HLAL Vs. VOO: Another Shariah ETF Beating An Unrestricted Large-Cap ETF

(This article was co-produced with Hoya Capital Real Estate)

Introduction

While there are investors who want at least some of their portfolio reflecting their values, such as ESG funds, ideally such alternatives can be done without loss of the return as compared to those achieved by non-restricted funds. For the followers of Islam, funds that screen based on Shariah law were developed and there is a growing list to consider. Here, I examine how the Wahed FTSE USA Shariah ETF (NASDAQ:HLAL) has done against the Vanguard S&P 500 ETF (NYSEARCA:VOO). Over its almost four years of history, HLAL has provided a higher return, accompanied by a higher Beta but less income for investors.

Vanguard S&P 500 ETF review

Seeking Alpha describes this ETF as:

The investment seeks to track the performance of the Standard & Poor's 500 Index that measures the investment return of large-capitalization stocks. VOO started in 2010.

Source: seekingalpha.com VOO

VOO has $315b in AUM and has only 3bps in fees, 6bps less than its leading competitor. The TTM Yield is 1.5%.

Index review

S&P describes their index as:

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. According to our Annual Survey of Assets, an estimated USD 15.6 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 7.1 trillion of this total (as of Dec. 31, 2021). The index includes 500 leading companies and covers approximately 80% of available market capitalization.

Source: spglobal.com S&P 500 Index

Important characteristics of the current index include the following:

S&P provided the next chart that shows the importance of the stocks included in the index.

VOO holdings review

The ETF, as expected, holds mostly Large-Cap stocks, with almost no exposure to stocks below Medium in size.

Being S&P 500 based, VOO's top sector is Technology stocks.

About 64% of the allocation is in the Top 4 sectors. The Top 20 stocks account for 40% of the portfolio, the last 250 only 11% of the weight.

VOO distributions review

Over the past decade, dividends are grown at a 7.52% rate, helping VOO earn a "B" grade from Seeking Alpha for this factor.

Wahed FTSE USA Shariah ETF review

Seeking Alpha describes this ET as:

The investment seeks to track the total return performance, before fees and expenses, of the FTSE Shariah USA Index. The index is composed of common stocks of large- and mid-capitalization U.S. companies the characteristics of which meet the requirements of Shariah and are consistent with Islamic principles as interpreted by subject-matter experts. HLAL started in 2019.

Source: seekingalpha.com HLAL

HLAL has $260m in AUM and starts off with a big fee disadvantage to VOO: 50bps. The TTM Yield is .95%.

Index review

FTSE describes how their various Shariah indices are developed:

The FTSE Global Equity Shariah Index Series is based on the FTSE Global Equity Index Series universe. Screening is undertaken by Shariah consultants, Yasaar Limited, against a set of guiding principles. The series has been fully certified as Shariah-compliant through the issue of a Fatwa (Islamic legal opinion) by Yasaar's principals. The screening approach is briefly as follows:

Business Activity Screening

Initially, companies involved in any of the following activities will be filtered out as non-Shariah compliant:

• Conventional finance (non-Islamic banking, finance, and insurance, etc.)
• Alcohol
• Pork related products and non-halal food production, packaging and processing or any other activity related to pork and non-halal food
• Entertainment (casinos, gambling, and pornography)
• Tobacco, weapons, arms, and defence manufacturing.

Financial Ratios Screening

The remaining companies are then screened on a financial basis. The following financial ratios must be met for companies to be considered Shariah-compliant:

• Debt is less than 33.333% of total assets
• Cash and interest bearing items are less than 33.333% of total assets
• Accounts receivable and cash are less than 50% of total assets
• Total interest and non-compliant activities income should not exceed 5% of total revenue.

Source: ftserussell.com

HLAL holdings review

More on sectors is provided in the ETF comparing section of this article. With only 225 stocks, the Top 20 account for 63% of the portfolio, the lower half here is just 8.5%. For either ETF, the results will be driven by a fraction of the stocks held.

HLAL distributions review

HLAL shows more variations than VOO in the quarterly payouts but at under 1%, this isn't an ETF to own for income. HLAL earned a "B-" grade.

Comparing ETFs

Using Vanguard's Style boxes, we see that HLAL has less Blended and more Growth allocation than VOO; market size shows little difference.

Looking at how the ETFs overlap, we see HLAL owns stocks outside of the S&P 500 Index used by VOO, which is not a surprise since their index is provided by FTSE.

The two major sector shifts match what I have seen in other Shariah/non-Shariah comparisons: a shift toward Tech stocks, the total elimination of Financial stocks. Unlike the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS), HLAL has some exposure to the Real Estate sector.

Using data from Morningstar, here is how the two ETFs matchup using equity factors.

Most of the Value metrics favor VOO, while the Growth ones favor HLAL. With the understanding that the above data only reflects the current portfolios, here is what the return and risk results have been since HLAL started in the summer of 2019.

Even with a slightly higher Beta, the higher CAGR results in superior risk ratios for HLAL compared to VOO. Both SA Analysts and Quant Rankings favor HLAL.

Portfolio strategy

As shown in my SPUS Vs. SPY: Sharia Screens Benefit Investors article, sometimes an ethical focus on Large-Cap stocks also comes with better results, as we see here too. This does not always happen, even with Sharia ETFs, as my article on reviewing the ETFB Green SRI REITs ETF (RITA) revealed. For those who want/need to screen to align their investing with their faith, that doesn't matter.

For investors drawn to the high Technology sector weighting, comparing HLAL to either the Invesco QQQ ETF (QQQ) or the Technology Select Sector SPDR ETF (XLK) makes more sense than S&P 500 Index ETFs. Here we see both ETFs providing better results than HLAL.

Final thoughts

Islamic investors are not the only ones with target funds; many ETFs follow various Social Responsible Investing screens based on restrictions other faiths, mainly Christian, managers believe there is a desire for in the market. There are over 200 Socially Responsible ETFs having total AUM of $95.88B currently trading in the US markets.