what makes one Shariah, and the tech underneath

October 7, 2026 · by Iftikar

It started in 2007

In 2007, BNP Paribas launched the world's first Islamic ETF. That same year, iShares followed with three of its own: Islamic ETFs tracking world, US, and emerging-market stocks. They were tiny at the time. The idea stuck, and the mechanics are worth understanding.

What is an ETF

An ETF (exchange-traded fund) is a basket of investments you buy in a single trade. Instead of buying 200 stocks one by one, you buy one share of a fund that holds all 200. The fund's price moves with the combined value of everything inside it. You can buy and sell it on a stock exchange during market hours, just like a stock.

How it differs from buying stocks

When you buy a stock, you own one company. When you buy an ETF share, you own a slice of everything the fund holds. Three practical differences:

Diversification: one purchase spreads your money across many companies instead of one.
Cost: most ETFs are passive. They follow an index instead of paying a manager to pick stocks, so annual fees are usually a fraction of a percent.
Effort: you don't research 200 companies. You research one fund: what index it follows, what it holds, what it costs.

The tradeoff: you give up control. You can't remove one company you dislike. You get the whole basket.

The risks

Market risk: if the stocks inside fall, your ETF falls. Diversification softens single-company blows, not market-wide ones.
Tracking error: the fund can drift from the index it follows, so your return may not match the index exactly.
Sector bias: Shariah screens exclude banks and highly leveraged companies, so Islamic ETFs lean toward technology and energy. That tilt helps some years and hurts in others.
Liquidity: smaller ETFs trade less. Wide gaps between buy and sell prices cost you money.
Compliance drift: a company can become non-compliant after you buy the fund. The index drops it at the next review, but there is a lag.

What makes an ETF Shariah

A Shariah ETF is a normal ETF with one extra layer: everything inside must pass Islamic screens. Two screens run on every company:

Business screen: the company's main business can't be alcohol, gambling, weapons, pork, tobacco, adult entertainment, or interest-based finance.
Financial screen: even a halal business can fail on its numbers. Typical limits: debt under 33% of total assets, and income from interest or other non-compliant sources under 5% of total revenue.

The ETF itself just tracks an index built from companies that pass both screens. The Shariah work happens at the index level, not in the fund.

Who says it's Shariah

Nobody's word is taken on trust. Each index has named scholars or firms behind it:

MSCI Islamic indices (behind the iShares Islamic ETFs): methodology approved by MSCI's committee of Shariah scholars. An independent Shariah board issued a fatwa on the methodology in March 2007.
FTSE Shariah USA Index (behind HLAL): screened by Yasaar, a Shariah consultancy, which issued a fatwa certifying the index.
Dow Jones Islamic Market Index: overseen by its own Shariah Supervisory Board.
FTSE IdealRatings Islamic indices: screened by IdealRatings, fatwa certified.

A fatwa is a formal legal opinion. It certifies the screening method, and the scholars review compliance on an ongoing basis.

The technology behind it

Three things make a Shariah ETF work, and all three are technology.

First, the screening. A company called IdealRatings builds software that reads the financial reports and news of over 40,000 public companies and checks each one against Shariah rules. Companies that pass go on a clean list. This runs automatically, every quarter.

Second, the list becomes an index. Companies like MSCI and FTSE turn that clean list into an official basket: which stocks, and how much of each.

Third, the ETF copies the basket. The fund buys the stocks in it. Then large trading firms trade ETF shares for those same stocks all day, in blocks of tens of thousands of shares. That constant trading keeps the ETF's price pinned to what the stocks are actually worth. Only big firms can do this part, because it takes huge capital. Everyday investors benefit anyway: the price on the exchange stays fair.

The biggest ETF maker in the world is BlackRock, whose ETF brand is iShares. BlackRock runs its funds on a giant investment computer system called Aladdin. It tracks what each fund holds, measures the risk, and handles the daily work of trading and settling. About $4 trillion of BlackRock's US ETFs run on it.

Notable Shariah ETFs

US:

SPUS — SP Funds S&P 500 Sharia Industry Exclusions ETF (NYSE Arca, 2019). Tracks Shariah-screened S&P 500 stocks. 0.45% annual fee, around $3.3 billion in assets. The largest US-listed Islamic ETF.
HLAL — Wahed FTSE USA Shariah ETF (Nasdaq, 2019). Tracks the FTSE Shariah USA Index, about 200 US companies. 0.50% annual fee, around $1 billion in assets.

UK / EU:

ISWD — iShares MSCI World Islamic UCITS ETF (London, 2007). The one from the 2007 story. Tracks the MSCI World Islamic Index. 0.30% annual fee, physical replication.
ISUS — iShares MSCI USA Islamic UCITS ETF and ISDE — iShares MSCI Emerging Markets Islamic UCITS ETF (London, 2007). The other two from that same launch.

Every one of them works the same way: a screening engine builds the index, scholars certify the method, the ETF copies the index.