What is HLAL? (Pros, Cons, and Strategies)

In a world where ethical investing is becoming increasingly significant, many investors are exploring Shariah-compliant options that align with their values. One such option is HLAL, which stands for Wahed FTSE USA Shariah ETF. This ETF is aimed at offering a diversified pool of investments that adhere to Islamic principles while also providing solid returns. In today's blog post, we'll delve into what HLAL is, its pros, cons, and effective investment strategies related to it.

What is HLAL?

HLAL, managed by Wahed Invest, is a Shariah-compliant ETF that invests primarily in U.S. stocks. The ETF follows the FTSE USA Shariah Index, ensuring that all investments adhere to Islamic principles, which means avoiding businesses related to alcohol, gambling, and interest-based financial services.

Key Features of HLAL

• Shariah Compliance: Investments pass rigorous Shariah-compliance screens.
• Diversification: Exposure to various sectors within the U.S. market.
• Ethical Investing: Appeals to investors seeking socially responsible investments.

The FTSE USA Shariah Index screens companies not just for ethical considerations, but also for financial health and reputation, ensuring that only the top contenders make the cut into HLAL.

HLAL Composition

HLAL comprises well-known U.S. companies across various sectors, excluding businesses that engage in non-compliant activities. You’ll find industries like technology, health care, and consumer goods represented, but finance and other interest-related sectors are notably absent.

Pros of HLAL

Ethical and Shariah-compliant

For Muslim investors or those interested in ethical investing, HLAL offers an avenue to invest without compromising their principles. The Shariah screening process excludes companies involved in gambling, adult entertainment, pork production, and financial services based on interest, resulting in a cleaner portfolio from an ethical standpoint.

Diversified Exposure

Despite its ethical constraints, HLAL still provides diversified exposure to a variety of sectors within the U.S. stock market. This diversification lowers risk, as negative performance in one industry can be balanced by positive performance in another.

Competitive Performance

HLAL has managed to deliver competitive returns, making it not just an ethical choice but also a financially sound one. Ethical investing doesn’t mean compromising on performance, and HLAL has shown that it's possible to achieve both.

Cons of HLAL

Limited Sector Exposure

Due to the exclusion of specific sectors like finance and alcohol, HLAL has a narrower investment universe. While this aligns with Shariah principles, it can be a downside for those seeking comprehensive market exposure.

Higher Expense Ratio

HLAL has a higher expense ratio compared to some other ETFs, reflecting the additional costs associated with Shariah compliance and ethical screening. Investors need to weigh these costs against their investment goals and ethical considerations.

Lower Dividend Yield

HLAL tends to have a lower dividend yield compared to other ETFs. While it provides competitive returns, those seeking high dividend income may find this aspect less appealing.

HLAL Investment Strategies

So, how do you make HLAL a part of your investment portfolio? Given its strengths and limitations, here are some effective strategies.

Long-term Investment Strategy

HLAL is best suited for long-term investments, especially for those focusing on ethical and Shariah-compliant portfolios. The diversified yet ethically constrained composition allows for steady, long-term growth.

*Utilize dollar-cost averaging*: By investing a fixed amount regularly, you can accumulate shares over time, benefiting from the long-term growth potential of the U.S. market while adhering to your ethical considerations.

Diversify with Complementary ETFs

Consider pairing HLAL with other ETFs that fill the gaps created by ethical constraints. For instance, if you're comfortable investing in bonds but want to maintain a primarily ethical portfolio, you can include socially responsible bond ETFs alongside HLAL.

Maximize the Compound Effect

Reinvesting dividends is an excellent way to leverage the compound effect, resulting in accelerated growth over the long term. Despite HLAL’s lower dividend yield, consistently reinvesting these dividends can contribute significantly to your overall returns.

Ethical Tax-Loss Harvesting

Use tax-loss harvesting to offset gains from other investments. This strategy not only minimizes your tax liability but also keeps your portfolio aligned with ethical principles. It's another way to enhance returns while adhering to a Shariah-compliant investment approach.

Conclusion

HLAL offers a compelling mix of ethical investing, Shariah compliance, and competitive performance. While it has some limitations in sector exposure and a slightly higher expense ratio, it remains a strong candidate for those focused on long-term, principled investments. By employing the right strategies, such as dollar-cost averaging and diversifying with complementary ETFs, investors can make the most out of this unique investment vehicle. Whether you're preparing for retirement or looking to grow your assets ethically, HLAL presents an option worth considering.