The Cost of Investing Your Conscience (by /pmg)

I admire anyone who has the strength to follow through on his or her convictions, especially when it's clear that doing so comes with an opportunity cost. (This is to say nothing of far more dire or dramatic costs outside the scope of this post.)

Today, we learned a lot about Islamic finance, the only finance method that is based upon a religion. Among its chief features is a prohibition on interest or usury. (The Qu'ran uses the same word for both, riba, therefore making no distinction.) Obviously, all activities must remain Shariah compliant or, in other words, conform to the precepts of Islam set forth in the Qu'ran. Investments, obviously, must be similarly constrained.

It turns out that the S&P has a number of indices that track Shariah-compliant securities. One is the S&P GCC Composite Shariah Index (SPSHG) described as:

The S&P GCC Composite Shariah offers investors a comprehensive Shariah compliant benchmark for the GCC [Gulf Cooperation Council] region, including Saudi Arabia. The index reflects the float defined by foreign investment limits applicable to GCC residents, which is typically larger than that available to investors based outside the region.

Here's how it stacks up next to the S&P 500:

So, a Shariah-compliant investor who got into the market a year ago gets about half the return of the benchmark index.

Now, the delta gets wider when you consider an index that takes into account the Shariah-compliant opportunities available to non-GCC investors, as offered by the S&P GCC Investable Shariah Index (SPSHGI).

This fund only includes five members of the GCC and excludes Saudi Arabia entirely, given the difficulty outsiders have in terms of investing in that market. 

Continuing with the theme of investing based on one's conscience, let's look at "green" investing as in the case of the Neuberger Berman Socially Responsible Investing fund (NBSRX).

The blue line is the fund, the red is the S&P 500. Ouch.

On the other hand, consider the Vice Investor fund (VICEX), which invests exclusively in pretty much everything haram ("not permissible" under Islam), including companies involved in alcohol, tobacco, and gambling. These are industries that are also somewhat secularly demonized in the U.S. and elsewhere, to say nothing of the stance of many religions.

Year-to-date, you come out just a little bit ahead. 

As you know, I consider freedom and choice to be a first-order variable in terms of life and living. As such, I'm thrilled that there are investment instruments that cater to every worldview, creed, or strategy. That said, it should be noted that faith- or cause-based investing comes with a certain level of sacrifice.