Many Muslims have been investing according to their faith for years In fact due to the popularity of Islamic investing, last month the first Exchange Traded Fund (ETF) adhering to strict Islamic beliefs, Dow Jones Islamic Market International (NYSE: JVS), began trading.

Following the Shariah law, this index screens out companies involved in the following industries: pornography, gambling, alcohol, tobacco, weapons, borrowing or lending, women’s fashions, cosmetics, modern cinema, popular music, or pork.

The wave of faith-based investing is catching on. Later this year five new ETFs dedicated to other faiths will roll out. FaithShares, Inc. has created 5 Exchange Traded Funds (ETF) to be managed by FaithShares Advisors, LLC., that are based on the 5 largest Christian denominations in the United States – Baptist, Catholic, Lutheran, Christian, and Methodist. The bigger question is how will funds that avoid “sin stocks” perform?

Sinful Profits

I don’t think anyone would argue that sin is not profitable. A September 14, 2007, New York Times article titled “At Least on Wall Street, Wages of Sin Beat Those of Virtue” claimed that “sin” stocks (those involved in gambling, alcohol, and tobacco) outperformed the S&P 500 Index over a five-year period (September 2002-September 2007). It even highlighted a mutual fund that had purposely invested in “sin” stocks and averaged over 20 percent per year for the five years. A detailed analysis of the fund revealed it was investing as follows:

* 5 percent of the fund was invested in pro-abortion-related companies.

* 10 percent of the fund was invested in companies involved in the production and distribution of pornographic materials.

* 30 percent of the fund was invested in companies involved in alcohol manufacturing and distribution.

* 20 percent of the fund was invested in tobacco companies.

* 30 percent of the fund was invested in casinos, online gaming, and other gambling companies.

Is this the type of fund you would want to invest in? The returns were quite attractive, but do the types of companies in this mutual fund mirror your values and beliefs? It is true that many stocks in these industries have per formed well over time. Selling illegal drugs and prostitution have also been very profitable. Does that make those activities right?

What’s more important to you?

Is the return on your investments more important than the source of the profit? Do you turn your head and invest blindly or develop a process to screen out investments that violate your faith? The choice is up to you. If you would not knowingly invest in the mutual fund described above, why would you not take the time to discover what values your investments are supporting?

Merrill Lynch recently examined the performance of alcohol, tobacco and casino stocks in all recessions since 1970 and found that while the S&P 500 fell 1.5% on average, vice stocks rose an average 11%. Why such a huge difference? Is it security selection? Taking advantage of habits that transcend economic down times?

Profit without principles is ill-gained profit. Principles without sound financials often lead to weak profits. However, principles with sound financials will help you maximize profits. The two go hand in hand. You should consider both your principles and the financial feasibility of the investment. If you are privileged enough to be able to invest, shouldn’t you make sure that you are doing the best you can to maximize your money? At the same time, shouldn’t you make sure you are not profiting at the expense of others’ misfortunes?

Sin versus Virtue

Take a look at two funds the Vice Fund (VICEX) that specifically seeks out tobacco, alcohol, and gambling companies. As of 7-15-09 the fund was up 2.45% for the year (0.71% better than the Standard & Poor’s 500 Index). However a look at the Gilead Fund (ETGLX), a fund dedicated to faith-based investing and avoiding “sin stocks”, is up 20.18% over the same period. This clearly trumps the S&P 500 and the Vice Fund. You can slice and dice the numbers any way you want, screening doesn’t harm performance when you have good money management. It comes down more to security selection, asset allocation, and developing a disciplined investment approach.

History confirms that bad behavior has a way of catching up with both people and companies. Earning a return in a manner that honors God and is a blessing to your fellow man is more important than just maximizing your returns without considering what your dollars are supporting. It may or may not prove to be more profitable to invest in “sin” stocks, but eventually there may be a price to pay. Are you willing to take that risk?