Are Index Funds and ETFs Halal? A Sharia Analysis for Muslim Investors (2026)

Verdict: Conventional broad-market index funds are not halal. They hold conventional banks, insurers, alcohol producers, and weapons manufacturers by default. But Shariah-screened index ETFs such as SPUS and HLAL are permissible for Muslim investors. These funds start with a standard index, remove every company that fails Islamic business activity and financial ratio screens, and are certified by independent Shariah supervisory boards. The S&P 500 Shariah Index, the Dow Jones Islamic Market Index, and the FTSE Shariah USA Index are the three most widely used Shariah-compliant benchmarks for this purpose.

Global ETF assets reached a record USD 23 trillion at the end of May 2026, drawing USD 1.07 trillion in net inflows in just five months. Yet Shariah-compliant ETFs account for roughly USD 60.5 billion across 79 funds worldwide, less than 0.3 percent of the global total. The gap is not a sign that Muslim investors are avoiding passive investing. It is a sign that most Muslim retail investors do not yet know that halal index funds exist and that the ones which do exist are still discovering product-market fit.

What Index Funds and ETFs Actually Are

An index fund is a pooled investment vehicle that tracks a specific market index such as the S&P 500, the FTSE 100, or the MSCI World. An exchange-traded fund (ETF) is the same concept traded on a stock exchange like a single share. When you buy an S&P 500 ETF, you own a proportional slice of roughly 500 large American companies, weighted by market capitalisation.

The structure itself is not the problem. Pooling capital and investing it proportionally across a defined set of assets is conceptually similar to a mudarabah or musharakah arrangement, both of which are recognised contracts in classical fiqh al-muamalat. The question is not how the fund is structured. The question is which companies it holds.

A conventional S&P 500 ETF holds JPMorgan Chase, Bank of America, Berkshire Hathaway, Anheuser-Busch InBev, Philip Morris, and Lockheed Martin. Each of these companies fails the Shariah screen on either business activity or financial ratio grounds. The fund passes their prohibited revenue straight through to the investor.

The Property Question

Allah says in Surah Al-Baqarah, verse 275:

وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا

"But Allah has permitted trade and has forbidden interest [riba]." (Saheeh International)

When you buy a share of a company, you acquire proportional ownership in its underlying assets. The classical view, articulated by Mufti Taqi Usmani in Fiqh al-Buyu (2015), treats a share as an undivided portion of the company's real assets and not merely as a financial instrument. For a pooled investment like an index fund, the same principle applies: the investor's capital is spread across the real assets of all the companies the fund holds.

AAOIFI Shari'ah Standard No. 21 on Financial Paper: Shares and Bonds (issued 2004; 2015 English edition) affirms that shares represent an undivided ownership stake in the company's assets. The standard applies the same screening rules whether the shares are held directly or through a fund. The critical difference is that a fund manager, not the individual investor, selects which shares to hold. The investor must therefore ensure the fund itself applies a Shariah screen, because the fund's holdings become the investor's de facto portfolio.

The Riba Question

Riba in an index fund operates at two levels. The first is direct: the fund may hold shares of companies whose primary business is interest-based lending. Banks and insurers fall into this category. The second is indirect: even a permissible company such as Apple or Microsoft earns small amounts of interest on its corporate cash reserves.

Allah says in Surah Al-Imran, verse 130:

يَا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُّضَاعَفَةً ۖ وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ

"O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful."

AAOIFI Standard 21 addresses both levels. The business activity screen removes any company whose primary revenue comes from prohibited sources, including conventional banking and insurance. This catches the direct riba exposure. The financial ratio screen then limits indirect exposure: interest-bearing debt must stay below 30 percent of market capitalisation (or 33 percent under the S&P/DJIM methodology), and interest income must stay below 5 percent of total revenue. Companies that pass both thresholds are permissible to hold, but the investor must purify the small fraction of dividends traceable to interest income.

A conventional S&P 500 fund fails both screens. The financial sector alone constitutes 12 to 14 percent of the index by weight, and every major bank and insurer in that sector derives the overwhelming majority of its revenue from interest-based activities. No amount of purification can fix a holding whose primary business is riba.

A Shariah-screened fund such as SPUS (tracking the S&P 500 Shariah Industry Exclusions Index) removes every conventional financial institution before construction. Its 200 to 230 remaining holdings consist primarily of technology, healthcare, and consumer staples companies. The residual interest income from these companies' cash reserves falls below the 5 percent threshold and is managed through the fund's published purification ratio.

The Gharar Question

Gharar, excessive uncertainty, is not a significant concern in Shariah-screened index funds. The underlying assets are shares of publicly listed companies with audited financial statements, regulatory disclosure obligations, and transparent market pricing. The index methodology is rules-based and published. The fund structure itself does not introduce hidden terms or unknown obligations.

The potential gharar concern with index funds is that the investor delegates stock selection to the index provider. The investor does not individually evaluate each holding. This delegation is acceptable under the AAOIFI framework for collective investment schemes, provided the fund has a Shariah supervisory board that oversees the screening process and the investor can access the list of holdings. Both conditions are met by the major Shariah ETF providers.

Mufti Faraz Adam, in his research paper "Solving the Dynamics of Shariah in ETFs & ETNs" (Darul Fiqh, 2018), addresses the structural gharar question directly. He concludes that the standardised, rules-based nature of index fund construction, combined with Shariah board oversight, reduces uncertainty to an acceptable level. The same reasoning applies to Shariah-screened ETFs.

The Maysir Question

Maysir, gambling or speculation, is not engaged by passive index investing itself. The investor is buying proportional ownership in productive enterprises, not betting on short-term price movements. Passive index investing involves buying proportional ownership in productive enterprises and holding it, which no major methodology treats as maysir. Whether frequent short-term trading of otherwise compliant shares crosses into speculation is debated among contemporary scholars, but that debate does not touch buy-and-hold index investing.

The maysir concern arises in leveraged or inverse ETFs, which use derivatives to amplify daily returns. These instruments are not permissible under any of the major screening methodologies. The Shariah-screened ETFs listed in this article do not use leverage.

The Shariah Screening Framework

The screening that transforms a conventional index into a halal one operates in two stages, both governed by AAOIFI Standard 21.

Stage One: Business Activity Screen

Every company in the index is evaluated for its primary business. Companies whose core revenue comes from any of the following are excluded:

Conventional banking, insurance, and interest-based financial services
Alcohol production and distribution
Tobacco manufacturing
Gambling and casinos
Pork and non-halal meat products
Adult entertainment and pornography
Weapons and defence (excluding non-offensive equipment in some methodologies)
Conventional music and cinema (subject to materiality thresholds in some standards)

Stage Two: Financial Ratio Screen

Companies that pass the business activity screen must also satisfy three financial ratio tests. The thresholds vary slightly across methodologies:

Ratio Test	AAOIFI (Strict)	S&P/DJIM (SPUS)	FTSE (HLAL)
Debt / Market Cap (or Assets)	<=30%	<=33%	<=33.33% of assets
Cash + Securities / Market Cap	<=30%	<=33%	<=33% of assets
Non-Compliant Income / Revenue	<5%	<5%	<5%

The denominator difference matters. AAOIFI and S&P/DJIM use market capitalisation (S&P averages over 36 months). FTSE uses total assets. Market-cap-based denominators produce tighter screens in growth markets where valuation multiples are high. Asset-based denominators are more stable across market cycles.

The S&P 500 Shariah Index, which SPUS tracks, was developed by S&P Dow Jones Indices and is supervised by an independent Shariah board through Ratings Intelligence Partners, an independent London and Kuwait-based Shariah advisory firm. The index is reconstituted monthly, and constituent changes are applied at the open of trading on the Monday following the third Friday of each month.

The S&P 500 Shariah Industry Exclusions Index, which SPUS specifically tracks, takes the S&P 500 Shariah and removes three additional GICS sub-industries: Aerospace and Defence, Financial Exchanges and Data, and Data Processing and Outsourced Services. This results in a slightly more conservative index than the standard S&P 500 Shariah.

Available Halal ETFs in 2026

The following Shariah-compliant ETFs are the most widely used by Muslim investors as of mid-2026:

US Equity Funds:

SPUS (SP Funds S&P 500 Sharia Industry Exclusions ETF) tracks the S&P 500 Shariah Industry Exclusions Index. Approximately 200 to 230 holdings. Expense ratio: 0.45 percent. AUM: approximately USD 2.82 billion. Shariah board: SP Funds with oversight by Ratings Intelligence Partners.
HLAL (Wahed FTSE USA Shariah ETF) tracks the FTSE Shariah USA Index. Approximately 184 holdings including mid-cap stocks. Expense ratio: 0.50 percent. AUM: approximately USD 917 million. Shariah board: Yasaar Limited (four audits per year).

Global Equity Funds:

ISWD (iShares MSCI World Islamic UCITS ETF) tracks the MSCI World Islamic Index. Expense ratio: 0.30 percent. AUM: approximately USD 1.44 billion. Listed in London, accessible globally.
UMMA (Wahed Dow Jones Islamic World ETF) tracks the Dow Jones Islamic World Index. Expense ratio: 0.65 percent. AUM: approximately USD 199 million. Provides ex-US international exposure.

Emerging Markets:

ISDE (iShares MSCI EM Islamic UCITS ETF) tracks the MSCI Emerging Markets Islamic Index. Expense ratio: 0.35 percent. AUM: approximately USD 807 million.

Specialty:

SPRE (SP Funds S&P Global REIT Sharia ETF) is the only Shariah-compliant global REIT ETF. Expense ratio: 0.55 percent. Monthly distributions.
SPSK (SP Funds Dow Jones Global Sukuk ETF) provides exposure to global sukuk. Expense ratio: 0.55 percent. Monthly income.

You can screen any ETF's underlying holdings for Shariah compliance using the stock screener. For digital asset screening, the crypto screener applies the same AAOIFI-based methodology.

Purification: What You Must Do

Even a Shariah-screened fund holds companies with residual non-compliant income below the 5 percent threshold. Apple earns interest on its corporate cash reserves. Microsoft does the same. This interest is a tiny fraction of total revenue, but it must be cleansed.

AAOIFI Standard 21 requires the investor to donate the proportionate share of dividends traceable to non-compliant income. If a fund publishes a purification ratio of 0.5 percent and the investor receives USD 100 in dividends, the investor donates USD 0.50 to charity. This donation cannot be classified as zakat and cannot be deducted from zakat obligations.

SPUS publishes its purification ratio quarterly on the SP Funds website. HLAL does the same through Wahed. For individually screened holdings, apps such as Zoya, Musaffa, and Islamicly calculate purification automatically.

Sheikh Joe Bradford's equity screening guidelines (2024) confirm that the purification obligation applies to dividends and, in the more precautionary scholarly view, to capital gains as well. Mufti Taqi Usmani, in Principles of Shari'ah Governing Islamic Investment Funds (1998; reprinted by Quranic Studies Publishers), treats purification on capital gains as the more equitable approach, especially for open-ended funds where unit-holders redeem at different times.

Where Scholars Differ

The primary scholarly disagreement on index funds and ETFs is not about whether Shariah-screened funds are permissible. All three named scholars accept the permissibility of screened equity funds with proper Shariah board oversight. The disagreements cluster around two technical questions.

Debt ratio threshold: 30 percent versus 33 percent.

AAOIFI Shari'ah Standard No. 21 on Financial Paper: Shares and Bonds (issued 2004; 2015 English edition) sets the interest-bearing debt threshold at 30 percent of market capitalisation. The S&P/DJIM methodology, used by SPUS, sets it at 33 percent. The FTSE Shariah methodology, used by HLAL, sets it at 33.33 percent of total assets.

Mufti Taqi Usmani, who chairs the AAOIFI Shari'ah Board that issued Standard 21, endorses the stricter 30 percent threshold. The 33 percent figure used by S&P/DJIM and FTSE is conventionally justified by analogy to the hadith of Sa'd ibn Abi Waqqas on bequests, 'One third, and one third is much' (Sahih al-Bukhari 2744); AAOIFI's 30 percent sits deliberately below that ceiling as an added margin of safety. Sheikh Joe Bradford's screening guidelines (2024) reference the AAOIFI framework and apply the 30 percent debt threshold in his core methodology. However, he acknowledges that the 33 percent threshold used by S&P and Dow Jones is a recognised alternative that has been accepted by other Shariah boards.

Mufti Faraz Adam, whose firm Amanah Advisors provides Shariah advisory to asset managers, has written that the choice between 30 percent and 33 percent reflects a legitimate ijtihad on the appropriate margin of safety. His published methodology for fund screening evaluates each fund against its own stated threshold, provided the threshold is documented, approved by a Shariah board, and consistently applied.

In practice, the 3 percentage point gap matters for a small number of borderline holdings. The broad verdict on funds such as SPUS and HLAL is not affected. Both funds would pass the stricter 30 percent threshold on the overwhelming majority of their holdings.

Purification on capital gains.

Mufti Taqi Usmani (Principles of Shari'ah Governing Islamic Investment Funds, 1998; reprinted by Quranic Studies Publishers) argues that purification on capital gains is the more precautionary and equitable position, because the market price of a share incorporates the company's non-compliant income even when no dividend is paid.

Sheikh Joe Bradford takes a pragmatic view: for individual stock investors, purification is required only on dividends. For fund investors, the fund typically handles purification at the portfolio level, and the individual investor need only follow the fund's published purification figure.

Mufti Faraz Adam's framework distinguishes between realised gains from selling shares and unrealised appreciation. He treats purification as mandatory on dividends and recommended (but not mandatory) on realised capital gains, consistent with the view held by several contemporary Shariah boards.

Neither disagreement affects the core permissibility of holding Shariah-screened index ETFs. Both are implementation questions about how much to purify and by which calculation.

What Remains Impermissible

The following fund types are not permissible under any of the major Shariah screening methodologies:

Conventional bond ETFs: A bond is an interest-bearing contract by definition. No screening methodology can fix that.
Leveraged and inverse ETFs: These use derivatives and interest-based financing to magnify returns. They fail both the business activity screen and the gharar screen.
Broad-market index funds without Shariah screening: VOO, IVV, SPY, VTI, VWRP, and similar funds hold prohibited sectors by design. The investor cannot purify their way out of holdings whose primary business is riba.
Sector-specific ETFs that include prohibited industries: For example, a financial sector ETF holds only banks and insurers. A consumer staples ETF may hold alcohol and tobacco companies.

Practical Guidance

If you are a Muslim investor looking to invest in index funds, follow these steps:

Only invest in ETFs with a named Shariah supervisory board and a published screening methodology. SPUS, HLAL, ISWD, ISDE, UMMA, SPRE, and SPSK all meet this standard.
Verify the fund's holdings against your chosen methodology. If you follow AAOIFI's strict 30 percent debt threshold, check the fund's current constituents using a screening app such as Musaffa or Zoya. If you follow the S&P/DJIM or FTSE methodology, the fund's stated methodology is sufficient.
Purify your dividends annually using the fund's published purification ratio. If the fund does not publish one, calculate it as the weighted average of non-compliant income across the holdings.
Pay zakat on the full market value of your ETF holdings at your annual zakat date, using the 30 percent proxy method or a look-through calculation. Sheikh Joe Bradford recommends the 30 percent proxy for diversified equity funds.
Avoid leveraged, inverse, or bond ETFs entirely. They are not permissible under any mainstream methodology.

For a complete breakdown of the screening methodology applied to individual stocks, see the halal vs haram in Islamic finance guide. The analysis of Apple stock and NVIDIA stock both demonstrate how the same AAOIFI framework produces per-company verdicts.

Conclusion

Conventional index funds are not halal. They bundle prohibited businesses into a single product and pass their non-compliant revenue to the investor. But Shariah-screened index ETFs solve this problem. They apply a rigorous two-stage screen that removes prohibited sectors and filters for acceptable financial ratios. The S&P 500 Shariah Index, the FTSE Shariah USA Index, and the Dow Jones Islamic Market Index are the most widely used benchmarks, and funds such as SPUS, HLAL, and ISWD have grown to sufficient scale that liquidity and tracking error are no longer concerns.

The trade-off is a higher expense ratio (0.30 to 0.65 percent versus 0.03 percent for a conventional S&P 500 fund), a smaller and more concentrated portfolio, and an annual purification obligation. These are acceptable costs for compliance. Muslim investors do not need to abandon passive indexing. They need to choose the right index. This analysis is educational, not a fatwa or investment advice; verify a fund's current certification and holdings, and consult a qualified Shari'ah scholar for your own situation.

Frequently Asked Questions

Are all ETFs halal? No. Only ETFs that apply Shariah screening to their underlying holdings are permissible. Conventional ETFs hold banks, insurers, alcohol companies, and weapons manufacturers by default. Shariah-screened ETFs such as SPUS, HLAL, ISWD, and UMMA are permissible for Muslim investors.

Is the S&P 500 halal? Not in its unscreened form. The S&P 500 includes JPMorgan Chase, Bank of America, Berkshire Hathaway, Anheuser-Busch InBev, and Lockheed Martin, all of which fail the Shariah business activity screen. The S&P 500 Shariah Index, which removes these companies, is the halal alternative.

What is the S&P 500 Shariah Index? It is a version of the S&P 500 that has been screened by Ratings Intelligence Partners to remove companies with non-compliant business activities and unacceptable financial ratios. It retains approximately 200 to 230 of the original 500 constituents. The S&P 500 Shariah Industry Exclusions Index goes further by also removing aerospace and defence companies.

Does SPUS or HLAL hold any prohibited stocks? Both funds are periodically reviewed by their respective Shariah boards. Holdings that become non-compliant between reviews are removed at the next reconstitution. The residual non-compliant income from permissible holdings is addressed through the fund's published purification ratio.

Do I still need to purify if I invest in a Shariah-screened ETF? Yes. Even Shariah-screened funds hold companies with small amounts of non-permissible income (below the 5 percent threshold). You must donate the proportionate share of any dividends received. SPUS and HLAL both publish quarterly purification ratios.

Are sukuk ETFs halal? Yes, provided the sukuk in the fund are structured as genuine asset-based or asset-backed certificates and not as conventional bonds with an Islamic label. SPSK (SP Funds Dow Jones Global Sukuk ETF) is the most widely used Shariah-compliant sukuk ETF in the US market.

What about gold ETFs? Physically backed gold ETFs are disputed. AAOIFI Shari'ah Standard No. 57 on Gold (2016) requires constructive possession and immediate settlement. Funds structured or certified with these rules in mind are the stronger case; funds such as GLD, where only large Authorized Participants can redeem for metal and retail investors hold only a securitised claim, are classified as non-compliant by several screeners. Check the specific fund's Shariah certification rather than assuming bullion backing is sufficient.