What is an ETF?
An ETF, or exchange-traded fund, holds a basket of investments and trades on an exchange. One ETF can hold many underlying investments, making it a convenient way to gain exposure to a market, index or investment strategy. Some ETFs apply Shariah screening; many do not.
A fund that trades on an exchange
An ETF, or Exchange-Traded Fund, pools investors' money and holds a portfolio of underlying assets.
Shares in the ETF are then bought and sold on a stock exchange, which is why it is described as 'exchange-traded'.
What can an ETF hold?
Depending on its objective, an ETF might hold:
company shares
sukuk or other eligible fixed-income instruments
commodities or commodity-linked assets
a mixture of investments
Many ETFs are designed to track an index, although ETFs can also follow other strategies.
Why investors use ETFs
An ETF can provide exposure to many securities through one holding. This can make diversification simpler than buying every underlying security separately.
ETFs also publish fees and investment objectives, and their market price changes throughout the trading day.
An ETF is not automatically Shariah-compliant
'ETF' describes the vehicle, not its Shariah status.
A Shariah-compliant equity ETF needs an underlying portfolio and methodology that meet the relevant Islamic investment rules. Two ETFs covering a similar geographic market can therefore have very different holdings.
Investors should understand what the ETF owns, which index or methodology it follows, its costs and the risks involved.
This guide is general education, not personal financial advice.
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