Online investment manager Wealthsimple has partnered with Mackenzie Investments to launch the first Shariah-compliant ETF in Canada.
The Wealthsimple Shariah World Equity Index ETF (WSHR CN) provides passive exposure to a global multi-factor equity portfolio aligned with Islamic principles.
The fund has listed on NEO Exchange and comes with a management fee of 0.50%.
Ben Reeves, Chief Investment Officer at Wealthsimple, said: “As the ETF market continues to grow, Shariah-compliant self-directed investment options remain limited and expensive, and we saw an opportunity to change that.
“Having investment options that honour and reflect the values of investors across our country is at the heart of our mission.”
Mackenzie Investments serves as trustee, manager, and portfolio manager for the ETF.
Methodology
The fund tracks the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index which selects its constituents from a universe of developed market companies with average daily trading volume above $20 million.
Screening for Shariah compliance is conducted by Ratings Intelligence Partners, a London/Kuwait-based consultant specializing in the global Islamic investment market, in coordination with a Shariah Supervisory Board of Islamic scholars that interpret business issues related to S&P’s indices.
The methodology examines companies’ business activities and accounting metrics to remove firms that do not adhere to Islamic principles.
The business activity screen excludes companies that derive more than 5% of their revenue from alcohol, gambling, weapons, tobacco, adult entertainment, pork products, credit cards, hotels, cinemas, music, and interest-based loans. The accounting metric screen removes firms with debt to equity, accounts receivable to equity, or cash to equity ratios above 33%.
Companies satisfying the Shariah screens are then assigned multi-factor scores based on an equal-weighted mix of low volatility and quality metrics. Companies are ranked within their GICS sector according to their multi-factor scores, and the 20 highest-ranked firms from each sector are selected to form the index.
Constituents are weighted by the inverse of their share price volatility subject to a single security cap of 4%. The index is rebalanced quarterly with buffer rules helping to limit unnecessary turnover.
Approximately one-third (34.2%) of the index is presently dedicated to stocks from the US with the next-largest country exposures being Japan (17.3%), Switzerland (7.6%), the UK (6.5%), and Canada (5.3%). The top sector allocations are evenly split between consumer staples, industrials, health care, materials, consumer discretionary, and information technology which each account for a weight of approximately 12%.
Wealthsimple and Mackenzie have previously partnered on two multi-factor ESG-focused equity ETFs listed on Toronto Stock Exchange – the C$380m Wealthsimple North America Socially Responsible Index ETF (WSRI CN) and C$350m Wealthsimple Developed Markets ex North America Socially Responsible Index ETF (WSRD CN) come with expense ratios of 0.20% and 0.25%, respectively. These funds are linked to Solactive indices that screen out companies with poor ESG profiles and select firms with exposure to momentum, value, and quality risk premia. Constituents are also weighted so as to reduce portfolio volatility.