Is Your ETF Actually Halal?

Imagine investing in dozens of companies with just one purchase. That’s what an Exchange-Traded Fund (ETF) allows you to do.

But what if some of those companies earn money from interest, gambling or other activities prohibited in Islam?

Not every ETF is Halal, even if most of its holdings are.

In this lesson, you’ll discover how ETFs work, what makes them Shariah-compliant and how to identify a Halal ETF before investing.

What is an ETF?

An ETF is an investment fund that holds a collection of assets, such as stocks, commodities or Sukuk, and trades on a stock exchange.

Instead of buying shares in several companies individually, you can purchase shares in one ETF that gives you exposure to multiple investments.

For example, imagine an ETF holding shares in 50 different companies. By buying shares in that ETF, you gain exposure to all 50 companies without purchasing each stock separately.

Why do investors choose ETFs?

Diversification

Spread your investment across multiple companies or assets instead of relying on a single stock.

Lower costs

Many ETFs have lower management fees than actively managed investment funds.

Easy trading

ETFs can generally be bought and sold on stock exchanges during market hours, just like individual stocks.

However, diversification and low fees don’t automatically make an ETF Halal.

What makes an ETF Halal?

A Halal ETF must meet two important requirements: its underlying investments must be Shariah-compliant, and the fund itself must operate according to Islamic principles.

1. Shariah-compliant investments

The companies held by the ETF must pass business and financial screening. This means avoiding prohibited industries and meeting the applicable financial ratios.

2. A Shariah-compliant structure

The ETF’s operations must also comply with Islamic principles, including how it manages cash, uses financial instruments and handles non-permissible income.

A fund holding permissible stocks can still have compliance issues if its structure involves prohibited financial practices.

How are Halal ETFs screened?

Halal ETFs typically use Shariah screening standards to select their investments.

For example, under the AAOIFI criteria described in Tabadulat’s guide, companies are assessed against the following financial limits.

Interest-bearing debt

30%

Interest-bearing debt must remain within the applicable 30% limit relative to market capitalization.

Interest-earning deposits

30%

Interest-earning deposits must remain within the applicable 30% limit relative to market capitalization.

Non-permissible income

5%

Income from prohibited activities must remain within the applicable 5% threshold of total revenue.

These figures describe the AAOIFI screening criteria covered in Tabadulat’s guide. Other Shariah methodologies may apply different requirements.

ETFs also need to consider their use of derivatives, leverage and interest-bearing accounts. A Shariah-compliant fund should have an appropriate process for purifying any non-permissible income.

Example: Is an S&P 500 ETF Halal?

Imagine you want to invest in an ETF tracking the S&P 500, which provides exposure to hundreds of major US companies.

A conventional S&P 500 ETF can include conventional banks, alcohol producers and other businesses that don’t meet Shariah requirements.

A Shariah-compliant alternative screens companies before including them in its portfolio.

Conventional ETF

Standard S&P 500 ETF

Tracks a broad index that includes companies regardless of their Shariah compliance.

Shariah-compliant ETF

SPUS

Tracks a Shariah-screened selection of S&P 500 companies, excluding businesses that fail its criteria.

Other examples of ETFs designed for Shariah-compliant investing include Wahed FTSE USA Shariah ETF (HLAL) and iShares MSCI World Islamic UCITS ETF.

What should you check before buying a Halal ETF?

Before investing, look beyond the ETF’s name and check the following:

• Underlying holdings: Are the companies and assets Shariah-compliant?
• Screening standards: Does the fund follow a recognized methodology, such as AAOIFI?
• Fund structure: Does it avoid prohibited financial practices and provide a clear purification process?
• Costs and risks: What is its expense ratio, and how diversified is its portfolio?

Remember that ETF holdings and company financial ratios can change. A fund’s compliance therefore requires ongoing monitoring.

Test your knowledge

Choose the correct answer to each question.

Question 1 of 3

What is an ETF?

• A single company’s stock.
• A fund that holds a collection of assets and trades on an exchange.
• A savings account that guarantees a fixed return.

Question 2 of 3

What makes an ETF Halal?

• It invests in at least 50 companies.
• Its holdings and operational structure both meet Shariah requirements.
• It tracks a major stock market index.

Question 3 of 3

Is every ETF tracking the S&P 500 automatically Halal?

• Yes, because it invests in large US companies.
• Yes, because ETFs are diversified.
• No, conventional ETFs can include companies that fail Shariah screening.

Check answers

Sources

Tabadulat | Blog | Are ETFs Halal? Halal Investing in 2025 — Main content reference covering ETFs, Shariah screening, fund structures and examples.

Frequently asked questions

What is an ETF?

An ETF is an investment fund that holds a collection of assets, such as stocks, commodities or Sukuk, and trades on a stock exchange. Buying shares in one ETF gives you exposure to multiple investments.

What makes an ETF Halal?

Both its underlying investments and its operational structure must be Shariah-compliant. Its companies must pass business and financial screening, and its operations must comply with Islamic principles, including cash management, financial instruments and handling non-permissible income.

Is every ETF tracking the S&P 500 Halal?

No. A conventional S&P 500 ETF can include conventional banks, alcohol producers and other businesses that don’t meet Shariah requirements. A Shariah-compliant alternative screens companies before including them in its portfolio.

What financial limits are described in Tabadulat’s AAOIFI screening guide?

Interest-bearing debt and interest-earning deposits must each remain within the applicable 30% limit relative to market capitalization. Income from prohibited activities must remain within the applicable 5% threshold of total revenue. Other Shariah methodologies may apply different requirements.

What should you check before buying a Halal ETF?

Check its underlying holdings, screening standards, fund structure, purification process, expense ratio and portfolio diversification. ETF holdings and company financial ratios can change, so compliance requires ongoing monitoring.

Related terms

• ETFs
• Shariah Compliance