SP Funds, an asset manager specializing in Sharia investing, has launched the first ETF in North America to provide targeted, Sharia-compliant exposure to real estate investment trusts (REITs).

The fund is the first North American-listed ETF providing Sharia-compliant exposure to the global property market.

The SP Funds S&P Global REIT Sharia ETF (SPRE US) has listed on NYSE Arca and comes with an expense ratio of 0.69%.

The fund is SP Funds’ third offering and, like its first two ETFs, has been brought to market in collaboration with private-label platform Tidal ETF Services.

The ETF is linked to the S&P Global Shariah All REIT Capped Index which applies Sharia screening to the S&P Global REIT Index universe of publicly traded equity REITs listed in both developed and emerging markets.

REITs in the parent universe must have market capitalizations above $100 million and annual trading values greater than $50m.

Screening is based on parameters set out by a Sharia Supervisory Board, a panel of Islamic scholars who interpret business issues and recommend actions for S&P’s suite of Sharia indices.

The methodology examines constituents’ business activities and accounting metrics to remove firms that do not comply with Sharia principles.

The business activity screen removes REITs that derive more than 5% of their revenue from ‘impure’ sources such as alcohol, gambling, weapons, tobacco, adult entertainment, pork products, credit cards, cinemas and broadcasting, and interest-based loans.

The aversion to interest-based financial transactions means REITs that utilize conventional loans to acquire new properties will also be ineligible for selection.

REITs permissible under the business activity test must also comply with certain financial ratio filters. In particular, REITs must have total debt divided by average market capitalization and accounts receivable divided by average market cap below 30%.

Constituents are weighted by float-adjusted market capitalization subject to an individual cap of 12% and a cumulative cap of 50% on REITs with weights above 5%. The index is rebalanced on a monthly basis.

The index consists of 34 REITs, significantly down from the near 500 REITs that populate the universe.

By removing REITs with higher leverage, the ETF may offer reduced volatility, especially during market downturns. Combined with the requirement that REITs must pay at least 90% of their net earnings to shareholders as dividends, the ETF may, therefore, suit investors looking for quality income.  As of 1 January, the index has a weighted average dividend yield of 2.91%.

Generally, REITs offer investors an inflation hedge as real estate rents and values tend to increase when prices do, due in part to many leases being tied to inflation. This further supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.

REITs have also historically provided diversification benefits due to low-to-moderate correlations with the stock market and bonds.

Naushad Virji, CEO of SP Funds, commented, “The SP Funds S&P Global REIT Sharia ETF has joined our family of ETFs which are designed not only for investors who might be looking for Halal exposure but for any investor who is seeking a value-focused portfolio as well as those who seek to avoid over-levered enterprises.

“Real Estate has always been a preferred asset class for value investors. This Sharia-compliant REIT ETF will certainly be welcomed especially given its stability and performance in turbulent market conditions.”

SP Funds debuted its first two Sharia-compliant ETFs, the SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS US) and the SP Funds Dow Jones Global Sukuk ETF (SPSK US), one year ago.

SPUS tracks the performance of approximately 200 Sharia-compliant S&P 500 stocks. The fund houses $45m AUM and comes with an expense ratio of 0.49%.

SPSK was the first ETF to target exposure to sukuks – bonds conforming with Islamic finance laws that prohibit interest. Instead, sukuks entitle holders to a share of ownership, and therefore revenues, of underlying assets. It houses $30m and costs 0.65%.