S&P 500 Shariah Index for IUL

Investing in alignment with one's personal beliefs is increasingly popular in today's world. For Muslim investors and those interested in ethical investing, the S&P 500 Shariah Index offers a unique opportunity. In this blog post, we will will look at the details of the S&P 500 Shariah Index, explore its performance over the short, medium, and long term, and highlight how it relates to Indexed Universal Life (IUL) insurance, providing a diversified and flexible approach to wealth growth.

What is the S&P 500 Shariah Index?

The S&P 500 Shariah Index is a stock market index that is specifically designed to comply with Islamic finance principles. It comprises a subset of the S&P 500 companies that meet specific Shariah guidelines, excluding businesses involved in activities considered non-compliant, such as alcohol, gambling, and conventional financial services.

The index is screened by a panel of Shariah scholars to ensure it is in line with Islamic investment principles. This makes it an attractive choice for Muslim investors or anyone seeking a socially responsible investment approach. Unlike the standard S&P 500 Index, which includes a wide range of companies from various sectors without such restrictions, the Shariah Index provides a unique blend of growth opportunities while adhering to ethical values.

Performance: Short, Medium, and Long Term

The performance of the S&P 500 Shariah Index can be assessed across different timeframes, offering valuable insights for both investors and policyholders interested in Indexed Universal Life (IUL) insurance.

Short-Term Performance

In the short term, the S&P 500 Shariah Index tends to closely follow the trends of the broader S&P 500 Index, given that it still includes some of the biggest players in the U.S. economy. During market rallies, the Shariah Index often shows similar gains but may slightly underperform during periods where financial stocks are leading the charge, as these are excluded from the Shariah-compliant version.

For those considering IUL policies, short-term performance is critical because it influences the crediting rate of an IUL in the early years. The S&P 500 Shariah Index provides a stable and ethically screened option that can align well with a cautious investment strategy, especially in uncertain times.

Medium-Term Performance

Over the medium term, the S&P 500 Shariah Index has demonstrated strong growth, driven by sectors such as technology and healthcare—two sectors that have performed well over the past decade and are well-represented in the Shariah Index. Without the volatility brought in by financial services and companies involved in high-debt activities, the Shariah Index has often shown a more stable growth trajectory compared to the traditional S&P 500.

For IUL policyholders, medium-term performance impacts the value accumulation within the policy. Since IULs use indices like the S&P 500 or S&P 500 Shariah to determine crediting rates, the relatively lower volatility of the Shariah Index can help provide consistent value growth over a five to ten-year period, enhancing cash value while protecting against market downturns.

Long-Term Performance

Long-term performance is where the S&P 500 Shariah Index truly shines for investors focused on ethical and sustainable growth. Historically, it has shown returns that are similar to or even outperformed the standard S&P 500, driven largely by high-growth sectors. The exclusion of highly leveraged companies and financial institutions, especially during economic downturns, has helped the Shariah Index weather financial crises better than its traditional counterpart.

For Indexed Universal Life policyholders, this long-term performance is crucial for retirement planning and building a lasting legacy. The potential for steady long-term growth means that the cash value within an IUL can accumulate significantly, giving policyholders flexibility to fund future needs, such as education expenses, retirement income, or even estate planning.

Diversification is a key strategy to reduce risk and enhance returns in any investment portfolio. By pairing the S&P 500 Shariah Index with other asset classes—such as bonds, real estate, or even other Shariah-compliant indices—policyholders can achieve a more balanced allocation. This approach spreads exposure across various markets, reducing overall volatility and improving the potential for steady, long-term growth. For Indexed Universal Life (IUL) insurance, incorporating diversified asset classes alongside the Shariah Index can optimise the crediting rate and provide more consistent cash value accumulation, ultimately enhancing the financial stability of the policy.

1. Ethical Screening: The Shariah Index removes companies involved in activities such as gambling, alcohol, and conventional banking, which makes it more aligned with Islamic principles and broader ethical investing standards.

2. Sector Allocation: The absence of financial services companies leads to a higher concentration in sectors like technology and healthcare. This sector bias can impact its performance, often resulting in greater stability during financial downturns but sometimes lagging during financial stock booms.

3. Lower Volatility: Without exposure to highly leveraged companies, the Shariah Index generally experiences less volatility, which can be an appealing aspect for those seeking a more stable investment vehicle over the long term.

These differences make the S&P 500 Shariah Index a unique and attractive option for investors interested in ethical investing, as well as for those leveraging IUL policies to build wealth over time. By choosing the Shariah Index as an underlying benchmark, policyholders can align their investment growth potential with their personal values.

Why Consider the S&P 500 Shariah Index for Indexed Universal Life Insurance?

Indexed Universal Life insurance offers flexibility, allowing policyholders to allocate a portion of their premium to an indexed account, which is credited based on the performance of indices such as the S&P 500 Shariah. By selecting the Shariah Index, policyholders benefit from:

• Ethical Alignment: Assurance that investments are aligned with ethical and Islamic finance principles.
• Stability in Growth: Exposure to sectors that have shown resilience and potential for high growth, such as technology and healthcare, while avoiding the risks associated with leveraged financial institutions.
• Less Volatility: A focus on less volatile companies that avoid high levels of debt, making it an attractive choice for policyholders who prioritize stability and risk management.

S&P 500 vs. S&P 500 Shariah Index

How does the S&P 500 Shariah Index compare to the S&P 500 in terms of performance?

The S&P 500 Shariah Index and the S&P 500 have shown comparable growth over different timeframes, but there are key differences due to the exclusion of non-compliant sectors in the Shariah Index. The Shariah Index tends to perform better during economic downturns due to its exclusion of highly leveraged financial companies, while in periods of financial sector growth, it may lag behind the broader S&P 500. This unique performance characteristic makes it particularly suitable for those seeking ethical and lower-risk investment options.

Comparing Historical Performance: S&P 500 Shariah vs. S&P 500

To provide a clearer picture of how the S&P 500 Shariah Index has performed compared to the regular S&P 500, we have included a chart below showing historical performance over the last 10, 15, and 20 years. This visual comparison helps illustrate the consistency, growth, and potential advantages of choosing the Shariah Index as part of an IUL strategy.

The S&P 500 Shariah Index provides an excellent alternative to the standard S&P 500 for those seeking a balance of growth and ethical investment principles. When combined with Indexed Universal Life insurance, the Shariah Index can help policyholders build a financial foundation that is in line with their values, offering a blend of market-linked growth potential and the protection of a life insurance policy.

Whether you are planning for retirement, legacy building, or just want to diversify your investment portfolio with an ethical tilt, understanding the strengths of the S&P 500 Shariah Index and its role in an IUL policy can make a significant difference in achieving your financial goals.

If you want to learn more about Indexed Universal Life insurance and how it can align with ethical investment strategies like the S&P 500 Shariah Index, contact us at Capital for Life today or answer some quick questions to get a quote.

Frequently Asked Questions (FAQ)

How is the S&P 500 Shariah performance compared to the S&P 500?

For the 15-year period ending July 31, 2019, the S&P 500 Shariah posted an annualised total return of 10.2%, while the S&P 500 gained 9.1%. Over the same period, the Dow Jones Islamic Market World Index and Dow Jones Global Index gained 8.4% and 7.7%, respectively.

What is the difference between the S&P 500 Shariah Index and the regular S&P 500?

The S&P 500 Shariah Index is a subset of the S&P 500, excluding companies that are non-compliant with Islamic finance principles, such as those involved in alcohol, gambling, and conventional banking. This makes the Shariah Index an ethical investment option for those looking for a socially responsible investment alternative.

Is the S&P 500 Shariah Index suitable for ethical investing?

Yes, the S&P 500 Shariah Index is specifically designed to align with Islamic finance principles and broader ethical investing standards. It excludes companies involved in non-compliant activities, making it a suitable choice for ethical investors.

Can I use the S&P 500 Shariah Index for Indexed Universal Life (IUL) insurance?

Yes, the S&P 500 Shariah Index can be used as an underlying benchmark for Indexed Universal Life (IUL) insurance. It allows policyholders to benefit from ethical investment growth while building cash value within their policy.

How does the S&P 500 Shariah Index affect the cash value growth of IUL insurance?

The S&P 500 Shariah Index impacts the crediting rate of an IUL policy, providing growth opportunities aligned with ethical investment principles. The stable and consistent growth of the Shariah Index can help build the cash value within the policy over time.

What sectors are included in the S&P 500 Shariah Index?

The S&P 500 Shariah Index primarily includes sectors such as technology, healthcare, and consumer staples. Financial services companies are excluded due to non-compliance with Shariah principles.

How volatile is the S&P 500 Shariah Index compared to the standard S&P 500?

The S&P 500 Shariah Index generally experiences less volatility compared to the standard S&P 500. This is due to the exclusion of highly leveraged companies, which reduces the overall risk exposure of the index.

Why choose an IUL with the S&P 500 Shariah Index?

Choosing an IUL with the S&P 500 Shariah Index provides policyholders with the potential for market-linked growth while ensuring that investments are aligned with ethical and Islamic finance principles. This combination offers both financial growth and peace of mind.

Is the S&P 500 Shariah Index a good investment for retirement planning?

Yes, the S&P 500 Shariah Index can be a good choice for retirement planning due to its consistent long-term growth and focus on ethical investing. It offers an opportunity for sustainable wealth accumulation while adhering to personal values.

How does ethical screening impact the performance of the S&P 500 Shariah Index?

Ethical screening results in the exclusion of certain industries, such as alcohol, gambling, and banking, which can impact sector allocation. However, it also leads to a focus on high-growth sectors like technology and healthcare, often resulting in comparable or even superior performance to the standard S&P 500.

What companies are excluded from the S&P 500 Shariah Index?

Companies involved in activities such as alcohol production, gambling, conventional financial services, pork-related products, and other non-compliant activities are excluded from the S&P 500 Shariah Index.

What are the advantages of using the S&P 500 Shariah Index in an IUL policy?

The advantages include ethical alignment, reduced volatility, and exposure to high-growth sectors. Using the S&P 500 Shariah Index in an IUL policy allows for stable cash value growth while ensuring that investments adhere to ethical guidelines.

Can non-Muslim investors benefit from the S&P 500 Shariah Index?

Absolutely. Non-Muslim investors seeking a socially responsible and ethical investment option can benefit from the S&P 500 Shariah Index. Its focus on high-growth sectors and exclusion of highly leveraged companies make it appealing to a wide range of ethical investors.

Disclaimer

This article is written by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist life insurance agency providing international life insurance solutions. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses extensive expertise in international life insurance, readers are advised to consult with a qualified financial advisor before making investment decisions or purchasing insurance products.