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

If you're striving to build an ethical and sustainable investment portfolio, especially adhering to Islamic principles, it's time to consider options like UMMA. The Wahed Dow Jones Islamic World ETF (UMMA) offers a unique blend of socially responsible investing with a Sharia-compliant structure. In this post, we'll delve into what UMMA is, discuss its advantages and disadvantages, and explore some effective investment strategies.

What is UMMA?

UMMA is an Exchange Traded Fund (ETF) that adheres to Islamic principles, commonly known as Sharia law. Managed by Wahed Invest, UMMA aims to provide exposure to a diversified portfolio of international companies that comply with these principles.

UMMA tracks the Dow Jones Islamic Market International Titans 100 Index. This index includes companies that meet strict Islamic investment guidelines, which prohibit investing in businesses related to alcohol, gambling, tobacco, pork, and certain financial services.

Key Features of UMMA

• Sharia Compliance: Rigorous screening for adherence to Islamic investment principles
• Global Diversification: Exposure to a variety of sectors and regions while maintaining ethical standards
• Quality Companies: Focus on financially sound companies that align with Islamic ethical norms

The screening criteria exclude companies with high levels of debt, interest income, or any activities not permissible under Sharia law.

UMMA Composition

UMMA consists of globally recognized, financially stable companies such as Nestle, Roche, and ASML Holding. It emphasizes sectors like healthcare, technology, and consumer goods, which align well with ethical investment principles while avoiding heavily leveraged or interest-based enterprises.

Pros of UMMA

Ethical Investing

For those looking to invest in a socially responsible manner while adhering to religious principles, UMMA provides an excellent pathway. The rigorous Sharia-compliant screening ensures that investments are both ethically and religiously sound. This makes UMMA attractive to Muslim investors or anyone looking to align their investments with ethical values.

Global Diversification

UMMA’s composition is globally diversified, providing exposure to various sectors and regions around the world. This diversification helps to spread risk and provides a balanced investment portfolio. Unlike domestic-focused ETFs, UMMA offers a broader range of opportunities by including companies from multiple countries.

Financial Stability

The companies included in UMMA are generally financially stable and have shown consistent performance. This stability ensures that the ETF is less volatile compared to those focusing on high-risk sectors or startups. By investing in established companies, UMMA aims to offer a reliable return with reduced risk.

Cons of UMMA

Limited High-growth Sectors

Due to the restrictions imposed by Sharia-compliant investing, UMMA excludes certain high-growth sectors such as conventional finance and biotechnology, which often involve interest-based income or other non-compliant activities. This limitation may result in slower growth compared to non-ethical ETFs.

Lower Dividend Yield

UMMA tends to have a lower dividend yield compared to other ETFs focusing solely on high-dividend sectors. For investors looking for a higher immediate return through dividends, this might not be the most suitable option.

Higher Expense Ratio

UMMA's expense ratio is relatively higher due to the rigorous screening and compliance processes it undergoes. This can be a significant factor for long-term investors considering the cumulative impact of fees over years of investment.

UMMA Investment Strategies

UMMA provides a unique opportunity for ethical and long-term growth-oriented investments. The key is to leverage its strengths while being aware of its limitations.

Long-term Investment Strategy

To maximize the benefits of UMMA, it's advisable to adopt a long-term investment strategy. Due to its ethical and stable composition, UMMA can serve as a cornerstone of a portfolio designed for retirement or long-term wealth accumulation. Over a period of 10 to 20 years, the global diversification and ethical screening can yield consistent, reliable returns.

Diversifying with Other Ethical ETFs

For balanced growth and diversification, you might consider combining UMMA with other ethical or Sharia-compliant ETFs focused on different sectors or regions. This can further broaden your investment base, spread risk, and leverage opportunities across various markets.

Monthly Investment Plan

One effective strategy would be to allocate a fixed amount monthly towards UMMA. This allows you to take advantage of dollar-cost averaging, reducing the impact of market volatility by spreading your investment over regular intervals. Over time, this method can help in building a significant portfolio with relatively less risk.

Conclusion

UMMA offers an ethical, Sharia-compliant investment avenue that combines global diversification with financial stability. While it may have some limitations, such as lower dividend yields and a slightly higher expense ratio, its advantages make it an attractive option for long-term, ethical investors. By employing strategies like long-term investment, diversification with other ETFs, and consistent monthly contributions, UMMA can be a valuable component of a sustainable investment portfolio.