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News and Insights

S&P 500 vs S&P 500 Shariah Index - A quick comparison

Wasim Khan - January 17, 2020

In 2019 S&P 500 index increased by over 28%. It would be interesting to do a quick comparison of S&P 500 and S&P 500 Sharia index to understand which one performed and why? S&P 500 is a US market index that serves as a barometer for the movement of the US equity market. The S&P 500 consists of 500 large-cap US shares, which combine for about 80% of all US market capitalisation. 

The graph below shows a comparison of S&P 500 and S&P 500 Shariah over one year period up to 16th January 2020. Both indexes move in the same direction, but interestingly the Shariah index performed slightly better. 

Source: S&P Global

So what's behind the performance of both indexes in 2019? it's mainly the mega brands like Apple (up 100%), Microsoft (up 54%), Facebook (up 47%) and Alphabet (up 34%), which are part of both indexes. Apple and Microsoft alone accounted for 14.8% of 2019 S&P 500 gains. 

It's important to note that S&P 500 index is weighted by market capitalisation. Market capitalisation weighting means that the portion of the index represented by each company is proportional to its market capitalisation. For example, Apple and Microsoft are the largest components of S&P 500, amounting to 4.6% and 4.5% respectively. The tech giants are key part of the index, we observe that these tech giants have delivered around 20% of S&P 500 performance in the past year. 

The S&P 500 Shariah Index is comprised of all Shariah compliant constituents in the S&P 500. As of 31 December 2019, it had 248 of its constituents with information technology accounting for the largest portion of the index at 35% compared to 23.2% for the S&P 500 index 

S&P 500 - Sector breakdown:

 

Source: S&P Global

S&P 500 Shariah - Sector breakdown: 

 

Source: S&P Global

As noted, the S&P 500 Shariah index has greater exposure to the information technology and health care sectors than the broader S&P index. The Shariah index has the least exposure to the financial sector as the Sharia screening criteria prohibit investing in financial insititutions involved in interest based lending and transactions. The financial sector did contribute positively to the S&P 500 index in 2019, but the performance of tech giants far outweighs other sectors. It's the relatively higher exposure towards the information technology sector, particularly the tech giants that mainly explains the better performance of the Sharia index in year 2019.


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