A Factor and Sector Lens for Islamic Investing
- The growth of the Islamic finance industry has increased the importance of understanding how Shariah principles shape portfolio construction and the resulting sensitivity to market and macro drivers.
- Differences in financial leverage calculations — especially how company size is defined — have driven distinct sector and style exposures between capital-intensive value firms and higher-growth companies.
- MSCI’s datasets and solutions can help quantify these time-varying exposures, giving investors better insight into how different Islamic strategies may behave in fluctuating market regimes.
The Islamic finance investment industry reached USD 4.9 trillion in assets in 2023 and is projected to hit USD 7.5 trillion by 2028.1 Islamic funds saw 16% growth in 2023 to reach USD 254 billion in assets under management. As the market expands, so too does the diversity of how Islamic investment principles are integrated into investment strategies. For compliance with Shariah principles, a security must pass a series of financial exposure ratio screens. But how company size is calculated — either by total assets or market capitalization — materially affects which companies qualify for inclusion and whether a portfolio is more exposed to capital-intensive or growth-oriented sectors. These sector and factor differences, in turn, can lead to very different return outcomes across Islamic funds through economic and market cycles. The exclusion of highly leveraged firms, however, leads to a structural tilt toward the quality factor, regardless of the size calculation.
Two index approaches, divergent sector profiles
MSCI has two distinct Islamic index series that can be used to illustrate the effect on the underlying factor and sector tilts. The MSCI Islamic Index Series uses total assets, and hence is tilted towards companies in capital-heavy sectors such as energy and materials.2 The MSCI Islamic M-Series uses a 3-year average of market capitalization, easing the inclusion of growth-oriented companies, information technology (IT) and healthcare.
Data from June 30, 2009, to Aug. 29, 2025. Chart shows the median active sector exposures where the median has been calculated over monthly observations for MSCI ACWI Islamic and MSCI ACWI Islamic M-Series Indexes relative to MSCI ACWI Index.
Sector tilts and style factor exposures
The sectoral exposures influence the differing factor characteristics of the two indexes. The MSCI ACWI Islamic Index has shown a higher tilt toward the value factor, while the MSCI ACWI Islamic M-Series Index has demonstrated stronger growth and momentum exposures, driven by its tech tilt. The large median difference in exposure to IT shows strong time variation. The gap was widest in 2022 but it has since narrowed considerably. As of Aug. 29, 2025, both indexes had an active overweight of more than 10% in IT. Industry tilts, however, remain distinctly different. The MSCI ACWI Islamic Index favors the software and services industry group, whereas the MSCI ACWI Islamic M-Series Index is weighted toward semiconductors.
Data from June 30, 2009, to Aug. 29, 2025. Chart shows the median active factor exposures where the median has been calculated over monthly observations for MSCI ACWI Islamic and MSCI ACWI Islamic M-Series Indexes relative to MSCI ACWI Index.
Persistent differences in valuation and profitability metrics
The inherent differences between the two approaches to Islamic investment captured by the indexes have also contributed to a clear divergence in valuation and profitability metrics. Since 2009, the MSCI ACWI Islamic M-Series Index has exhibited a persistently higher price-to-book ratio (P/B) and return-on-equity (ROE) compared to the MSCI ACWI Islamic Index. The P/B gap widened from around 0.5 in 2009 to a peak of over 3.0 in late 2021. As of Aug. 29, 2025, it remains elevated above 2.3x.
Data from June 30, 2009, to Aug. 29, 2025. Chart shows P/B for MSCI ACWI Islamic and MSCI ACWI Islamic M-Series Indexes.
ROE shows a similar trend: The profitability gap between the two indexes has more than doubled over the period, increasing from 2.8 to 6.8 percentage points. Again, these differences partly reflect the underlying industry tilts: The MSCI ACWI Islamic M-Series Index has greater exposure to semiconductors, which have seen both profitability and valuations increase in recent years. In contrast, the MSCI ACWI Islamic Index has higher exposure to energy, where valuation multiples have remained more stable. Software and services, which are more prominent in this index, have also seen valuation increases, but without a corresponding improvement in profitability.
Data from June 30, 2009, to Aug. 29, 2025. Chart shows ROE for MSCI ACWI Islamic and MSCI ACWI Islamic M-Series Indexes.
Grasping these dynamic exposures helps investors understand why funds that are based on the same set of principles may have unique equity universes and therefore varying exposure to market and macro trends.
Subscribe todayto have insights delivered to your inbox.
ESG Integration in Islamic Investments
Our analysis suggests that incorporating ESG and sustainability considerations into Islamic finance not only aligns with the ethical mandates of Sharia law but also has the potential to improve financial outcomes.
Islamic Investing in Turbulent Times
The global credit crunch has led to high levels of equity market volatility. Financial services companies have been particularly affected, with some large financial institutions failing and others seeing their market capitalization shrink rapidly.
Islamic Indexes
The MSCI Islamic Indexes exclude non-Sharia-compliant securities through business activity screening and two financial ratio screens.
1 ICD-LSEG Islamic Finance Development Report 2024.
2 Sector definitions are based on the Global Industry Classification Standard (GICS®). GICS is the industry-classification standard jointly developed by MSCI and S&P Dow Jones Indices.
The content of this page is for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to recommend any product, tool or service. For all references to laws, rules or regulations, please note that the information is provided “as is” and does not constitute legal advice or any binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.