Shariah ETF Selection: 7 Criteria & Estate Tax Risk You Must Know
Why Shariah-Compliant ETFs Are Gaining Popularity
Shariah-compliant ETFs (Exchange Traded Funds) are increasingly becoming the go-to choice for Muslim investors in Malaysia - and for good reason. They combine two key advantages: lower management fees compared to unit trusts, and guaranteed shariah compliance that is periodically reviewed by qualified shariah advisors.
But with a growing number of shariah ETFs available - from Bursa Malaysia to global markets - the key question for investors is: how do you choose the right one?
There is also one more risk that many Malaysian investors are completely unaware of - estate tax, which can consume up to 40% of your investment value if you pick the wrong ETF.
This article will walk you through 7 criteria for selecting shariah ETFs, a full list of shariah ETFs available to Malaysian investors, and a thorough explanation of estate tax that you must understand before investing.
What Is a Shariah-Compliant ETF?
A shariah-compliant ETF is an exchange-traded fund that only invests in securities meeting Islamic shariah principles. It works like a regular ETF - traded on the stock exchange like a share, tracking a specific index - but with an additional layer: shariah screening.
How Does Shariah Screening Work?
Shariah ETFs must go through two stages of screening before a stock qualifies for inclusion:
Stage 1: Business Activity Screen
Companies are excluded if involved in:
- Alcohol, gambling, tobacco, weapons
- Conventional banking and conventional insurance
- Non-permissible entertainment (pornography, non-shariah music)
- Pork products and non-halal food
Stage 2: Financial Ratio Screen
Even if business activities are permissible, a company can still fail the screening if:
- Interest-bearing debt exceeds 33% of total assets (or market capitalization)
- Interest income exceeds 5% of total revenue
- Receivables + cash exceed a certain threshold (depending on the standard used)
The standard used varies by issuing body. In Malaysia, the Securities Commission's Shariah Advisory Council (SAC) uses its own methodology. For global ETFs, the AAOIFI or S&P Shariah standards are more commonly used.
What matters for you as an investor: shariah ETFs have already done this screening work for you. You don't need to check every stock individually - the fund manager and shariah advisors do it periodically (usually quarterly).
Shariah-Compliant ETFs on Bursa Malaysia (2026)
Here are the shariah-compliant ETFs currently available on Bursa Malaysia:
| ETF Name | Code | Index Tracked | Expense Ratio (TER) | Type |
|---|---|---|---|---|
| MyETF MSCI Malaysia Islamic Dividend | 0821EA | MSCI MY Islamic Dividend | ~0.55% | Malaysian Equity |
| MyETF MSCI SEA Islamic Dividend | 0822EA | MSCI SEA Islamic Dividend | ~0.65% | ASEAN Equity |
| MyETF Dow Jones Islamic Market Malaysia Titans 25 | 0823EA | DJIM Malaysia Titans 25 | ~0.50% | Malaysian Equity |
| TradePlus S&P Shariah US 500 Tracker | 0827EA | S&P 500 Shariah | ~0.50% | US Equity |
| TradePlus Shariah Gold Tracker | 0828EA | Gold Price (LBMA) | ~0.50% | Commodity |
| TradePlus DWA US Momentum Shariah | 0834EA | Dorsey Wright US Tech Leaders Shariah | ~0.80% | US Equity |
| TradePlus MSCI Asia ex Japan REITs Tracker | 0835EA | MSCI AC Asia ex Japan REITs | ~0.65% | Asia REITs |
Source: Bursa Malaysia. Total Expense Ratios are estimates and may change.
Global Shariah ETFs for Malaysian Investors
Beyond Bursa Malaysia, Malaysian investors can also access global shariah ETFs through international brokers. Among the popular ones:
| ETF Name | Ticker | Exchange | Domicile | TER | Index Tracked |
|---|---|---|---|---|---|
| SP Funds S&P 500 Sharia | SPUS | NYSE | US | ~0.49% | S&P 500 Shariah |
| Wahed FTSE USA Shariah ETF | HLAL | NASDAQ | US | ~0.50% | FTSE USA Shariah |
| iShares MSCI World Islamic UCITS ETF | ISWD | LSE | Ireland | ~0.30% | MSCI World Islamic |
| HSBC MSCI World Islamic ESG UCITS ETF | HIES | LSE | Ireland | ~0.30% | MSCI World Islamic ESG |
| iShares MSCI EM Islamic UCITS ETF | ISDE | LSE | Ireland | ~0.35% | MSCI EM Islamic |
Pay close attention to the "Domicile" column - this is extremely important. ETFs domiciled in the US (SPUS, HLAL) carry estate tax risk. ETFs domiciled in Ireland (ISWD, HIES, ISDE) avoid this risk. We will discuss this in detail in the Estate Tax section below.
7 Criteria for Choosing the Right Shariah ETF
Don't buy an ETF simply because it is "shariah compliant." Use these 7 criteria to make sure your choice is sound:
1. Shariah Compliance and Advisory Body
Not all shariah advisors are the same. Check:
- Who is the ETF's shariah advisor? (Individual name or firm)
- What screening standard is used? (SC Malaysia, AAOIFI, S&P Shariah, DJIM)
- How often is re-screening done? (Quarterly is ideal)
- Is a purification process for non-compliant income provided?
For Malaysian investors investing on Bursa only, ETFs approved by SC Malaysia are sufficient. For global ETFs, make sure it follows an internationally recognized standard.
2. Expense Ratio (Total Expense Ratio - TER)
This is the annual fee charged by the fund manager - and it significantly impacts your long-term returns.
| Investment Type | Typical Fees |
|---|---|
| Unit trust (mutual fund) | 1.5% - 2.5% |
| Bursa Malaysia ETFs | 0.4% - 0.8% |
| Global ETFs (UCITS Ireland) | 0.25% - 0.50% |
A 1% annual difference seems small, but over 20 years on a RM100,000 investment:
- 0.50% fee: You pay ~RM10,000 in fees, balance grows to ~RM252,000
- 1.50% fee: You pay ~RM28,000 in fees, balance only reaches ~RM224,000
- Difference: RM28,000 - just because of a 1% higher fee
Aim for shariah ETFs with a TER below 0.60% if possible.
3. Fund Size (AUM) and Liquidity
AUM (Assets Under Management) indicates how large the fund is. ETFs with small AUM carry risks:
- Low liquidity - difficult to buy/sell without moving the price (wide spread)
- Closure risk - the fund manager may shut down an uneconomical ETF
- Higher tracking error - small funds struggle to replicate the index accurately
Tip: For Bursa Malaysia ETFs, check the daily trading volume. If it is less than 10 lots per day, liquidity may be an issue - you might have to wait a long time for your order to match.
4. Tracking Error
Tracking error measures how much the ETF's return deviates from the index it tracks. A good ETF has a low tracking error (< 0.5% per year).
Check tracking error in the ETF's prospectus or fact sheet. If the ETF consistently underperforms its index by more than its fees, there is a management problem.
5. Geographic and Sector Exposure
Choose an ETF that aligns with your investment strategy:
- Malaysia only: MyETF DJIM Titans 25, MyETF MSCI MY Islamic Dividend
- ASEAN: MyETF MSCI SEA Islamic Dividend
- US: TradePlus S&P Shariah (0827EA), SPUS, HLAL
- Global: iShares MSCI World Islamic (ISWD)
- Gold: TradePlus Shariah Gold Tracker (0828EA)
For good diversification, some investors combine 2-3 ETFs: one for the Malaysian market, one for US/global, and one for gold as a hedge. This is consistent with the principle of diversification in shariah-compliant investing.
6. Currency and Exchange Rate Risk
ETFs that invest overseas expose you to currency risk:
- TradePlus S&P Shariah (0827EA) is traded in MYR but invests in USD assets - you are exposed to USD/MYR fluctuations
- If MYR strengthens against USD, the ETF return in MYR will be lower even if the US index rises
- Conversely, if MYR weakens, you "gain" more because USD assets are worth more in MYR
There is no right or wrong answer here. Just understand this risk and make sure it fits your risk tolerance.
7. Fund Domicile and Tax Implications
This is the criterion most investors overlook - yet it can be the most expensive. ETF domicile determines:
- Dividend Withholding Tax (WHT): US-domiciled ETFs charge 30% tax on US dividends. Ireland-domiciled ETFs charge only 15% (due to the US-Ireland tax treaty).
- Estate tax: US-domiciled ETFs are exposed to US estate tax. Ireland-domiciled ETFs? Not at all.
This brings us to a very important topic - and one rarely discussed.
What Is Estate Tax? The Hidden Risk for ETF Investors
Estate tax is a tax imposed by the United States government on the assets of a deceased individual.
Why Malaysian Investors Need to Pay Attention
If you, as a Malaysian citizen, own assets domiciled in the US - including US stocks, US-domiciled ETFs, or any securities registered on US exchanges - those assets are subject to US estate tax in the event of your death.
According to the IRS (Internal Revenue Service), the estate tax rate for non-resident aliens is:
| Item | Details |
|---|---|
| Exemption threshold | USD 60,000 (only ~RM270,000) |
| Tax rate | Up to 40% on amounts exceeding USD 60,000 |
| Who is affected? | Non-US citizens who own US assets |
| What counts as "US assets"? | US stocks, US-domiciled ETFs, US real estate |
Estate Tax Impact Example
Let's say you are a Malaysian investor who owns:
- SPUS (US-domiciled shariah ETF) worth USD 200,000 (~RM900,000)
- You pass away
Estate tax calculation:
- Total assets: USD 200,000
- Exemption: USD 60,000
- Taxable amount: USD 140,000
- Tax (~40% rate): USD 56,000 (~RM252,000)
This means your heirs could lose over a quarter million ringgit to the US government - before they can inherit your investments. And this is separate from the faraid process that needs to be carried out in Malaysia.
Which ETFs Are Exposed to Estate Tax?
| ETF | Domicile | Estate Tax? | Dividend WHT |
|---|---|---|---|
| SPUS, HLAL | US | YES - up to 40% | 30% |
| ISWD, HIES, ISDE | Ireland | NO | 15% |
| TradePlus S&P Shariah (0827EA) | Malaysia | NO* | 30%** |
*TradePlus 0827EA is domiciled in Malaysia but invests in US assets indirectly - it is generally not subject to US estate tax because ownership is through a Malaysian intermediary.
**The 30% withholding tax is applied at the fund level (not the individual investor). This is already deducted before the ETF's return is calculated.
How to Avoid Estate Tax
There are several strategies Malaysian investors can use:
1. Choose Ireland-domiciled ETFs
Ireland has a tax treaty with the US that eliminates estate tax for non-US citizens. UCITS ETFs listed on the London Stock Exchange (LSE) are typically domiciled in Ireland. This also reduces dividend WHT from 30% to 15%.
2. Use local ETFs that invest indirectly
TradePlus S&P Shariah (0827EA) is traded on Bursa Malaysia but tracks a US index. Because it is domiciled in Malaysia, it is generally not exposed to US estate tax. This is the simplest option for investors who don't want to deal with international brokers.
3. Keep total US assets below USD 60,000
If you really want to buy US-domiciled ETFs (for example, because of higher liquidity), make sure your total US assets don't exceed USD 60,000 (~RM270,000). This requires regular monitoring since asset values fluctuate.
For a deeper understanding of taxes and risks when investing in the US market, read our article: 7 Things You Must Know Before Investing in US Stocks.
How to Buy Shariah ETFs in Malaysia
Shariah ETFs on Bursa Malaysia can be purchased just like regular stocks. You need:
- A CDS account and trading account - open through any SC-licensed broker
- A trading platform - for example M+ Online or M+ Global
- Search for the ETF using its code - enter the ETF code (e.g., 0827EA) in the platform
- Place a buy order - same as buying regular stocks (lot size of 100 units)
For global ETFs (ISWD, HIES), you need:
- A trading account with a broker that provides access to international exchanges (LSE, NYSE)
- For example, M+ Global allows you to invest on Bursa Malaysia as well as US, Hong Kong, and other markets
Important: The difference between ETFs and unit trusts - ETFs are traded in real-time on the exchange. Prices change throughout the day, and you can buy/sell anytime during trading hours. Unit trusts only calculate NAV at the end of the day.
5 Common Mistakes New Shariah ETF Investors Make
1. Assuming all shariah ETFs are the same
They are not. Each ETF tracks a different index, has different fees, and delivers different performance. An ETF tracking the S&P 500 Shariah is very different from one tracking the DJIM Malaysia Titans 25.
2. Not checking tracking error
Many buy ETFs because they are "cheap" without checking whether the ETF actually tracks its index properly. A high tracking error means you are not getting the returns you expected.
3. Ignoring liquidity
Some shariah ETFs on Bursa Malaysia have very low trading volumes. This means you may have difficulty selling at the price you want - especially in large amounts.
4. Not understanding tax implications
Buying US-domiciled ETFs without understanding estate tax and withholding tax can significantly reduce your net returns. This is not just a "small tax" issue - it can be a hundreds-of-thousands-of-ringgit problem for your heirs.
5. Buying too many ETFs
Diversification is good, but holding 7-8 ETFs that all track similar markets is over-diversification. 2-3 ETFs covering different segments (Malaysia + Global + Gold/Commodities) is sufficient for most investors.
Simple Strategy: 3-Fund Shariah ETF Portfolio
If you are just starting out and want a simple strategy:
| Component | Suggested ETF | Allocation | Purpose |
|---|---|---|---|
| Malaysia | MyETF DJIM Titans 25 (0823EA) | 40% | Exposure to Malaysia's largest shariah stocks |
| Global/US | TradePlus S&P Shariah (0827EA) or ISWD | 40% | Global market growth |
| Gold | TradePlus Shariah Gold (0828EA) | 20% | Inflation & crisis hedge |
Invest using DCA (Dollar Cost Averaging) - for example, RM500 per month distributed according to the ratio above. This reduces the risk of "timing the market" and builds your portfolio consistently.
Frequently Asked Questions (FAQ)
What is the difference between a shariah ETF and a shariah unit trust?
Both are shariah-compliant, but ETFs are traded on the stock exchange like shares (you can buy/sell in real-time), while unit trusts are purchased through agents or platforms and priced at NAV at the end of the day. ETFs generally have lower management fees (0.3-0.8%) compared to unit trusts (1.5-2.5%).
Are Bursa Malaysia shariah ETFs safe from estate tax?
Yes. ETFs listed and domiciled in Malaysia (e.g., all MyETF and TradePlus series) are generally not subject to US estate tax because they are not "US assets" under IRS definition. This includes TradePlus 0827EA even though it tracks a US index.
What is the minimum amount to start investing in shariah ETFs?
On Bursa Malaysia, the minimum lot size is 100 units. Depending on the ETF price, this could be as low as RM100-RM500 per lot. For example, if the ETF price is RM1.50 per unit, 1 lot (100 units) = RM150. Add broker fees (~RM8-12 minimum brokerage).
How do I check if an ETF is shariah-compliant?
For ETFs on Bursa Malaysia, check the SC list on the Securities Commission or Bursa Malaysia website. For global ETFs, check the ETF prospectus - it will state who the shariah advisor is and the screening standard used.
Are shariah ETF dividends taxable in Malaysia?
Dividends from ETFs listed on Bursa Malaysia are generally exempt from income tax for individual Malaysian investors. However, for ETFs investing in foreign assets, withholding tax may have already been deducted at the fund level before dividends are distributed to you.
What is UCITS and why is it important?
UCITS (Undertakings for Collective Investment in Transferable Securities) is a European regulatory standard for investment funds. UCITS ETFs are typically domiciled in Ireland or Luxembourg and comply with European investor protection regulations. For Malaysian investors, the benefits are: (1) no US estate tax, (2) lower dividend WHT (15% vs 30%), and (3) strong regulatory protection.
Can I buy global shariah ETFs through M+ Global?
Yes. M+ Global provides access to international exchanges including NYSE, NASDAQ, LSE, and Hong Kong. You can search for ETFs like ISWD or HLAL using their tickers in the platform. However, check first which ETFs are available on the platform - not all global ETFs may be supported.
What are the risks of investing in shariah ETFs?
Like any investment, shariah ETFs carry market risk (value can drop), currency risk (for international ETFs), liquidity risk (for ETFs with small AUM), and compliance risk (stocks in the ETF may lose shariah status at the next review). However, the key advantage of ETFs - built-in diversification - makes them a safer choice compared to buying individual stocks.
Conclusion
Choosing a shariah-compliant ETF is not just about checking the "shariah" label and buying. You need to consider 7 important criteria - from shariah compliance and fees all the way to fund domicile and estate tax implications. With smart selection, shariah ETFs can become the backbone of your investment portfolio - cost-efficient, diversified, and shariah-compliant.
If you haven't started investing yet, the first step is to open a trading account.
Open a CDS Trading Account to start investing in shariah ETFs on Bursa Malaysia as well as overseas stocks in the US and Hong Kong markets.
Also download the Free Stock Market Basics Ebook to understand the fundamentals of investing before you begin.