JVS: International Islamic Investing

By Greg Moses

As the introductory article at Seeking Alpha warns, Islamic investing is not always about selecting companies that purport to be be Islamic or that do business in predominantly Islamic markets.

In the case of a new Exchange Traded Fund (ETF) offered by Javelin Exchange Traded Shares (JETS) and known as the JETS Dow Jones Islamic Market International Index Fund (JVS), the top company held is BP (4.94 percent) and the top country represented is the UK (18.11 percent).

According to a press release at javelinfunds.com the JVS fund began trading on the New York Stock Exchange (NYSE) June 30, 2009. While Islamic ETFs have traded in other countries, this is the first Islamic ETF to trade in the USA.

As the name of the fund suggests, it is based upon one of the Dow Jones Islamic indexes–the DJ Islamic Market International Titans 100 IndexSM.

As explained by the DJIM Family Brochure, the first of the DJ Islamic Market indexes was constructed in 1999 as “the first attempt by any global index provider to create a measurement tool for Shari’ah compliant investors and to reduce the research costs of ascertaining and measuring Shari’ah compliance by creating a global universe of Shari’ah screen companies approved by a Shari’ah Supervisory board.”

As of the date of this post, the Dow Jones Islamic Market International Titans 100 IndexSM is not readily accessible at the djindexes website. A similar Titans 100 Index is constructed from a combination of the DJIM U.S. Titans 50 IndexSM, the DJIM Europe Titans 25 IndexSM, and the DJIM Asia/Pacific Titans 25 IndexSM. It’s not clear at this time what sorts of regional weightings are used by djindexes to construct the ex-US International Titans 100 Index.

In order to produce the universe of equities eligible for the DJIM International Titans 100 Index, Dow Jones pulls from the “eligible universe” of companies in the DJIM World Index. The DJIM World Index in turn is compiled from 55 country-level indexes.

Now in order for companies to be listed on DJIM country indexes in the first place, they must pass through several screens.

According to the Guide to the Dow Jones Islamic Market IndexesSM
(June 2009) there are certain business activities that are “inconsistent with Shari`ah precepts”: Alcohol, Tobacco, Pork-related products, Conventional financial services (banking, insurance, etc.), Weapons and defense, and Entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.).

If the company has business activities in any one of the following sectors defined by the Industry Classification Benchmark (ICB), it is considered inappropriate for Islamic investment purposes and is excluded from the index.

• 2717 Defense
• 3533 Brewers
• 3535 Distillers & Vintners
• 3577 Food Products
• 3745 Recreational Products
• 3785 Tobacco
• 5337 Food Retailers & Wholesalers
• 5553 Broadcasting & Entertainment
• 5555 Media Agencies
• 5752 Gambling
• 5753 Hotels
• 5755 Recreational Services
• 5757 Restaurants & Bars
• 8355 Banks
• 8532 Full Line Insurance
• 8534 Insurance Brokers
• 8536 Property & Casualty Insurance
• 8538 Reinsurance
• 8575 Life Insurance
• 8600 Real Estate Development & Holding
• 8773 Consumer Finance
• 8775 Specialty Finance
• 8777 Investment Services
• 8779 Mortgage Finance

Companies which pass this test will then be subjected to a further screen for Acceptable Financial Ratios:

All of the following must be less than 33%:
• Total debt divided by trailing 12-month average market capitalization
• The sum of a company’s cash and interest-bearing securities divided by trailing 12-month average market capitalization
• Accounts receivables divided by trailing 12-month average market capitalization

Companies that pass all the above screens “are included as components of the Dow Jones Islamic Market World Index.” And the index is reviewed on a quarterly basis.

Note: the above article was revised on July 8 thanks to an email from the JETS office clarifying the difference between the DJIM Titans 100 Index (added 9/7/2006) which is documented at djindexes–and the newer DJIM International Titans Index (added 3/4/2009) which is not yet documented at djindexes. The Bloomberg ticker symbol for the International index is DJI100XT:IND.