ETF and Index Fund Compliance Guide — Which Funds Work and Why
Data as of May 2025. Non-compliant weighting estimates are approximate, based on sector composition data and MSCI Islamic screening criteria as the reference framework. ETF holdings change; verify current holdings before any investment decision. Educational content only.
I. Why ETFs Are Different from Individual Stocks
When you screen an individual stock for compliance, you are assessing the underlying business: what it does, how its balance sheet is structured, and what proportion of its revenue comes from compliant activities. The assessment is of the company itself. If the company passes, you own a compliant asset. If it fails, you do not invest.
ETFs work differently. An ETF is a wrapper — a fund structure that holds a basket of underlying securities. When you buy an ETF, you do not own the ETF itself; you own a proportional share of everything the ETF holds. The compliance question is therefore not about the ETF structure but about the holdings. A fund that holds 500 companies will hold some compliant companies and some non-compliant ones. The question is not whether the fund is compliant but what proportion of the fund's holdings are compliant, and what that means for how you should treat the income you receive from it.
This distinction produces three practical categories of ETF compliance.
Inherently compliant ETFs hold physical assets (gold, silver) or specifically screened equities (dedicated Islamic equity ETFs). No compliance calculation is required because the underlying holdings are either physical commodities with no income stream from prohibited activities, or equities that have already been screened for compliance. For these funds, you hold a compliant asset and no purification is required on distributions received.
Structured mixed ETFs are broad equity funds that hold non-compliant constituents alongside compliant ones. The S&P 500, Nasdaq 100, and most sector ETFs fall into this category. Compliance is calculated at the portfolio level: you estimate the proportion of the fund's holdings that are non-compliant, and you apply a purification calculation to any dividends received from the fund. These funds are usable with purification, but the scale of non-compliance varies significantly between funds.
Structurally excluded ETFs hold debt instruments, derivatives, or primarily non-compliant sectors. Fixed income ETFs (government bonds, corporate bonds), leveraged ETFs, and financial sector ETFs fall into this category. These are generally not usable as compliant investments because the underlying holdings are categorically incompatible with ethical screening criteria.
The passive investor's dilemma is real: broad market ETFs provide diversification and low cost, but they guarantee some non-compliant exposure. The practical question is whether the scale of non-compliance makes the vehicle usable. A fund where 5% of holdings are non-compliant is very different from a fund where 30% are non-compliant. The purification calculation handles the former easily; the latter raises questions about whether the fund is appropriate as a primary holding for investors seeking meaningful compliance.
II. The 15 ETFs Assessed
Category A — Commodity-Backed (Inherently Compliant Potential)
GLD (SPDR Gold Shares)
GLD is a physically-backed gold ETF managed by State Street Global Advisors. Each share represents a fractional ownership of physical gold held in HSBC's London vault. The fund does not hold any interest-bearing instruments, does not engage in securities lending, and generates no income from prohibited business activities. There is no dividend — the fund's return is purely from gold price appreciation.
GLD is generally considered the cleanest ETF available from a compliance perspective. The underlying asset is physical gold, which is a permissible store of value. The fund structure is transparent and straightforward. The primary scholarly nuance is whether ownership of a gold ETF constitutes genuine ownership of the underlying gold, or whether it is a paper claim that lacks the direct possession (qabd) required under some interpretations. For practical investment purposes, the consensus among most contemporary scholars and methodology bodies is that physically-backed commodity ETFs are compliant. Investors who hold a more conservative position on this question should note it and make their own determination.
GLD has no purification requirement. Estimated non-compliant weighting: approximately 0%.
SLV (iShares Silver Trust)
SLV is the silver equivalent of GLD — a physically-backed silver ETF managed by BlackRock. Each share represents a fractional ownership of physical silver held in JPMorgan's London vault. The same compliance reasoning applies as for GLD: no interest income, no prohibited business activity, no dividend.
SLV has lower liquidity than GLD and a smaller asset base, but the compliance picture is identical. The same scholarly nuance about physical possession applies. For practical investment purposes, SLV is treated as compliant alongside GLD.
SLV has no purification requirement. Estimated non-compliant weighting: approximately 0%.
Category B — Broad Equity (Mixed, Calculable)
SPY (SPDR S&P 500 ETF)
SPY is the world's largest ETF by assets under management, tracking the S&P 500 index. It holds all 503 constituents of the S&P 500 in proportion to their market capitalisation. The compliance picture reflects the S&P 500 analysis described in Article 2 of this series.
The S&P 500 contains approximately 65 Financials sector constituents, including major commercial banks, investment banks, and insurance companies — all excluded at the business activity screen. It also contains tobacco companies (Altria, Philip Morris), alcohol producers (Brown-Forman, Molson Coors), casino operators (MGM, Caesars), and defence prime contractors (Raytheon, Northrop Grumman, Lockheed Martin). The combined non-compliant weighting by market capitalisation is estimated at approximately 25–30%.
SPY is usable with a purification calculation on dividends received. However, the non-compliant weighting is significant — approximately one-quarter to one-third of the fund's value is in non-compliant holdings. For investors seeking meaningful compliance, SPY is not suitable as a primary equity holding. It is more appropriate as a tactical or transitional holding where the investor is moving towards a more compliant portfolio but has not yet completed the transition.
Estimated non-compliant weighting: ~25–30%. Purification required on dividends.
VOO (Vanguard S&P 500 ETF)
VOO tracks the same S&P 500 index as SPY. The compliance picture is identical. The primary difference is the expense ratio (VOO is cheaper at 0.03% vs SPY's 0.0945%) and the fund manager (Vanguard vs State Street). For compliance purposes, VOO and SPY are interchangeable.
Estimated non-compliant weighting: ~25–30%. Purification required on dividends.
VTI (Vanguard Total Stock Market ETF)
VTI tracks the CRSP US Total Market Index, which includes approximately 3,700 US-listed companies across large, mid, small, and micro-cap segments. The broader universe includes more small and mid-cap companies than the S&P 500, but the sector composition at the market-cap-weighted level is similar to SPY, since large-caps dominate the weighting.
The non-compliant weighting for VTI is comparable to SPY — approximately 25–30% — because the Financials, Utilities, and Real Estate sectors that drive most exclusions are present in similar proportions. The small-cap tail of VTI adds some additional non-compliant exposure from small financial companies and leveraged businesses, but this is marginal given the market-cap weighting.
Estimated non-compliant weighting: ~25–30%. Purification required on dividends.
QQQ (Invesco Nasdaq 100 ETF)
QQQ tracks the Nasdaq 100 index, which contains the 100 largest non-financial companies listed on the Nasdaq exchange. The exclusion of financial companies from the Nasdaq 100 by index construction removes the largest single source of non-compliance in broad market indices. The Nasdaq 100 has no banks, no insurance companies, and no diversified financial services firms.
The compliance picture for QQQ is significantly better than SPY. The index is heavily weighted towards technology and growth companies — sectors that are broadly compliant from a business activity perspective. The primary compliance concerns are: (1) the cash-and-securities screen for large-cap technology companies with significant cash holdings (Apple, Microsoft, Alphabet); (2) the debt screen for companies that have levered up for acquisitions; and (3) the revenue purity screen for companies with meaningful interest income.
Under MSCI total-assets methodology, Apple fails the cash-and-securities screen and would be excluded from a strictly MSCI-compliant version of QQQ. Under S&P Sharia / DJIM methodology, Apple passes. The estimated non-compliant weighting for QQQ is approximately 10–15% under MSCI criteria, and somewhat lower under market-cap-denominated criteria.
QQQ is the most compliant of the major broad equity ETFs. It is more usable than SPY or VTI for investors seeking meaningful compliance, with a purification calculation on dividends.
Estimated non-compliant weighting: ~10–15% (MSCI criteria). Purification required on dividends.
IWM (iShares Russell 2000 ETF)
IWM tracks the Russell 2000 index of small-cap US companies. The compliance picture for IWM is worse than for SPY. The Russell 2000 contains a high proportion of financial companies (regional banks, insurance companies, specialty finance), a significant number of unprofitable companies with negative earnings and high debt ratios, and many businesses in capital-intensive sectors that fail the debt screen.
The small-cap universe also includes a higher proportion of companies in sectors that are difficult to screen — diversified businesses, early-stage companies with complex revenue compositions, and companies with limited public disclosure. The estimated non-compliant weighting for IWM is approximately 30–40%, higher than SPY.
IWM is harder to justify as a compliant holding than SPY or QQQ. The purification calculation is larger, the non-compliant exposure is higher, and the analytical difficulty of screening the underlying holdings is greater. Investors seeking small-cap exposure within a compliant framework should consider dedicated Islamic small-cap ETFs rather than IWM with purification.
Estimated non-compliant weighting: ~30–40%. Purification required on dividends. Low usability.
DIA (SPDR Dow Jones Industrial Average ETF)
DIA tracks the Dow Jones Industrial Average, a price-weighted index of 30 large-cap US companies. The 30 constituents include Goldman Sachs, JPMorgan Chase, and American Express — three financial companies that are excluded at the business activity screen. These three companies represent approximately 15–20% of the price-weighted index.
The remaining 27 constituents are a mix of industrial, technology, healthcare, and consumer companies, most of which are broadly compliant. However, the concentrated exposure to financial services in a 30-stock index is notable — it means that approximately one-fifth of the fund's value is in categorically non-compliant holdings.
DIA is usable with purification, but the financial services concentration makes it less suitable than QQQ or sector ETFs for investors seeking meaningful compliance. The price-weighting methodology (which weights by share price rather than market cap) also makes the compliance picture less intuitive to calculate.
Estimated non-compliant weighting: ~20–25%. Purification required on dividends.
ARKK (ARK Innovation ETF)
ARKK is an actively managed ETF focused on "disruptive innovation" — companies in genomics, robotics, artificial intelligence, fintech, and space exploration. Unlike passive ETFs, ARKK's holdings change frequently as the fund manager (ARK Invest) adjusts the portfolio based on its research.
ARKK presents two compliance challenges. First, the holdings change frequently, making it impossible to provide a stable compliance assessment — any analysis would be outdated within weeks. Second, many of ARKK's holdings are high-growth, pre-profitability companies with significant debt relative to their asset base. The speculative, high-growth orientation of the fund means that many holdings will fail the debt screen even if their business activities are compliant.
ARKK is not suitable as a compliant vehicle. The variable holdings, the high debt ratios of many constituents, and the inclusion of fintech companies with potentially non-compliant financial services revenue make it impossible to apply a consistent compliance assessment. Investors who want exposure to innovation and technology themes should use a dedicated Islamic technology ETF rather than ARKK.
Estimated non-compliant weighting: Variable. Not suitable for compliant use.
Category C — Sector ETFs
XLK (Technology Select Sector SPDR)
XLK tracks the Technology Select Sector of the S&P 500. It holds approximately 65 technology companies, heavily weighted towards Apple, Microsoft, Nvidia, and Broadcom. The Financials sector is entirely absent from XLK by construction.
XLK is the most compliant of the sector SPDR funds. The primary compliance concerns are the cash-and-securities screen for Apple (which fails under MSCI total-assets criteria) and the revenue purity screen for large-cap tech companies with meaningful interest income. Under MSCI criteria, Apple's exclusion would reduce the non-compliant weighting significantly, but Apple represents approximately 20% of XLK's weighting, so its exclusion or inclusion has a material effect on the fund's compliance picture.
Under market-cap-denominated criteria (S&P Sharia, DJIM), XLK is broadly compliant with an estimated non-compliant weighting of approximately 5–8%. Under MSCI total-assets criteria, the non-compliant weighting is approximately 8–12% (primarily from Apple's cash-and-securities ratio and a small number of other companies with elevated ratios).
XLK is one of the more usable sector ETFs for compliant investors, with a purification calculation on dividends.
Estimated non-compliant weighting: ~8–12% (MSCI criteria). Purification required on dividends. Moderate-High usability.
XLE (Energy Select Sector SPDR)
XLE tracks the Energy Select Sector of the S&P 500, holding major oil and gas companies including ExxonMobil, Chevron, ConocoPhillips, EOG Resources, and Schlumberger. Oil and gas extraction and refining is generally considered a compliant business activity — it is the extraction of natural resources, which is productive economic activity.
The primary compliance concern for XLE is the debt screen. Capital-intensive upstream oil and gas operations require significant debt financing. ExxonMobil and Chevron, as integrated majors with strong balance sheets, typically pass the debt screen. Smaller exploration and production companies within the index may not. The estimated non-compliant weighting for XLE varies with oil prices and capital expenditure cycles — in periods of high investment, debt ratios rise; in periods of capital discipline, they fall.
XLE is broadly usable for compliant investors with a debt-screen analysis of the major holdings and a purification calculation on dividends. The business activity is clean; the compliance risk is in the balance sheet.
Estimated non-compliant weighting: Varies by debt screen; approximately 15–25%. Purification required on dividends. Moderate usability.
XLF (Financial Select Sector SPDR)
XLF tracks the Financial Select Sector of the S&P 500, holding banks, insurance companies, diversified financial services firms, and real estate companies. The business activity screen eliminates this fund categorically. Approximately 95% of XLF's holdings are in conventional financial services — commercial banking, investment banking, insurance, and financial intermediation — all of which are excluded at the business activity screen.
XLF is not suitable for compliant investment. No purification calculation makes a fund whose primary holdings are categorically excluded usable. The fund should be avoided entirely.
Estimated non-compliant weighting: ~95%+. Not suitable.
XLV (Health Care Select Sector SPDR)
XLV tracks the Health Care Select Sector of the S&P 500, holding pharmaceutical companies, medical device manufacturers, healthcare services companies, and managed care organisations. Healthcare is broadly compliant from a business activity perspective — pharmaceutical development, medical devices, and healthcare services are productive activities with no prohibited elements.
The primary compliance nuance in XLV is UnitedHealth Group, which is the largest constituent by weighting. UnitedHealth is a managed care organisation — its primary business is health insurance, which some methodologies treat as a financial services exclusion. Under MSCI criteria, insurance companies are excluded at the business activity screen. UnitedHealth represents approximately 20–25% of XLV's weighting, which is a significant non-compliant exposure if the insurance business activity exclusion applies.
Excluding UnitedHealth, the remaining XLV holdings are broadly compliant. The estimated non-compliant weighting for XLV is approximately 5–10% (primarily from UnitedHealth and a small number of other managed care companies) if the insurance exclusion is applied, or lower if managed care is treated as healthcare services rather than financial services.
XLV is one of the more compliant sector ETFs available, with a purification calculation on dividends.
Estimated non-compliant weighting: ~5–10%. Purification required on dividends. Moderate-High usability.
XLI (Industrial Select Sector SPDR)
XLI tracks the Industrial Select Sector of the S&P 500, holding aerospace and defence companies, industrial machinery manufacturers, transportation companies, and professional services firms. The compliance picture for XLI is mixed.
The primary exclusions are defence prime contractors: Raytheon Technologies (RTX), Northrop Grumman, Lockheed Martin, and L3Harris Technologies are all excluded at the business activity screen. These companies collectively represent approximately 15–20% of XLI's weighting. Boeing is a more complex case — civil aviation manufacturing is compliant, but Boeing's defence revenue is significant and requires a revenue purity calculation.
The remaining industrials holdings — Caterpillar, Honeywell, Parker Hannifin, Deere & Company, Emerson Electric — are broadly compliant from a business activity perspective, subject to debt screen analysis. Capital-intensive industrials carry elevated debt ratios; individual company analysis is required.
XLI is usable with purification, but the defence prime contractor exposure is notable. Investors who want industrial sector exposure without defence involvement should consider individual stock selection within the sector rather than XLI.
Estimated non-compliant weighting: ~15–20%. Purification required on dividends. Moderate-Low usability.
Category D — Fixed Income (Structurally Excluded)
TLT (iShares 20+ Year Treasury Bond ETF)
TLT holds US government bonds with maturities of 20 years or more. Government bonds are interest-bearing instruments by structure — the entire return from holding TLT comes from interest payments (coupon income) and price appreciation driven by interest rate movements. There is no compliant interpretation of a bond ETF that makes it usable for ethical investors.
TLT is categorically excluded. The fund's purpose — to provide exposure to long-duration interest-bearing government debt — is structurally incompatible with ethical screening criteria. No purification calculation applies; the fund is not usable in any proportion.
Estimated non-compliant weighting: 100%. Categorically excluded.
III. ETF Compliance Ranking Table
| ETF | Category | Est. Non-Compliant Weighting | Purification Required | Usability |
|---|---|---|---|---|
| GLD | Commodity (Physical Gold) | ~0% | No | High |
| SLV | Commodity (Physical Silver) | ~0% | No | High |
| XLV | Sector Equity (Healthcare) | ~5–10% | Yes (on dividends) | Moderate-High |
| XLK | Sector Equity (Technology) | ~8–12% | Yes (on dividends) | Moderate-High |
| QQQ | Large-Cap Growth (Nasdaq 100) | ~10–15% | Yes (on dividends) | Moderate |
| XLE | Sector Equity (Energy) | ~15–25% (varies by debt screen) | Yes (on dividends) | Moderate |
| XLI | Sector Equity (Industrials) | ~15–20% | Yes (on dividends) | Moderate-Low |
| DIA | Large-Cap Blend (DJIA) | ~20–25% | Yes (on dividends) | Low-Moderate |
| SPY | Broad Market (S&P 500) | ~25–30% | Yes (on dividends) | Low |
| VOO | Broad Market (S&P 500) | ~25–30% | Yes (on dividends) | Low |
| VTI | Total Market | ~25–30% | Yes (on dividends) | Low |
| IWM | Small-Cap (Russell 2000) | ~30–40% | Yes (on dividends) | Low |
| ARKK | Active Growth | Variable | Yes | Very Low / Not Suitable |
| XLF | Financials Sector | ~95%+ | N/A | Excluded |
| TLT | Fixed Income (Government Bonds) | 100% | N/A | Excluded |
Non-compliant weighting estimates are approximate, based on sector composition data and MSCI Islamic screening criteria as of early 2025. Figures will differ under S&P Sharia or DJIM criteria. ETF holdings change; verify current holdings before any investment decision.
IV. How to Calculate Portfolio-Level Purification for Mixed ETFs
When you hold a mixed ETF and receive dividends, a proportional share of those dividends is considered to have originated from non-compliant holdings. Purification is the practice of identifying that proportion and donating it to charity. It is a personal accounting step, not a regulatory requirement.
The Calculation
The formula is straightforward:
Purification Amount = Non-Compliant Weighting (%) × Dividends Received
Where "Non-Compliant Weighting" is the estimated proportion of the ETF's holdings that are non-compliant, expressed as a decimal.
Step-by-Step Process
Step 1: Determine the non-compliant weighting of the ETF. Use the fund provider's sector breakdown (available on the fund's website) and apply the business activity screen to each sector. For a more precise calculation, use the fund's full holdings list and screen each constituent. For most investors, the sector-level approximation is sufficient.
Step 2: Note dividends received in the tax year. This is the total cash distribution you received from the ETF during the year, before any tax deductions.
Step 3: Calculate the purification amount. Multiply the non-compliant weighting by the dividends received.
Step 4: Donate the purification amount to charity. This is not a tax deduction — it is a personal ethical accounting step. The donation should go to a genuine charitable organisation that does not benefit you personally.
Worked Example
An investor holds 100 units of SPY. During the year, SPY pays total dividends of £200. The investor estimates SPY's non-compliant weighting at 28% (using the sector breakdown from State Street's website and applying the business activity screen to the Financials, tobacco, alcohol, gambling, and defence categories).
Purification amount = 0.28 × £200 = £56
The investor donates £56 to a charity of their choice. The remaining £144 is clean income. The investor's SPY holding is otherwise unaffected — purification does not require selling or adjusting the position.
Practical Notes on the Calculation
The non-compliant weighting does not need to be calculated to the penny. Directional accuracy is the standard — using the fund's sector breakdown and applying a consistent screen is sufficient. If you estimate 28% and the precise figure is 26%, the difference in purification amount is small and the analytical effort required to achieve greater precision is not proportionate to the benefit.
The non-compliant weighting should be updated annually, when the fund's sector composition is reviewed. Most ETF providers publish sector breakdowns monthly; an annual review using the most recent data is adequate for most investors.
For ETFs that do not pay dividends (growth-oriented ETFs, some sector ETFs), purification on dividends does not apply. If you sell units and realise a capital gain, some investors apply a proportional purification on the gain; others do not. Both positions are defensible. See Article 6 in this series for a detailed discussion of capital gains purification.
V. Dedicated Islamic ETF Alternatives
For investors who want broad equity exposure without the complexity of purification calculations on mixed ETFs, several dedicated Islamic equity ETFs are available. These funds apply Shariah screening criteria to their holdings, eliminating the need for purification calculations on dividends received.
The most widely available dedicated Islamic ETFs include:
- HLAL (Wahed FTSE USA Shariah ETF): Tracks the FTSE USA Shariah Index, which applies FTSE Russell's Shariah screening criteria to US equities. Provides broad US equity exposure with Shariah screening applied. Listed on Nasdaq.
- SPUS (SP Funds S&P 500 Sharia Industry Exclusions ETF): Tracks a Shariah-screened version of the S&P 500, applying S&P Sharia criteria to exclude non-compliant constituents. Provides S&P 500-like exposure with screening applied. Listed on NYSE Arca.
- ISWD (iShares MSCI World Islamic UCITS ETF): Tracks the MSCI World Islamic Index, providing global developed market equity exposure with MSCI Islamic screening applied. Listed on the London Stock Exchange. Suitable for UK and European investors.
- SPRE (SP Funds Dow Jones Global Sukuk ETF): Tracks a global sukuk (Islamic bond) index. Provides fixed income-like exposure through Shariah-compliant sukuk instruments rather than conventional bonds. For investors who want a fixed income allocation without conventional bonds.
These dedicated funds are the cleanest solution for investors who want broad market exposure without the complexity of purification calculations. The trade-off is that they have smaller asset bases and lower liquidity than mainstream ETFs like SPY or QQQ, and their expense ratios are generally higher.
VI. Building a Compliant ETF Portfolio
A practical combination for investors who want broad diversification within a compliant framework might include:
- GLD — commodity exposure and portfolio diversification without non-compliant income
- XLK or QQQ — technology and growth exposure with manageable non-compliant weighting and purification
- XLV — healthcare defensive exposure with low non-compliant weighting
- ISWD or HLAL — broad global or US equity exposure via dedicated Islamic ETF, eliminating purification complexity
This combination provides sector diversification, global equity exposure, commodity hedge, and technology growth exposure without the heavy Financials sector concentration of broad market funds. The non-compliant weighting across the portfolio is significantly lower than holding SPY or VTI directly.
This is illustrative, not investment advice. The appropriate portfolio construction depends on the individual investor's circumstances, risk tolerance, and investment objectives.
Disclaimer: Educational content only. Not religious advice. Not financial advice. Approximate figures based on data as of May 2025. ETF holdings change; verify current holdings before any investment decision. Non-compliant weighting estimates are based on sector composition data and MSCI Islamic screening criteria as the reference framework; figures will differ under other methodologies. Dedicated Islamic ETF details are provided for informational purposes only and do not constitute a recommendation.
