Are the Islamic indexes size or sector oriented? evidence from Dow Jones Islamic indexes

This paper examines the impact of the Shari'ah filtering criteria on the composition in size and sectors of Dow Jones Islamic indexes relative to their conventional counterparts. Filtering criteria remove a large number of Shari'ah non-compliant firms, reducing the number of stocks included in the DJ Islamic indexes, and thus implying the relative under-diversification of the Islamic indexes. We show that all conventional and Islamic indexes are rather small-cap oriented, except for DJ Islamic Asia and Japan indexes which are more mid-cap oriented. Further, the Shari'ah compliant screens slightly modify the proportion of firm sizes. However, we find that filtering leads to higher concentration in some sectors, especially Basic Materials, Industrials and Technology focused in most DJ Islamic indexes, whereas the conventional indexes are rather Industrials, Consumer Goods and Services and Financials sector oriented. Finally, we compare the risk-adjusted performance on the Islamic and conventional size- and sector-indexes. We find that the Islamic size sub-indexes exhibit higher risk-adjusted performance than their conventional counterpart, and the Islamic sector sub-indexes outperform their non-Islamic counterpart for Basic Materials, Consumer Goods and Services, Health Care, Industrials, Technologies and Telecommunications. These differences in performance at the sector level can explain the higher performance of the DJIM than the DJGM at the aggregate level.