Are Index Funds Halal? VAS, VGS, VDHG and IVV Screened for Australians (2026)

Broad-market index funds are not halal as whole products, and the four most Australians own all fail the AAOIFI business screen on their own published holdings: VAS holds 31.55% in financials, mostly the big banks; VGS holds 16.11% financials plus alcohol, defence and conventional insurers inside the MSCI World ex-Australia index; VDHG adds a 10% allocation to conventional bonds; and IVV, the Australian-listed S&P 500 fund, holds 11.31% financials including JPMorgan and Bank of America. Index investing as a method is permissible; it is the index that is the problem. This article screens each fund with the numbers from vanguard.com.au and blackrock.com, explains why the ASX 300 is harder to pass than the S&P 500, and sets out whether to sell, purify or hold, and which Shariah-screened ASX funds replace them.

The screen we applied and where the thresholds come from

Shariah screening of listed equities has two stages, and we used the version Hejaz Asset Management publishes in its screening methodology because it is the most explicit Australian statement of the AAOIFI approach. Stage one excludes any company whose core business is impermissible: conventional banking, lending, insurance and brokerage; alcohol; tobacco; pork; gambling; weapons; adult entertainment; music and cinema production. Stage two tests the survivors on three ratios: impermissible income must not exceed 5% of revenue, cash plus interest-bearing investments must not exceed 30% of twelve-month average market capitalisation, and interest-bearing debt must not exceed 30% on the same basis. The AAOIFI screening explainer covers the reasoning; the halal stocks hub lists screened names.

A fund is screened the same way as a company, by looking through to what it holds. A fund that holds a bank fails stage one for that slice of its assets regardless of ratios, and a fund that holds conventional bonds holds riba directly. We did not have company-level ratio data for every constituent of four indices, so the verdicts below rest on the published sector weights, which are enough: a fund with a double-digit allocation to a prohibited sector cannot pass, whatever the ratios of its compliant holdings.

VAS: the ASX 300 fund where banks and miners are 59% of the money

Vanguard Australian Shares Index ETF (VAS) tracks the S&P/ASX 300, charges 0.07% a year, listed in May 2009 and held $26.68 billion at 30 September 2026, which makes it the largest ETF in the country. Vanguard's sector table at 31 August 2026 shows financials at 31.55%, materials 27.53%, industrials 6.79%, consumer discretionary 6.68%, health care 6.60%, real estate 5.51%, energy 4.52%, consumer staples 3.79%, communication services 3.23%, information technology 2.40% and utilities 1.40%. The financials bucket on the ASX is almost entirely the four major banks, Macquarie, the regional banks and the insurers, and every one of those fails the business screen outright.

That single number settles the verdict. Nearly a third of each VAS unit is a direct holding in interest-based businesses, which no ratio can rescue, and the real estate sleeve adds REITs that often carry debt above 30% of market value. Of the remaining two thirds, the miners, health care, retailers and energy companies would each need ratio testing, and some would fail on debt. VAS is not halal. The individual miners, health care and retail names you might keep instead each need their own ratio test before you buy them directly.

VGS: the MSCI World ex-Australia fund that is 73% United States

Vanguard MSCI Index International Shares ETF (VGS) tracks the MSCI World ex-Australia index with net dividends reinvested, charges 0.18%, listed in November 2014 and held $18.62 billion at 30 September 2026. Its sector table at 31 August 2026 shows information technology 30.52%, financials 16.11%, industrials 11.21%, health care 9.32%, consumer discretionary 8.82%, communication services 8.03%, consumer staples 4.91%, energy 4.08%, materials 3.05%, utilities 2.41% and real estate 1.55%. By country it is 73.58% United States, 5.88% Japan, 3.66% United Kingdom, 3.54% Canada and the rest spread across Europe and Asia.

VGS fails for the same reason as VAS, at half the dose. Sixteen per cent in financials means banks, insurers and asset managers across every developed market in the index, and the index also contains brewers, distillers, tobacco companies, defence contractors and casino operators that sit inside consumer staples, industrials and consumer discretionary rather than in a labelled sector. The large technology weight is the part most likely to pass the ratio tests, which is why a screened developed-markets fund looks like a technology-heavy subset of VGS. VGS itself is not halal.

VDHG: the diversified fund with a 10% bond sleeve

Vanguard Diversified High Growth Index ETF (VDHG) is a fund of Vanguard funds, charges 0.27%, listed in November 2017 and held $4.14 billion at 30 September 2026. Vanguard's description is the whole verdict: "a ready-made solution that invests in 90% growth assets (e.g. shares) and 10% defensive assets (e.g. bonds)", across more than 16,000 securities, tracking a composite index weighted to its strategic asset allocation. The 90% growth sleeve is built from the same Australian and international index funds screened above, so it inherits their bank and insurer weightings. The 10% defensive sleeve is conventional fixed interest, which means interest-bearing bonds held directly.

VDHG is therefore the clearest fail of the four. It is not only that a slice of the equities are banks; a tenth of the fund is itself a riba instrument, and that portion is by design, not by index accident. There is no purification arithmetic that handles a deliberate bond allocation, because purification addresses incidental impure income inside otherwise permissible businesses, not an asset class chosen for its interest. Anyone holding VDHG as a one-fund portfolio should treat it as the first position to replace.

IVV: the S&P 500 fund, and why it is the least bad of the four

iShares S&P 500 ETF (IVV) on the ASX is an Australian-domiciled fund since September 2018 that tracks the S&P 500 Net Total Return Index in Australian dollars, charges 0.04%, and held $15.15 billion of net assets at 3 October 2026. BlackRock's holdings file shows that the Australian fund holds a single security, the US-listed iShares Core S&P 500 ETF, at 99.96% of assets, and the look-through file of that fund at 5 October 2026 lists 505 equity holdings. Summing the look-through weights by sector gives information technology 40.08%, financials 11.31%, communication 9.86%, health care 9.05%, consumer discretionary 8.56%, industrials 8.06%, consumer staples 4.32%, energy 3.42%, utilities 1.89%, materials 1.67% and real estate 1.63%. The top holdings are NVIDIA 8.61%, Apple 7.24%, Microsoft 5.81%, Amazon 3.68% and the two Alphabet classes at 5.46% combined.

The financials sleeve is where IVV fails: Berkshire Hathaway 1.40%, JPMorgan Chase 1.32%, Visa 0.94%, Mastercard 0.68%, Bank of America 0.52%, Goldman Sachs 0.39%, Wells Fargo 0.37%, Morgan Stanley 0.34% and Citigroup 0.32% are all in the file. Eleven per cent in a prohibited sector is a fail, and it is why the question "is it haram to invest in the S&P 500" gets a yes from every screener for the whole index. What makes IVV the least bad is the composition of the other 89%: a 40% technology weight dominated by companies with low debt ratios means a large majority of the fund would survive both stages, which is exactly why Shariah-compliant US equity indices look like a lightly trimmed S&P 500. The fix is to buy the trimmed version, not to hold IVV and purify.

Why the ASX 300 is harder to pass than the S&P 500

Put the two tables side by side and the answer is structural. Financials are 31.55% of VAS and 11.31% of IVV; information technology is 2.40% of VAS and 40.08% of IVV. The Australian market is built on banks and miners, the American market on software and semiconductors, and Shariah screening happens to punish the first and tolerate the second. An Australian investor who screens the ASX 300 is left with mining, health care, some retail, some infrastructure and a few technology names, which is why the compliant Australian equity products in the ASX halal ETF guide hold a concentrated portfolio rather than a mirror of the index. The same investor screening the S&P 500 keeps most of the index's weight and loses the banks.

Index investing versus index funds: do not throw out the method

Nothing in the screening objects to the idea of indexing: holding a rules-based, diversified, low-cost basket and leaving it alone. The objection is to the specific rule set of a market-cap index, which includes every large company regardless of what it does. A Shariah index applies the business and ratio screens as its rules, weights the survivors by market capitalisation, and rebalances periodically, which is index investing in the full sense. The Hejaz Equities Fund Active ETF (ISLM) and its sibling funds are active rather than index products, so Australia does not yet have a plain passive Shariah index ETF on the ASX, but the Hejaz halal ETF review and the how to invest halal hub show how to build an indexed-style portfolio from what is listed, and the ratio screens above can be run yourself on a broker's holdings list if you prefer direct shares.

What to do with an existing holding: sell, purify, or hold with purification

The scholarly default is to exit holdings that fail the business screen, because the problem is ownership of the prohibited business, not merely receipt of its income. Purification, where you calculate the share of dividends attributable to impure income and give it away, is the remedy for a compliant company that has some incidental interest income, and the dividend purification guide explains the arithmetic. It is not a licence to hold a bank through a fund. That said, three practical cases differ.

• A small, recent holding with little gain: sell, purify any distributions received, and redeploy into a screened fund or screened shares.
• A large holding with a big capital gain: sell in tranches across financial years to manage capital gains tax, purifying distributions in the meantime, and do not let tax delay the exit beyond a plan you have written down.
• VDHG specifically: sell first, because the bond sleeve is direct riba rather than incidental income and cannot be purified away.
• Holdings inside super you do not control: switch the option to a Shariah-screened choice if the fund offers one, or move funds, rather than trying to purify a MySuper default.
• In every case, calculate the impure share of distributions already received using the fund's own sector weights as a proxy and give that amount to charity without expecting reward.

Capital gains tax is real and so is the obligation; the sensible path is a dated plan to exit within one to two financial years rather than an indefinite hold justified by tax. A reader unsure where a particular product sits can check the verdict pages on the is it halal hub before acting.

The Shariah-screened alternatives listed on the ASX

The replacements that actually exist on the ASX, as confirmed on Hejaz's important documents page, are the Hejaz Equities Fund Active ETF (ISLM), the Hejaz Sukuk Active ETF (SKUK), the Hejaz High Income Active ETF (HJHI), the Hejaz Property Fund Active ETF and the Hejaz High Innovation Active ETF, all managed by Hejaz Asset Management under its published AAOIFI methodology with Global Islamic Financial Services as the external Shariah auditor. Hejaz also packages three of them into the Investa Growth portfolio (50% ISLM, 25% SKUK, 20% HJHI, 5% cash) for a 0.50% management fee with a $1,000 opening minimum. These are active funds with fees well above VAS or IVV, and that trade-off is the price of screening in a small market; the Islamic investing hub covers the direct-share and overseas-fund routes for an investor who wants broader or cheaper exposure. What does not exist in Australia is a passive, screened, broad-market ETF at an index-fund price; until it does, the honest choice is between a screened active fund, a self-built screened share portfolio, or a conventional index fund that fails the screen.

Verdict: what each type of investor should do now

A VAS holder should sell and replace with ISLM or a screened portfolio of ASX names, accepting a narrower, miner-heavy exposure as the price of removing the banks. A VGS or IVV holder who wants global or US exposure has the easiest substitution in principle because most of what those indices hold would pass; in practice the ASX-listed screened options are limited, so look at the global and US screened funds discussed in the investing hub linked above and hold them through a broker that offers them. A VDHG holder should act first, because the bond sleeve is not a screening grey area. A beginner who has not bought yet should not start with any of the four; start with the screened options and the budget examples in the halal investing for beginners article. An investor who holds these funds inside super should check whether the fund offers a Shariah option before anything else. Facts checked against vanguard.com.au, blackrock.com, hejazfs.com.au on 3 October 2026.

Frequently asked questions

Are index funds halal?

Indexing as a method is permissible; broad market-cap index funds are not, because they hold banks, insurers and other prohibited businesses in proportion to their size. VAS holds 31.55% financials, VGS 16.11%, IVV 11.31% on look-through, and VDHG adds a 10% bond sleeve. A Shariah-screened index applies the same rules-based, low-cost approach to a filtered universe, and that is the halal form of index investing.

Is Vanguard halal to invest in?

Vanguard as a manager is neither halal nor haram; its funds are judged one by one. VAS, VGS and VDHG all fail because of bank holdings and, for VDHG, a deliberate bond allocation. Vanguard Australia does not offer a Shariah-screened fund. If you want Vanguard's low fees in a halal form you would need a screened index product, which no Australian manager currently lists as a passive ETF.

Is it haram to invest in the S&P 500?

Holding the whole S&P 500 through a fund such as IVV is impermissible on the standard screens because about 11% of it is financials, including JPMorgan, Bank of America, Goldman Sachs and Citigroup. Most of the remaining 89%, led by technology companies, would pass both the business and ratio tests, which is why screened US equity funds look like a trimmed S&P 500. Buy the screened version rather than the full index.

Is VDHG halal?

No. Vanguard describes VDHG as 90% growth assets and 10% defensive assets such as bonds, and the bond sleeve is a direct holding of interest-bearing securities. Its equity sleeve also carries the bank weightings of the Australian and international index funds it holds. Because the bond allocation is deliberate rather than incidental, purification does not apply; the position should be replaced.

Can I keep an index fund and purify the dividends?

Purification is the remedy for incidental impure income in an otherwise compliant company, not a way to keep owning prohibited businesses through a fund. Scholars generally require exit from holdings that fail the business screen, with purification of distributions received in the meantime. A tax-driven staged exit over one or two financial years is reasonable; an indefinite hold is not.

What halal index fund alternatives exist in Australia?

On the ASX the screened products are Hejaz's active ETFs: ISLM for equities, SKUK for sukuk, HJHI for income, plus a property and an innovation fund, with the Investa portfolio bundling three of them for 0.50%. None is a passive index tracker and their fees are higher than Vanguard's. Investors wanting cheaper, broader screened exposure currently look to overseas-listed Shariah index ETFs through a broker that offers them.