Original Article

A comparative performance
analysis of conventional and
Islamic exchange-traded funds
Received (in revised form): 12th December 2012

Nafis Alam
is an Assistant Professor of Finance at the Nottingham University Business School (NUBS) in the University of Nottingham –
Malaysia Campus (UNMC). He has published quite extensively in the area of Islamic finance and corporate finance and his scholarly
research has featured in leading journals like Journal of Banking Regulation, Review of Islamic Economics, Journal of Internet
Banking and Commerce and Journal of Financial Services Marketing, among others. He also co-authored three books on Islamic
Finance. Among them is the Encyclopedia of Islamic Finance, which is the first of its kind and has sold over 1000 copies worldwide.
He has also participated in leading Islamic finance conferences worldwide, such as the Harvard Islamic Finance forum and the IDB-
sponsored conference. He also acted as a consultant for various banks across the globe in the area of product development and
risk management. Currently, he is also a member of the editorial advisory board of finance journals and a book reviewer for Palgrave
Macmillan.

Correspondence: Nafis Alam, Nottingham University Business School, The University of Nottingham Malaysia Campus, Jalan
Broga, 43500 Semenyih, Selangor, Malaysia
E-mail: [email protected]

ABSTRACT Exchange-traded Funds (ETFs) have attracted many investors as one of the
most innovative products of financial engineering. By virtue of the nascent nature of Islamic
ETFs, comparative performance studies of Islamic and conventional ETFs are essential to
assess the attractiveness of two distinct financial instruments. By making use of 85 ETFs from
UK iShares between 2008 and 2011, this article compares the performance of conventional and
Islamic ETFs. In our analysis, the Sharpe, Treynor and Sortino ratios are used as risk-adjusted
performance measures. Islamic ETFs can beat both conventional ETFs and the market
benchmark index based on risk-adjusted performance measures. Overall, both ETFs were
able to outperform the market benchmark index. It is also evident that a portfolio of Islamic ETFs
shows less variability and hence is less risky compared with their conventional counterpart. As
the existing literature on ETFs generally lacks an empirical analysis of the comparative
performance of conventional and Islamic ETFs, this article is a pioneering empirical research
on the performance analysis of two distinct types of ETFs, taking samples from the largest
provider of ETFs, iShares. The findings of this article are very relevant for investors and fund
managers in determining policy matters, deciding investment and marketing strategy for two
distinct types of capital market products.
Journal of Asset Management (2013) 14, 27–36. doi:10.1057/jam.2012.23;
published online 10 January 2013

Keywords: exchange-traded Funds; performance evaluation

INTRODUCTION tracking, all-day trading, strategic trading

Exchange-traded Funds (ETFs) have capability, tax efficiency, lowest fees and
emerged as one of the most innovative transparent holdings (Carty, 2001).
financial market instruments of the twentieth According to Ferri (2008), ETFs marked an
century and have provided investors the imperative investment revolution that began
advantage of risk diversification, index in 1924 with the first open-end mutual fund

& 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36
www.palgrave-journals.com/jam/
 Alam

offering. In the wake of the market crash of Shariah-compliant ETFs, which seek to
1987, and by request of the law firm of provide investment opportunities beyond the
Leland, O’Brien and Rubinstein, the US existing pool of investment for Muslim
Securities and Exchange Commission started investors and ethical investors as part of its
reviewing and rewriting security regulations integration process into the international
to facilitate a novel kind of exchange-traded financial system. Although there had been
vehicle. In 1990, the SEC issued the unprecedented growth of conventional
Investment Company Act Release No. ETFs, Shariah-compliant ETFs found their
17809, which ultimately paved the way for rightful place only in February 2006 when
the formation of mutual funds that allowed the Dow Jones Islamic Market (DJIM)
for share creation and redemption during the Turkey ETF was listed on the Istanbul Stock
day (Ferri, 2008). In 1993, ETFs were first Exchange to track the performance of the
introduced in the United States by State DJIM Turkey Index. Ishares, one of the
Street Global Advisors to track the S&P 500 dominant forces in global ETFs, with over
index (Carrel, 2008). US$620 billion invested in 474 funds, which
ETFs are listed and therefore their units account for 43.0 per cent of the world’s total
can be bought and sold anytime during stock ETF assets (Blackrock, 2011), launched three
exchange trading hours. Investors buy and sell Islamic funds in December 2007 on the
ETF units through their stockbroker rather London Stock Exchange amid an increasing
than through unit trust agents. Most ETFs are shift by ETF providers to offer alternative
passively managed index funds, although there investment products. The three funds were
is ongoing work to create enhanced and primarily aimed at European investors with
actively managed ETFs. In passive share classes in sterling and US dollars.
management of index funds, managers do not Islamic ETFs and conventional ETFs share
pick stocks based on fundamental analysis. common characteristics. The main difference
Instead, managers aim to track the between a conventional ETF and an Islamic
performance of a benchmark index. ETF is the benchmark index that the Islamic
ETFs are assumed to be more cost- ETF tracks. An Islamic ETF tracks a
efficient than actively managed mutual funds benchmark index wholly comprising
because of their passive investing character. constituent securities that are Shariah
They are also more cost-efficient compared compliant, whereas a conventional ETF may
with many open-ended index mutual funds. track any benchmark index regardless of the
Dellva (2001) compared the expense Shariah status of its constituents. In addition,
components of Standard & Poor’s Depositary an Islamic ETF is managed under the Shariah
Receipts (SPDRs) and Barclays’ iShares S&P principle and guidelines and overseen by an
500 from the bundle of ETFs and the appointed Shariah committee. The Shariah
Vanguard index mutual fund. The author committee conducts regular reviews and
exhibits a significant advantage of ETFs with audits on the Islamic ETF to ensure strict
respect to annual expenses, even though they compliance with Shariah principles and
experience transaction costs, commissions practices.
paid to brokerage firms and are affected by The following diagram depicts the general
the bid-ask spread effect. Bernstein (2002) structure of an Islamic ETF: Figure 1
contradicts Dellva (2001) by claiming that the Given that ETF is an innovative product
cost advantage of ETFs is diminished by the and has become popular in recent years, this
trend of investors who liquidate their shares has attracted our attention to investigate the
quite frequently. comparative performance of Islamic and
With the rapid growth of Islamic conventional ETF. As the existing literature
finance, there has been an emergence of on ETFs generally lacks an empirical analysis

28 & 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36
 Performance analysis of conventional and Islamic exchange-traded funds

Buyer Stock Exchange Seller

ETF
Shares

Secondary
Authorized Participants
Primary market

ETF Securities
Shares

Islamic ETF Provider Shariah Advisory

Committee

Advisory on
Shariah matters

Figure 1: Structure of Islamic ETF.

Notes: In ETF, a basket of securities (index’s constituents) can be converted into an ETF unit via an ‘in-kind’ creation
process while ‘in-kind’ redemption converts the ETF unit back to securities.

of the comparative performance of The rest of this article is organized as

conventional and Islamic ETFs, this article is follows: The next section ‘Literature review’
a pioneering empirical research on the describes the main findings of the literature
performance analysis of two distinct types of concerning the interaction among expenses
ETFs from the largest provider of ETFs, and return of mutual funds in general and
iShares. By virtue of the diverse nature of both ETFs in particular. A presentation of the data
ETFs of Barclays’ iShares, a comparative study and the main statistical characteristics of
may shed remarkable light on their iShares is presented in the section ‘Data and
performance amid the current financial crisis. descriptive statistics’. In the section
This article is also motivated from the absence ‘Performance analysis’, we carry out a
of a comprehensive study on conventional and performance analysis for both conventional
Islamic ETF performance analysis. The study and Islamic ETFs. The last section will
will make use of 82 conventional ETFs and present the limitation of this research, our
three Islamic ETFs listed on UK iShares for recommendation and conclusion.
the period 2008–2011. iShares are a good
proxy for the entire ETF market, as they cover
a major part of the ETF industry with regard LITERATURE REVIEW
to assets and the number of funds. In this section, we will discuss the specifics
The main results can be summarized as and main advantages of ETFs. In addition,
follows. First, Islamic ETFs can beat both the interaction between expenses and returns
conventional ETFs and the market for mutual funds is included in our
benchmark index based on risk-adjusted discussion.
performance measures. Second, overall ETFs Carty (2001) claims that ETFs offer
were able to outperform the market significant advantages over individual stocks
benchmark index. There is also evidence to and traditional equity mutual funds. Indeed,
support that a portfolio of Islamic ETFs ETFs provide several advantages such as tax
shows less variability and hence is less risky efficiency, lower costs, transparency, buying
compared with their conventional and selling flexibility, all-day tracking and
counterparts. trading, diversification and a wide array of

& 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36 29
 Alam

investment strategies. Some of the advantages ETFs also provided diversification

and respective literature are highlighted advantages, as several securities are included
below. inside an ETF. As a result, well-diversified
ETFs are more tax-efficient compared ETFs limit security’s nonsystemic risk and
with traditional equity mutual funds. Poterba consist only of market risk. Holding an ETF
and Shoven (2002) compared the pre-tax and is different from holding a single stock that
after-tax return on the SPDR with the includes both nonsystemic risk and market
returns on the Vanguard Index 500 fund. The risk. Moreover, a fund of ETFs could be
results suggested that, between 1994 and double diversified. To justify this, Vassal
2000, the before- and after-tax returns on the (2001) pointed out that a portfolio holding
SPDR trust and Vanguard Index 500 fund 15B20 securities can diversify nonsystemic
were very similar. These findings asserted that risk efficiently. Cao (2005), while examining
ETFs offer taxable investors a method of the diversification benefits of iShares in
holding a broad basket of stocks that deliver comparison with closed-end country funds
returns comparable to those of low-cost (CECFs) and American Depository Receipts
index funds. On a similar line, Zigler (2002) (ADRs) between April 1996 and December
points out that tax efficiency for the ETF 2004, found that all these securities provide
version was 97.15 per cent, compared with diversification gains, but the results did not
the 81.23 per cent tax-efficiency rate of the support the hypothesis that iShares can excel
analogous mutual fund. On the other hand, over CECFs and ADRs.
Bernstein (2004) did not find evidence of tax Many papers discussed mutual fund
evidence when comparing ETFs, open-end measurement and performance based on data
mutual funds and closed-end mutual funds. from the past few years. Cumby and Glen
Literature also shows that ETFs are (1990) examined the performance of 15 US-
cheaper than closed-end country funds. Chang based internationally diversified mutual funds
and Swales (2003) reported that the average for the period 1982–1988. Both the Jensen
expense ratio on iShares MSCI country funds is (1968) measure and the methodology
only 0.87 per cent, whereas the average developed by Grinblatt and Titman (1989)
expense ratio on country closed-end funds is were used to measure portfolio performance.
1.59 per cent. Further, Harper et al (2006) Their findings show that the funds did not
pointed out that the expenses associated with outperform the international equity index;
portfolio trading and management of ETFs are however, there was some evidence of the funds
very low. For example, the S&P 500 ETF has outperforming the US index. These findings
an expense ratio of 0.11 per cent and the were also confirmed by Eun et al (1991), who
France and Singapore ETFs have an expense analyzed 19 US-based international mutual
ratio of 0.84 per cent. Conversely, the France funds for the period 1977–1986 using the S&P
Growth Fund has an expense ratio of 3.4 per 500 Index and the MSCI World Index as
cent and the Singapore Fund has an expense benchmarks. The results indicated that the
ratio of 2.12 per cent. Moreover, in an earlier majority of international mutual funds
study, Gastineau (2001) discusses the low outperformed the US market. However, most
expense ratios of ETFs as well, whereas international mutual funds underperformed
Gardner and Welch (2005) indicated that ETFs the world index. Alam and Rajjaque (2010)
boast of slightly lower management fees performed a comparative analysis on Islamic
compared with index mutual funds. ETF equities and conventional equities portfolio in
management fees averaged 0.12 per cent the European market and found that Islamic
compared with the 0.18 and 1.23 per cent equities outperformed both conventional
average for index mutual funds and actively equities and benchmark market portfolio
managed mutual funds, respectively. mainly during the crisis time.

30 & 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36
 Performance analysis of conventional and Islamic exchange-traded funds

Redman et al (2000) examined the risk- iShares. From an analysis point of view, only
adjusted returns using the Sharpe Ratio, equity-based ETFs were obtained. We choose
Treynor Ratio and Jensen’s a for not to include bond, fixed income, real estate
international mutual funds, separating the and commodity iShares for homogeneity
data into three time periods: 1985 through purposes, as the majority of ETFs mainly
1994, 1985–1989 and 1990–1994. With the invest in equity investments. In addition,
Vanguard Index 500 mutual fund used as a equity iShares experience great interest among
benchmark index, the author found that, for investors and present great growth with
1985 through 1994, the portfolios of respect to assets and the number of funds.
international mutual funds outperformed the The current study covers the period from
benchmark and the US equity portfolio 2008 to 2011 and the data are considered in
under the Sharpe and Treynor ratio. During monthly terms. One reason for choosing the
1985–1989, the international portfolio sample period from 2008 is the availability of
outperformed both the benchmark and the ETF data, which was launched in December
US equity portfolio. However, the 2007. The sample includes 82 conventional
international portfolio underperformed the ETFs and three Islamic ETFs listed on UK
benchmark and the US equity portfolio iShares. The data were extracted from the
during 1990–1994. annual reports of iShares cited on the Web
It can be seen from the above review that site of UK iShares (www.uk.ishares.com).
ETFs have shown greater return and lower Table 1 presents the basic statistical
expenses compared with other groups of characteristics of both conventional and
mutual funds. So far, we have not seen studies Islamic ETFs on iShares for the period
discussing the performance of Islamic ETFs 2008–2011. First, the table reports the
with respect to their conventional counterpart; average monthly percentage return of
thus, this research will try to fill the research iShares. The return is negative for
gap on superiority among the two ETFs. conventional ETFs for 2008 but it is positive
for the subsequent 2 years. On the contrary,
Islamic ETFs registered a higher and positive
return for the similar period. Conventional
DATA AND DESCRIPTIVE ETFs again showed a decline in 2011,
STATISTICS whereas the Islamic counterpart recorded a
This section describes the data and the positive return. Overall, the average return
methodology for the study. Basic trading shows that investors who choose to invest in
characteristics of both Islamic and Islamic ETFs for a long period of time face
conventional ETFs were obtained from great possibilities to receive significant

Table 1: Descriptive statistics of sample

Variables 2008 2009 2010 2011

Conventional Islamic Conventional Islamic Conventional Islamic Conventional Islamic

Return (in per cent) 36.8 NA 45.18 56.89 8.02 8.41 2.95 0.903
Expense ratio (in per cent) 0.51 0.72 0.49 0.68 0.45 0.66 0.42 0.65
Assets (in $ million) 387.4 8.5 530.2 24.4 677.1 36.7 597.8 45.8
NAV 43.21 15.01 60.70 20.52 62.85 23.02 60.42 19.85
Shares (in thousand) 27267 533 35348 1200 28088 1600 28868 2400
Income ratio (in per cent) 1.88 2.25 1.92 2.33 1.91 2.35 1.96 2.41
Turnover (in per cent) 13.96 48.39 12.58 28.07 12.21 21.01 11.93 20.55
Age 5.75 1 6.75 2 7.75 3 8.75 4

Source: www.uk.ishares.com, author calculations.

& 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36 31
 Alam

positive returns compared with conventional ETFs. The age of iShares is calculated by
ETFs. subtracting the inception date of each iShare
Moreover, Table 1 presents the average from the year end.
asset-weighted percentage expense ratios of
iShares. The mean expense ratio of both
Islamic and conventional ETFs steadily PERFORMANCE ANALYSIS
decreases during the 4 years. The mean There are several studies analyzing the
expense ratio for the period is substantially performance of mutual funds in the past
low for conventional ETFs, being equal to 50 few years, but very little is known about
basis points, whereas Islamic ETFs recorded a ETF performance. Harper et al (2006) looks
higher expense ratio of 0.65 on average. One at the performance comparison between
plausible explanation for this can be the exchange-traded funds and closed-end
maturity effect: Islamic ETFs are very new country funds. Their sample includes
compared with their old counterparts. The monthly returns based on prices, not NAV,
mean annual assets approximate US$550 for international ETFs and 22 closed-end
million for conventional ETFs, whereas the country funds over the period from April
mean annual assets for Islamic ETFs were 1996 to December 2001. The Sharpe ratio
worth only US$28.5 million. The growth in and Tracking Error were used as performance
assets shows the spectacular interest and measures. Their results indicated that ETFs
acceptance of ETFs by investors. exhibit higher mean returns and higher
Table 1 also presents the average net asset Sharpe ratios compared with foreign closed-
value per share of iShares and the number of end funds.
shares at year end. The number of shares is In this study, three measures will be used
estimated by the division of net assets to net to test the conventional and Islamic ETF
asset value per share and they thereby are performance: the Sharpe, the Treynor and
approximations of the actual number of the Sortino ratios.
shares outstanding at year end. The NAV The Sharpe ratio gives a comparison of
increases from 2008 to 2010 for both risk-adjusted return for portfolio in a given
conventional and Islamic ETFs, only to fall market. Originally developed to measure the
again in 2011. Overall, conventional ETFs performance of mutual funds, this statistical
registered a higher increase in NAV tool is also useful for analyzing the
compared with Islamic ETFs for the same performance of any given portfolio in a
period. market or for making a comparison between
The ratio of the annual percentage two portfolios. According to Sharpe (1994),
investment income to average net assets and this ratio is designed to measure the expected
the mean turnover (merchantability) of both return per unit of risk for a zero-investment
Islamic and conventional ETFs are also strategy.
highlighted in Table 1. The mean annual Rj  Rf
investment income is 1.91 per cent for Sharpe Ratio ¼ ð1Þ
conventional ETFs and 2.33 per cent for s
Islamic ETFs. The average turnover reaches where Rj is the historic mean return on ETF
12.7 per cent for conventional and 30 per over the interval considered, s is the
cent for Islamic ETFs. Turnover values historical standard deviation of the return on
highlight that Islamic ETFs incurred higher ETF over the interval considered and Rf is the
expenses compared with conventional ETFs. average risk-free rate over the interval
Finally, Table 1 presents the average age of considered.
iShares, which is equal to 7.25 years for The Treynor measure is based on the
conventional ETFs and 2.25 years for Islamic CAPM and gives the excess return per unit of

32 & 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36
 Performance analysis of conventional and Islamic exchange-traded funds

risk and is computed as: monthly risk-free rates, we have calculated

the monthly return based on the 1-year rate
Ri  Rf
T¼ ð2Þ for the same period. We use the S&P Europe
bi 350 Index as a representative of the market to
where Ri is the portfolio return, bi is the compare the performance of conventional
portfolio systemic risk and Rf is the average and Islamic ETFs with the benchmark index.
risk-free rate over the interval considered. It can be seen from Table 2 that, for the
Finally, the Sortino ratio is similar to the overall 4-year period, Islamic ETFs have
Sharpe ratio but uses downside risk instead of given the best return per unit of risk taken.
total risk. Where returns of a portfolio are This is very logical by the fact that Islamic
not normally distributed, a better measure financial activity and the constituent of
than standard deviation for measuring an Islamic ETFs were least affected during the
investment’s risk is its downside risk. A large financial crisis, creating less volatility and risk
Sortino ratio indicates a low risk of large for the investors. It can be concluded that the
losses occurring. Sortino and Robert (1991) excess return per unit of risk taken is
use the lower partial moments (LPM) to moderate by the Islamic ETF portfolio and is
measure the performance of funds replacing the best in the market. The conventional
the standard deviation with the downside risk ETF portfolio was also able to outperform
measure LPM. LPM is calculated using the benchmark index.
equation 3 below: The Treynor ratio tests portfolio b for
risk; the higher the Treynor ratio value, the
1 Xk
better is the performance. Results presented
LPM ða; tÞ ¼ Max½0; ðt  RpÞa  ð3Þ
K t¼1 in Table 2 show that, except for the year
2009, Islamic ETFs constantly outperformed
where Rp is the expected portfolio return, t is conventional portfolio and the benchmark
the target return, a is the level of investor risk index. In fact, for the overall period, we can
tolerance, the degree of LPM, and K is the see that conventional ETFs also
number of observations. Consequently, the outperformed the S&P 350 index. Finally, we
Sortino ratio is: could demonstrate that the S&P 350 index
Rp  t has both a negative Sharpe ratio and a
Sortinoða; tÞ ¼ p
a
ffiffiffiffiffiffiffiffiffiffiffiffiffi ð4Þ negative Treynor ratio during the period
LPMaðt; RpÞ
from January 2008 to December 2011. This
The higher the Sortino Ratio, the better the highlights that S&P 350 for Sharpe and
performance. The LPM value ao1 captures Treynor ratio measures underperformed both
risk-seeking behavior. Risk-neutral behavior Islamic and conventional ETFs. The Sortino
is a ¼ 1, whereas risk-averse behavior is ratio constructs a risk-adjusted performance
a41. The higher the a value, the higher the measure by replacing the standard deviation
risk aversion. We assume that the investors with the downside risk measure. In our study,
are risk averse, and therefore we will choose the LPM is used for downside risk measure
a equal to 2 and also use the risk-free rate as and takes the risk-free rate as the target
the target return. As a result, the LPM value return, as well as assumes that the investors
will become larger with an increase in the are risk averse (a ¼ 2). The result of the
level of investor risk tolerance (a). Sortino ratio further asserts the findings of
The monthly return of sample ETFs was the Sharpe ratio and the Treynor ratio.
calculated, whereas UK Treasury bond rates On the basis of these results, we can
were used as a proxy for the risk-free rates. conclude that the comparatively higher
For each of the 4 years, 1-year bond rates Treynor ratio exhibited by the Islamic ETF
were used as risk-free rates. To obtain portfolio for the entire period showed that

& 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36 33
 Alam

Sortino ratio (2, rf )

the Shariah guidelines led to better

0.4718
0.0912
0.3652
0.1854
0.1483
performance of Islamic ETFs over their
conventional counterpart. In other words, we
can say that Islamic ETFs provide better
Conventional ETFs

returns than what is determined by the

CAPM for a given level of risk in a market.
Treynor ratio

This corroborates the assertion made by

0.0637
0.0867
0.0345
0.0058
0.0195
MSCI that ‘applying Shariah screening to the
indices over the last 5 years shows the Islamic
indices outperforming their traditional
counterparts thanks to the recent collapse of
Sharpe ratio

0.3714
0.2784
0.1542
0.0202
0.0912

financials’ share prices’.

The analysis and the results obtained in
our study provide statistical evidence to
support the opinion that Islamic ETFs
Sortino ratio (2, rf )

significantly outperformed the market during

0.1731
0.1923
0.1071
0.2102

the period of general economic downfall.

NA

There is also evidence that a portfolio of

Islamic ETFs shows less variability and hence
is less risky. We also found evidence for the
Islamic ETFs

ability of Shariah Guidelines to pick better

Treynor ratio

ETFs in the market during the period of

0.0679
0.0097
0.0005
0.0274
NA

general downfall.
The higher Treynor ratio for the Islamic
ETFs for each of the 3 years and also for the
entire period shows that the concern that the
Sharpe ratio

0.2420
0.0783
0.0012
0.1058

loss of diversification by restricting the choice

NA

of securities available for investment will lead

to non-optimal returns does not hold good
for our data in particular and for the market
Sortino ratio (2, rf )

in general.
0.6377
0.1762
0.4821
0.5741
0.2179

One of the limitations of the study is a small

data set for Islamic ETFs. In addition, the
period of analysis has been small and contains
Table 2: Performance indicators of three portfolios

Source: www.uk.ishares.com, author calculations.

only one event of general economic downfall.

It is suggested that a comprehensive study be
S&P 350

Treynor ratio

undertaken with a larger data set and for more

0.0178
0.0498
0.0148
0.0148
0.0067

than one event of economic downfall. In other

words, this needs to be verified with a much
larger data set over a significant time period
before general acceptance. The results obtained
Sharpe ratio

0.4432
0.2258
0.0563
0.0725
0.0308

in the present study are more indicative in

nature. Even with the given limitations, the
findings of this study will provide the boost for
launching increasingly more Islamic ETFs in
2008–2011

the near future.

Corporate firms can benefit from the
2008
2009
2010
2011
Year

knowledge of which practices can lead to

34 & 2013 Macmillan Publishers Ltd. 1470-8272 Journal of Asset Management Vol. 14, 1, 27–36
 Performance analysis of conventional and Islamic exchange-traded funds

better stability during tough times in the a portfolio of Islamic ETFs shows less
market and what firms should avoid in terms variability and hence is less risky compared
of funding as well as markets when they go for with their conventional counterpart.
business expansion. The investors will also get As a future direction of our research and to
a much better knowledge of the risk associated substantiate the findings, we need to extend the
with a Shariah-compliant investment and a sample size and mix ETFs from various
non-Shariah-compliant investment while geographical locations such as the United States
selecting an industry and firms in a market and the World market. One of the drawbacks
based on their risk appetite and perception of of the study was the availability of only three
the future movement of the market. Islamic ETFs compared with a big sample of
Fund managers are one of the most conventional ETFs. This research can be
important entities to be affected by the results further extended once we have a big pool of
of this study. Generally, when the market Islamic ETFs in the market. In addition, we
goes down, everything goes down with it. have to consider the use of different
However, Islamic financial instruments such performance measures, such as a benchmark-
as ETFs provide a hedge against this relative value at risk measurement, which is
downward movement of the market, both by based on a VaR approach to examine the
resisting the downward movement as well as performance of ETFs. Finally, the sample
by recovering more quickly compared with period was only for 4 years because Islamic
the rest of the market. At the same time, it ETFs were launched only in December 2007;
does not compromise much on the returns hence, the extended time periods could drive
during a period of general economic growth. to more consistent conclusions.
This puts Islamic fund managers in a better Moving forward, given more data, this
position to market their products. research may be extended if measurement can
be obtained with regard to the speed of the
reaction of ETF prices to changes in the
CONCLUSION underlying stocks. Deville (2008) highlighted
The aim of this article was to investigate the that new types of ETFs, such as the recent
comparative performance of conventional commodity ETFs, are launched on a regular
and Islamic ETFs over the period from basis, and a study has yet to examine their
January 2008 to December 2011. With the specificities, trading or uses of fixed-income
recent innovation of Islamic ETFs in the last ETFs and ETF derivatives.
4 years, no empirical study has been
conducted to assess the financial advantage of
this investment option over their well-
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