A sukuk is a shariah-compliant, bond-like instrument that represents ownership in tangible assets, specifically related to a particular project or investment activity. Sukuk holders benefit from earnings generated by these assets. Similar to traditional bonds, sukuks have a stream of cash flows from the associated assets, and they also have an expiration date (e.g., maturity date). However, unlike traditional bonds, the original investment amount cannot be guaranteed. If the assets associated with sukuks increase in value, the value of sukuks will go up, and vice versa. For example, the sukuks issued by Nakheel, a subsidiary of Dubai World, experienced a significant loss in value in 2009.
Sukuk Investment Opportunities
US-based investors currently have the following sukuk ETFs and Mutual Funds:
- Azzad Wise Capital Fund (WISEX);
- Amana Participation Fund (AMAPX);
- SP Funds Dow Jones Global Sukuk ETF (SPSK).
WISEX has the longest track record (inception date 4/1/2010), followed by AMAPX (inception date 9/28/2015), and then the SPSK ETF (inception date 12/27/2019). In terms of cost, WISEX has the highest expense ratio (0.97%), followed by AMAPX (0.80%), and then the SPSK ETF (0.55%).
Unfortunately, building a well-diversified sukuk portfolio is very challenging due to high minimum purchases, typically $5000. As a result, most investors prefer relying on ETFs and mutual funds. Furthermore, buying sukuks in the secondary markets is practically impossible, as most investors prefer to hold sukuk until maturity.
Performance and Risk of the Funds
Performance and risk statistics of investments are highly dependent on the chosen time horizon. Therefore, we look at 14-year (inception date of WISEX), 8-year, and 4-year performance and risk statistics of the funds and compare them with SHY (iShares 1-3 Year Treasury Bond ETF) and IGSB (iShares 1-5 Year Investment Grade Corporate Bond) ETFs. The rationale for choosing these ETFs is that all sukuk funds have a duration of less than five years. In fixed income, duration is a good indicator of risk – the longer the duration, the higher the risk. In addition to this, by choosing these non-shariah-compliant ETFs, we will be able to see the relative performance of sukuks compared to risk-free bonds and corporate bonds.
Since inception, WISEX (1.3x) has demonstrated a performance similar to that of the IGSB ETF (1.3x), outperforming the SHY ETF (1.1x). The volatilities of the funds for this time period were as follows: 1.2% (SHY), 2.1% (WISEX), and 2.4% (IGSB).
Over the last 8-year period, both AMAPX and the IGSB ETF outperformed WISEX. However, when the Fed began raising rates, WISEX caught up with these two funds. The SHY ETF lagged behind all three in terms of performance. Additionally, AMAPX exhibited the highest volatility (3.1%), followed by the IGSB ETF at 3.0%, WISEX at 2.3%, and the SHY ETF at approximately 1.3%
The most recent 4-year data show that WISEX is outperforming all other funds, thanks to its shorter duration. The SPSK ETF is the worst performer, having a longer duration than others. Similarly, the IGSB ETF outperformed AMAPX, primarily due to having a shorter duration.
Wealth Preservation Traits of Sukuks
Evidently, sukuks generally do not contribute to wealth growth. However, they excel at preserving wealth, especially during both prolonged and abrupt market recessions.
When COVID-19 hit the markets, stocks and stock ETFs experienced losses exceeding 15%. However, during this period, WISEX only declined by 3.7%. Ostensibly, WISEX, AMAPX, and the SPSK ETF consist of sukuks issued by governments and corporations in countries such as Malaysia, Indonesia, Bahrain, UAE, KSA, etc. In contrast, the SHY ETF comprises solely US Treasuries, rendering these ETFs safe havens during market distress. This explains the positive performance observed in the SHY ETF during the COVID-19 event.
In 2022, both stocks and bonds experienced declines in value. Notably, the SPUS ETF, AMAGX, and the SPSK ETF incurred losses of around 23%, 21%, and 10%, respectively. In contrast, WISEX demonstrated a remarkable resilience, losing less than 5% during this challenging period. Once again, this underscores the wealth preservation attributes of sukuks, particularly those with shorter durations.
Conclusion
Individuals with substantial wealth, particularly those focused on preserving and safeguarding their assets, can leverage sukuks. Although sukuks might not offer significant growth, their strength lies in effectively preserving accumulated wealth, especially those with shorter durations. Presently, US-based investors have access to a short-duration sukuk fund (WISEX) and two medium-duration funds (AMAPX and the SPSK ETF). Understanding the appropriate usage for each type is crucial. Hence, sukuks can serve as a valuable addition to well-diversified portfolios.
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