Performance of shariah-compliant and non-shariah-compliant ETFs: a comparative study

Purpose The purpose of this paper is to elucidate the performance discrepancies between shariah-compliant and non-shariah-compliant exchange-traded funds (ETFs), aiming to enrich the academic and practical understanding of Islamic finance‘s nuances in the ETF sector. Design/methodology/approach Initiating with a broad literature review to cement a theoretical backdrop on Islamic investment principles and the mechanics of shariah-compliant ETFs, the research progresses to devise a comparative analytical framework. This framework focuses on assessing ETF performance through metrics like net asset value returns and volatility, specifically analyzing Blackrock ETFs to draw distinctions in portfolio outcomes and asset compositions. Findings The examination highlights discernible variances in portfolio performance between shariah-compliant and their conventional counterparts, presenting instances where shariah-compliant ETFs, such as ISUS from Blackrock, deliver competitive returns despite their generally lower net assets compared to conventional ETFs like VUSA from Vanguard. Moreover, the ISUS ETF‘s holdings investigation revealed discrepancies with AAOIFI standards, questioning its strict Shariah compliance and adding depth to the analysis of Islamic financial instruments‘ integrity. Originality/value This paper significantly advances the scholarly dialogue on Islamic financial practices within the ETF landscape, providing empirical evidence of performance differentials and compliance intricacies. While prior research has touched upon Islamic investing, this study pioneers a detailed comparative scrutiny, equipped with a novel methodological approach, to dissect the shariah-compliant ETFs‘ operational and ethical frameworks, offering invaluable insights for investors, financial analysts and Islamic finance scholars.