Are Index Funds Halal?

Passive investing has become one of the most popular strategies for building long-term wealth, with index funds managing over $11.6 trillion in global assets as of 2025. However, for Muslim investors seeking to align their portfolios with Islamic principles, a crucial question often arises: is index fund halal or haram?

Understanding this requires a closer look at how index funds are structured, how they function within the broader financial market, and how their components align with the ethical guidelines of Islamic finance. This article breaks down the criteria used in Shariah screening, explains the core principles of halal investing, and highlights the growing availability of Shariah-compliant index fund options. With proper context and clarity, we aim to help investors make informed decisions on whether an index fund can fit within a halal portfolio.

What are index funds?

If your key query is whether investing in index funds halal or not, it’s important to first understand what index funds are. These are investment vehicles made up of a collection of stocks or bonds, carefully selected to replicate the performance of a specific market index — such as the S&P 500 or the MSCI World Index. Index funds offer investors broad market exposure, which helps in spreading out risk.

Investing through index funds

• There are 2,437 index mutual funds and ETFs in the U.S. alone, reflecting the growing popularity of passive investment strategies. ​

• A standard S&P 500 fund includes approximately 500 companies, representing a wide spectrum of the U.S. economy. In contrast, its Shariah-compliant counterpart, the S&P 500 Shariah Index, comprises 243 companies. This reduction results from filtering out companies that do not meet specific ethical and financial criteria in accordance with Islamic principles. ​

An index fund is halal only when the fund complies with Islamic investment restrictions, particularly on industry type and financial structure.

Index funds, ETFs, and mutual funds: what’s the difference?

While these terms are often used interchangeably, they represent different types of investment vehicles:

• Index funds are a type of fund (either mutual fund or ETF) that tracks a market index. Their goal is to match the performance of that index, not beat it.

• ETFs (Exchange-Traded Funds) are traded like stocks on an exchange and often have lower expense ratios. They can be index-based or sector-specific.

• Mutual funds are typically actively managed and bought or sold through the fund company at the end of the trading day. They may include index funds, but many aim to outperform the market through active selection.

These differences matter when selecting halal investment vehicles, especially for Muslims who want both diversification and full Shariah compliance.

Are index funds halal or haram?

Not all index funds align with Islamic investment principles. Many conventional funds include companies involved in activities not permissible under Shariah law, such as earning interest or engaging in prohibited business sectors.​

• For example, Vanguard’s Total Stock Market ETF (VTI) holds approximately 3,552 companies, with about 74.5% not meeting Shariah compliance standards.​

• Similarly, the MSCI USA Islamic Index, which applies strict Shariah screening criteria, includes only 120 companies from a broader universe of U.S. stocks.​

So the answer to the question of whether an index fund is halal or haram largely depends on whether the fund holds halal stocks and how closely it follows Islamic investment principles. Its permissibility is assessed based on the Shariah compliance of the underlying assets and the fund's financial practices.

How shariah screening works

Sector-based exclusion

For Muslim investors seeking ethical options, the question often arises, is investing in index funds halal? Shariah-compliant funds are designed specifically to avoid companies engaged in activities prohibited under Islamic principles. These exclusions typically cover sectors such as alcohol, gambling, conventional financial services, adult entertainment, and weapons manufacturing.

Financial ratio screening

Is investing in index funds halal? Only if the fund strictly follows these Islamic investment principles. Following the guidelines issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI):

• Debt to Market Capitalization must be below 33%.

• Revenue from non-compliant sources must remain under 5%.

• Receivables to Total Assets must not exceed 49%.

If these financial ratios are breached, the company is removed from Shariah-compliant indices and the index fund no longer qualifies as halal.

Income purification

Understanding how to invest in a Sharia law compliant index fund also involves knowing how to manage income derived from non-permissible sources. In Islamic finance, any earnings that fall outside of Sharia-compliant activities must be identified and purified. Typically, investors allocate between 2 to 5% of their dividend income to charity to cleanse their earnings in line with Islamic principles.

Trusted references on halal index investing

When exploring the question is it haram to invest in index funds, it's important to consider the perspectives of Islamic scholars, Shariah advisory boards, regulatory bodies, and experienced financial professionals:

Qur’anic and Hadith guidance

• Riba (interest) prohibition. The Quran clearly forbids interest in verses such as Surah Al-Baqarah (2:275 to 279). So any activity involving interest, from borrowing to stock lending, becomes haram.

• Gharar (uncertainty) and speculation. Islam discourages financial dealings that involve ambiguity or elements of gambling, as noted in Hadith collections like Sahih Muslim.

• These core principles form the basis for excluding conventional banking, gambling, and speculative sectors in halal stock screening.

AAOIFI guidelines

The Accounting and Auditing Organization for Islamic Financial Institutions sets the financial ratios widely followed in Shariah-compliant investing:

• Debt-to-asset ratio must be below 33%.

• Non-compliant income should not exceed 5%.

• Receivables-to-assets ratio must stay under 49%.

These benchmarks are used by index providers such as MSCI, S&P Dow Jones, and FTSE Russell in developing Islamic indices.

Opinions from Islamic scholars

• Mufti Taqi Usmani, a leading authority in Islamic finance, supports investing in Shariah-compliant equity funds, provided that a purification process is in place.

• Shaykh Yusuf DeLorenzo, who advises various global financial firms, confirms that passive investing is allowed when the fund strictly follows Islamic screening rules.

Statements from halal fund providers

• Fund managers such as Wahed Invest, SP Funds, and Amana Mutual Funds share names of their Shariah board members, outline their methodologies, and publish purification reports annually.

• Tools like Zoya Finance and Islamically offer real-time screening based on accurate fund data and certifications approved by scholars.

How to invest in Sharia law index fund options

With the growing demand for ethical investing, Muslim investors are increasingly exploring whether an index fund is halal or haram under Islamic principles. As of 2025, the availability of Shariah-compliant index funds and ETFs has grown substantially, making it easier to build diversified portfolios that align with religious values. These funds are structured to comply with Islamic investment standards and are overseen by certified Shariah supervisory boards to ensure ongoing compliance.

They avoid prohibited sectors such as alcohol, gambling, and interest-based finance, and also apply rigorous financial ratio screening to maintain purity. Where necessary, income purification processes are applied to filter out any non-compliant earnings, further reinforcing the ethical nature of these investments.

If, as a muslim, you wish to invest in financial assets (stock, crypto, forex pairs, etc), we suggest you do so through brokers that offer Islamic accounts. We have presented the top options below. You may compare and choose one for yourself:

Further, muslim investors exploring ethical opportunities beyond large-cap funds can check our breakdown of halal penny stocks, which highlights smaller, affordable equities screened for Shariah compliance.

Key trends in 2025

If you’re evaluating ethical investing options like index funds or ETFs in 2025, it’s worth exploring key changes that extend beyond standard investment discussions, especially for those asking are index funds haram in the current financial landscape.

• More funds are screening secondary income streams. In 2025, Shariah audits are not just checking core business activity but also how much a company earns from side ventures like interest, insurance partnerships, or crypto exposure.

• AI-powered screening tools are changing the game. Some halal funds now use AI to scan balance sheets and earnings reports instantly, spotting riba, maysir, or gharar faster than traditional compliance reviews.

• Sukuk-linked ETFs are gaining traction. Instead of mixing with conventional bonds, some ETFs now build in sukuk structures for fixed-income exposure that aligns with Islamic rules on debt.

• REIT-heavy halal ETFs are being rebalanced. Funds overloaded with commercial real estate are shifting allocations due to post-pandemic market shifts and tenant non-compliance with halal standards.

• Dividend purifying is becoming automated. Investors can now use tools that calculate and donate the non-halal portion of ETF earnings directly to charity, helping avoid manual purification.

Performance and market data

As of early 2025, Shariah-compliant index funds have continued to deliver stable returns, closely tracking traditional benchmarks while adhering to sector restrictions and financial ratio guidelines. This steady performance highlights the growing potential of ethical investing without compromising religious principles.

• SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS). This fund reported a year-to-date return of -13.24% as of Q1 2025, closely tracking the broader S&P 500 while excluding over 30% of its constituents due to non-compliance with Shariah standards.​

• MSCI World Islamic Index. The index delivered a YTD return of -3.52%, compared to -1.68% from the conventional MSCI World Index in the same period. The performance difference is primarily due to the exclusion of financial services and other restricted sectors.​

• Amana Growth Fund (AMAGX). This fund achieved a Q1 2025 return of -8.29%, focusing on specific sectors while following Islamic investment principles.​

These funds continue to align with investors seeking ethical and religiously compliant strategies. While short-term gains may be affected by the exclusion of high-growth but non-compliant sectors, Shariah-compliant funds often experience less fluctuation and maintain consistent risk levels over time due to their cautious approach to debt.

Global market for shariah-compliant funds

As of 2025, the global Islamic finance sector continues to expand steadily, driven by regulatory advancements, increased investor awareness, and a wider range of Shariah-compliant investment products.

• Growth in Shariah-compliant funds. The number of Shariah-compliant investment funds globally is approximately 918, reflecting consistent growth in recent years.

• Assets under management. Total assets under management in Islamic mutual funds and ETFs are projected to rebound to about $140 billion within the next two to three years, indicating a positive trend in the market.

• Sector growth rate. The Islamic finance sector is projected to grow from $7.99 billion in 2024 to $8.94 billion in 2025, reflecting a compound annual growth rate of 11.9%.

• Key markets. The sector's primary markets are in the Gulf Cooperation Council (GCC) states, Malaysia, and Indonesia, with significant hubs also in the United Kingdom, Turkey, and emerging presence in African nations like Nigeria and Kenya.

Screening non-compliant stocks and dividend purification in halal index funds

Anastasiia Chabaniuk Author, Financial Expert at Traders Union

If you're new to halal investing through index funds, don’t stop at just checking whether the fund is “Shariah-compliant.” Go deeper. One of the most overlooked but impactful strategies is personally re-screening the fund’s top holdings every quarter. Why? Because companies often slip in and out of compliance due to fluctuating debt levels or haram income.

Many beginners ask whether index funds are halal, and while the short answer is often yes when dealing with certified Shariah-compliant portfolios, the reality is more complex. Even in a certified index fund halal structure, delays in updates or broad screening criteria can result in holding stocks that no longer meet Islamic standards. Index providers may take time to reflect these changes, so if you're relying purely on their certification, you may unknowingly be holding stocks that don’t pass Shariah screens anymore. Tools like Zoya and Islamicly let you do this in minutes and ensure your portfolio stays clean in real-time.

Another advanced tactic is dividend purification. Even in halal-certified index funds, some companies may earn a small portion of their income from non-permissible sources. Scholars recommend purifying this by donating a proportion of the dividend, typically based on financial ratios. This addresses a common concern among investors who wonder if an index fund is haram if any part of the income comes from non-halal activities.

But here’s the trick: if you know which stocks contribute more non-compliant income, you can over-purify or set rules to automatically redirect those dividends to sadaqah. Platforms rarely offer this nuance, but you can automate it through custom spreadsheets or fintech apps designed for ethical investing. It’s a small step that ensures not just halal compliance, but also intentional, value-driven investing.

Conclusion

Are index funds halal? The answer is yes,but only for funds that undergo Islamic compliance screening and adhere to Shariah investment standards. With over 2,400 Shariah-compliant funds available globally and certified halal ETFs accessible through leading platforms, Muslim investors today have greater opportunities than ever to invest ethically and responsibly.

Is index funds haram if the compliance process is absent? Yes, due diligence and transparency are essential prerequisites for Shariah-compliant investing.

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Team that worked on the article

Alamin Morshed

Contributor

Alamin Morshed is a contributor at Traders Union. He specializes in writing articles for businesses that want to improve their Google search rankings to compete with their competition. With expertise in search engine optimization (SEO) and content marketing, he ensures his work is both informative and impactful.

Learn about our editorial policies

Chinmay Soni

Developmental English Editor

Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito

Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Glossary for novice traders

Diversification

Diversification is an investment strategy that involves spreading investments across different asset classes, industries, and geographic regions to reduce overall risk.

Investor

An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.

Index

Index in trading is the measure of the performance of a group of stocks, which can include the assets and securities in it.

Cryptocurrency

Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks, typically based on blockchain technology.