A Guide to iShares Islamic UCITS ETF Dividend Purification

As many of us know, BlackRock is one of the leading asset managers of the world. Through their iShares business, they offer three Islamic UCITS ETFs for residents of the United Kingdom and the European Union. The following are the UCITS ETFs they offer:

Keep in mind that BlackRock is just a enabler or marketer of these investment products to retail investors. Their sole objective is to provide investors with a total return, taking into account both capital and income returns, which reflects the return of the corresponding indices developed by MSCI, who is a global leader in index products. As such, securities included in the benchmark indices for the Shariah (Islamic) Funds are deemed to be compliant with Shariah by a board appointed by MSCI (the “MSCI Shariah Board”), and will be reviewed on a quarterly basis by the MSCI Shariah Board to contemplate changes as a result of market changes or other events (e.g., de-listing, bankruptcy, corporate actions). In such event, the Investment Manager (i.e. BlackRock) is responsible for ensuring the Fund undertakes the required changes to its Investments in line with the Benchmark Indices for the Shariah Funds. In a nutshell, MSCI plays the role of the “kitchen staff” while BlackRock serves as the “server”.

Evidently, if you look at the names of these ETFs, MSCI have tried to cover as many geographies as possible. However, the underlying holdings within each of these UCITS ETFs are far from perfect (e.g. ISUS has 25% exposure to Microsoft). Unfortunately, those who do not have alternative investment options are compelled to resort to these less than optimal products. Hopefully, we will see some improvements, inshaAllah.

Dividend Purification

The goal of this post is to offer some transparency into dividend purification of these UCITS ETFs. This is what we can see in the Prospectus (p. 134) with regards to purification of dividends:

Investors in the Shariah Funds are responsible for ensuring the purification of dividends received from such Funds where such dividends have accrued prohibited income (e.g. interest earnings). Investors shall be notified on the dividend declaration date of the percentages of prohibited income in any dividend to be paid to them and which will require purification. Pure and impure dividend amounts reported to investors will be based on MSCI’s calculation to ensure consistency with the Benchmark Index. Neither the Shariah Funds, the Manager nor the Investment Manager is responsible for MSCI’s calculation of the pure and impure dividend amounts.

Dividend Payment History

All three UCITS ETFs have been paying dividends since their inception date. The dividend payments of ISDW and ISUS have been gradually increasing over time. According to the Dividend Policy of these products, dividends are distributed semi-annually, in May and November of each year. All of these distributions would be subject to purification as some companies may derive part of their total income from interest income and/or from prohibited activities – this proportion must be deducted from the dividends paid out to shareholders and given to charity.

The dividend payment history is accessible on each UCITS ETF’s page, under the Performance section. The graph below shows the distributed dividend amount per share over time.

Purification Data

Pure and impure dividend amounts per share are also reported to investors and are based on MSCI’s calculation to ensure consistency with the benchmark. They are calculated by MSCI and BlackRock is not responsible for the pure and impure dividend amount. Let’s focus on ISUS to analyze what we can see from the reported purification data.

The first chart below shows the reported purified (blue) and unpurified (orange) income NAV per share on the primary and secondary axes, respectively. The amount of unpurified income is relatively small, generally following the same directional trend, with occasional leading sharp drops. It turns out that accumulated unpurified income is nullified on the last days of April and October as ISUS distributes dividends semiannually every May and November. Therefore, purified income keeps growing until the dividend Ex-Date, which may be slightly confusing.

The second chart displays the actual amounts of dividends paid on their Ex-Date. Please note there is about two weeks lag between the Ex-Date and the Payment Date.

I hope at this point it is clear what you should do in order to purify your dividends. If not, no worries!

TLDR

When you receive a dividend payment either from ISUS, ISWS, or ISDE, it is necessary to purify your income, as the underlying companies of these UCITS ETFs are exposed to haram income. iShares publishes the total income, purified income and unpurified income in the Purification Data table under the Performance section. If you received your dividends in May, refer to the Purification Data table, find the last day of April, and to verify the total amount of your dividend by checking the column “Income NAV per share”. If the amount matches what you have received, then inspect the amount in the column “Unpurified Income NAV per share” for the same date. That is the amount that you have to purify per every share.

Here is an example using the most recent dividend payment. Under Distribution (click on “View full table”), we can see the Total Distribution amount (USD 0.3414) along with its Ex-Date, Record Date, and Payable Date. Now let’s navigate to the Purification Data (click on “View full table”) and find the last date of October in 2023, which is the 31st of October. The column “Income NAV per share” matches the Total Distribution amount. And on the same row, we can read off the Unpurified Income NAV per share, which was equal to USD 0.00118. Multiply this number by the number of shares that own (also consider the currency exchange rate as well) and give the calculated amount to charity.

Acknowledgement

I consider this issue to be of utmost importance, and it is crucial for investors to understand how to purify their dividend income. Prior to composing this post, I contacted BlackRock/iShares’ UK Team to validate the calculations. Subsequently, they reached out to the index provider (MSCI) for confirmation. Although the process took longer than anticipated, I am extremely satisfied with their support. Therefore, I extend my gratitude to the iShares UK Team for their assistance!

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May Allah grant you barakah!