Light on bank stocks, sharia indices outperform

Sharia-compliant equity indices, which have a low exposure to the financial sector, have outperformed their conventional peers so far this year.

The sharia-compliant version of the S&P Global broad market index returned 13.3% in the year to June 28, outpacing the conventional version of the index by 2.3 percentage points.

Michael Orzano, head of equity indices at S&P Dow Jones Indices, attributed the difference to the relatively poor performance of financial sector stocks, which are largely absent from sharia-compliant indices.

He added that, “information technology and health care – which tend to be overweight in Islamic indices – have been the two top performing sectors so far this year”.

Sharia-compliant indices exclude securities which do not comply with the principles of Islamic law, the sharia. For the purposes of creating a sharia-compliant index, compilers typically deem a company to be non-compliant if it gains more than 5% of its revenue from prohibited activities, such as alcohol, tobacco or conventional financial services.

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