A comparative performance analysis of conventional and Islamic exchange-traded funds

Exchange-traded Funds (ETFs) have attracted many investors as one of the most innovative products of financial engineering. By virtue of the nascent nature of Islamic ETFs, comparative performance studies of Islamic and conventional ETFs are essential to assess the attractiveness of two distinct financial instruments. By making use of 85 ETFs from UK iShares between 2008 and 2011, this article compares the performance of conventional and Islamic ETFs. In our analysis, the Sharpe, Treynor and Sortino ratios are used as risk-adjusted performance measures. Islamic ETFs can beat both conventional ETFs and the market benchmark index based on risk-adjusted performance measures. Overall, both ETFs were able to outperform the market benchmark index. It is also evident that a portfolio of Islamic ETFs shows less variability and hence is less risky compared with their conventional counterpart. As the existing literature on ETFs generally lacks an empirical analysis of the comparative performance of conventional and Islamic ETFs, this article is a pioneering empirical research on the performance analysis of two distinct types of ETFs, taking samples from the largest provider of ETFs, iShares. The findings of this article are very relevant for investors and fund managers in determining policy matters, deciding investment and marketing strategy for two distinct types of capital market products. © 2013 Macmillan Publishers Ltd.