Islamic ETF Is Built for Bull Markets

The JETS Dow Jones Islamic Market International Index Fund ( JVS), an exchange traded fund that follows the spiritual law of Shari'ah, can be appreciated by non-Muslims: About half the fund comprises energy and materials stocks, and financial-services shares are nowhere to be found. When the bull market takes off for real, this ETF is sure to get pulled along.

The fund consists of mega-cap and large-cap companies, including BP ( BP), 4.9%; Novartis ( NVS), 3.3%; and both BHP Billiton listings ( BHP) ( BBL), totaling 4.7%. The JETS Dow Jones Islamic Market International Index Fund is heaviest in energy, 30%; materials, 18%; and health care, 18%.

It's the first exchange traded fund compliant with Shari'ah law. The nature of the rules governing the index are such that there will be very little, and for now there is no, financial-industry exposure. The fund can't own casinos, alcohol, tobacco, pork or weapons producers. And there are debt restrictions.

The country breakdown favors Western Europe and Japan: the U.K., 18%; France 10%; Canada, 10%; Switzerland, 9%; and Japan, 9%. It has a little emerging market exposure with Russia, India and Brazil. The fund has 100 holdings with a median market cap of $20 billion.

The fund makes international indexing available to U.S.-based Islamic investors who wish to comply with Shari'ah law. A press release about the fund noted that there are "over 7 million Muslims in the United States" but no mention of what portion might be investors. So it's possible the target market is quite small.

Nevertheless, the JETS Dow Jones Islamic Market International Index Fund is a broad-based global, excluding the U.S., investment product with different attributes than its rivals. The most popular fund in this category is the iShares MSCI EAFE Index Fund ( EFA), which, other than Canada, has a similar country makeup but a much different sector makeup. The iShares fund is heaviest in financials, at 24%, compared with zero for the JETS fund. Materials and energy are weighted at 9% each in the iShares MSCI EAFE Index Fund and, as mentioned above, those two combine for 48% of JETS Dow Jones Islamic Market International Index Fund. Another alternative in this space is the WisdomTree DEFA Fund ( DWM), which also targets large-cap foreign stocks and weights them by dividends. The DEFA fund weights financials at 18%, down from 30% a year ago, has a similar weighting in energy and materials as the iShares fund but, unlike the other two, has a much heavier weighting to telecom, at 11%.

These sector differences create the potential for an interesting dynamic for the next bull market, even if it has already started. The bear market that started in 2000 was led down by technology stocks. When the broader market made a new high in October 2007, the Nasdaq was still 40% below its 2000 high, so technology was left behind. It's possible that this will happen again with financial stocks. Aside from the precedent for this, the financial sector would seem to be a long way from fundamental health.

An investor preferring to use broad based products but wanting to reduce or otherwise avoid financial sector exposure could use JETS Dow Jones Islamic Market International Index Fund as a substitute for the iShares MSCI EAFE Index Fund or the WisdomTree DEFA Fund.

At the time of publication, Novartis was a client holding.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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