AAOIFI Shari'a screening · Reviewed July 20, 2026

Are index funds halal?

Most conventional index funds are not halal: they hold banks, insurers, alcohol, and gambling names. The AAOIFI 5% basket rule, real screening data for VOO and QQQ, and the halal index funds that pass.

Most conventional index funds are not halal, because the indexes they track include prohibited businesses. Under the AAOIFI approach, a fund is compliant only when non-compliant holdings stay under 5% of the basket by weight. The S&P 500 fund VOO fails at roughly 22.6% non-compliant weight and the Nasdaq-100 fund QQQ fails at roughly 16.1% as of July 2026. Shariah-screened index funds such as HLAL and SPUS apply the same passive strategy to a filtered index and pass.

Why the big index funds fail. A total-market or S&P 500 index fund owns everything in the index, which means conventional banks (JPMorgan, Bank of America), insurers, and alcohol and gambling names sit inside the basket. When HalalScreener screened the Vanguard S&P 500 ETF (VOO) in July 2026, about 23% of the basket by weight was non-compliant, far above the 5% tolerance. The Nasdaq-100 fund QQQ came out at 16.1% non-compliant weight, with individually halal holdings like NVIDIA, Apple, and Microsoft outweighed by names that fail screening.

The 5% basket rule. Scholars tolerate a small amount of incidental non-compliance inside a diversified fund, provided non-compliant holdings stay under 5% of the basket by weight and the income from them is purified. This is the same tolerance logic AAOIFI applies to a single company's interest income. Almost no conventional broad-market index fund gets under the line, because financials alone are typically over 10% of any major index.

The halal alternatives. Shariah index funds run the same passive, low-cost strategy on a screened index: HLAL (Wahed FTSE USA Shariah ETF) and SPUS (SP Funds S&P 500 Sharia Industry Exclusions ETF) are the two most liquid US options, and Amana's mutual funds are the oldest. They exclude prohibited industries and apply the AAOIFI financial screens, then publish purification figures. Our answer on halal alternatives to the S&P 500 compares them in detail.

How to check any fund. Do not rely on the fund's name or category. Screen the actual basket: HalalScreener's ETF screening shows the halal, doubtful, and non-compliant weight of any US-listed ETF and the verdict under the 5% rule, free. If you hold index funds inside a 401(k) or pension, the same test applies to each fund on the menu.

Methodology

Verdict applies the methodology of AAOIFI Shari'a Standard No. 21: Financial Papers (Shares and Bonds): qualitative screening for prohibited business activities, plus three quantitative caps. Interest-bearing debt < 30% of market cap, interest-bearing securities < 30%, and non-permissible income < 5% of revenue.

Sources and scholars

  • AAOIFI Shari'a Standard No. 21: Financial Papers (Shares and Bonds)
  • Wahed Invest Shari'a Supervisory Board (HLAL)
  • SP Funds Shari'a Board (SPUS)
  • Amana Mutual Funds (Saturna) Shari'a Supervisory Board

Frequently asked

Is the S&P 500 halal?

No, not through a conventional fund. The index includes banks, insurers, alcohol, and gambling companies; VOO screened at roughly 22.6% non-compliant basket weight in July 2026, far above the 5% tolerance. Screened alternatives like SPUS and HLAL track filtered versions of US large-cap indexes and pass.

Are Vanguard or Fidelity index funds halal?

The provider does not matter; the basket does. Any fund tracking an unscreened index (total market, S&P 500, Nasdaq-100) will hold prohibited businesses well above the 5% tolerance. Check the specific fund's holdings rather than the brand.

Are target-date retirement funds halal?

Almost never. Target-date funds mix unscreened equity indexes with conventional bond funds, and bonds are interest instruments. If your retirement plan offers a brokerage window, halal ETFs like HLAL or SPUS can usually be held there instead.

What is the best halal index fund?

The two most liquid US-listed options are HLAL (about 200 US large caps, FTSE Shariah screened) and SPUS (S&P 500 with industry exclusions). Amana funds offer an actively managed alternative with the longest track record. Which is better depends on the index exposure you want; all three publish Shariah audits.