Quick -- let's say you want to invest in a broad-market index fund, but you don't like that the index includes alcohol producers such as Anheuser-Busch (NYSE: BUD ) and Molson Coors Brewing (NYSE: TAP ) . OK, you might look for a socially responsible mutual fund, which excludes certain objectionable industries. But what if you also wanted to avoid bank stocks such as Citigroup (NYSE: C ) and Morgan Stanley (NYSE: MS ) , because you were disgusted with the subprime lending fiasco, and had lost faith in the industry? What then?
Well, you're in luck -- no matter your religion, you might want to look into indexes and mutual funds that respect Islam's Shariah law. It frowns on companies involved in alcohol, pork, and tobacco, for starters. It also avoids many entertainment companies, as well as financial firms -- because the Islamic faith believes that things such as gambling, pornography, and even interest charged by banks are immoral. (Some Muslims and banks interpret the law to permit simple interest, but not compound interest.)
Indexes aside, there are actively managed mutual funds that respect Islamic principles, as well. And they show that a Shariah connection isn't enough to ensure good performance -- just like most other groups of funds, their performances vary widely. The Azzad Ethical Mid Cap (ADJEX) fund, for example, has done a little worse than the S&P 500 over the past five years, and it charges a rather steep expense ratio (annual fee) of 2.25%. (With a significantly lower fee, it would have beaten the S&P 500.) The fund's holdings recently included Western Digital (NYSE: WDC ) and China Mobile (NYSE: CHL ) .
The Amana Trust Growth (AMAGX) fund, meanwhile, has trounced the S&P 500 over the past five years, averaging 19% annual growth with a more reasonable expense ratio of 1.35% and recent top holdings including Qualcomm and Intel (Nasdaq: INTC ) .
You needn't invest in these kinds of funds (though the Amana fund holds some appeal!) or follow these indexes, but it's good to be familiar with this new kind of investment possibility. Be ready to see many more Shariah-compliant investments introduced, as the Middle East is sporting some strong stock market performances lately and drawing much investor interest. (The Saudi stock market, despite a sharp drop in 2006, has averaged annual growth of around 35% over the past five years.)
For guidance regarding investing abroad, I invite you to test-drive our Motley Fool Global Gains newsletter.