Is ZSP Halal? The 2026 Shariah Verdict for Canadian Muslim Investors

What ZSP Actually Holds — and Why That Matters for Shariah Compliance

ZSP is the BMO S&P 500 Index ETF. It tracks the S&P 500 index passively, holding all 500 constituent companies at their market-capitalization weight. It trades in Canadian dollars on the TSX, charges an MER of roughly 0.09%, and is one of the most widely held ETFs in Canadian RRSPs and TFSAs.

The problem for Muslim investors is straightforward: the S&P 500 does not care about Shariah compliance. The index includes every large-cap US company that meets its size and liquidity criteria, regardless of what that company does. That means ZSP holds:

• Conventional banks: JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Citigroup — collectively among the largest index weights. Their entire business model is interest-based lending and trading (riba).
• Insurance companies: Berkshire Hathaway, Progressive, MetLife, Allstate — conventional insurance involves uncertainty (gharar) and interest-based investment of float.
• Tobacco: Philip Morris International, Altria Group — haram products.
• Alcohol: Constellation Brands, Brown-Forman, Molson Coors — haram products.
• Gambling: Las Vegas Sands, MGM Resorts, Wynn Resorts, Caesars Entertainment — haram activity.
• Weapons and defence: Lockheed Martin, RTX (Raytheon), Northrop Grumman, General Dynamics, L3Harris Technologies — weapons manufacturing.

Financials alone — banks, insurance, diversified financial services — represent roughly 13% of the S&P 500 by weight. Add tobacco, alcohol, gambling, and defence, and you are looking at approximately 15-18% of the index in sectors that fail the AAOIFI business-activity screen before you even get to the financial-ratio tests.

Applying the AAOIFI Shari'ah Standard 21 Screen to ZSP

AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) sets the global benchmark for Shariah screening, and most halal ETFs available to Canadian investors — including HLAL, SPUS, and Wealthsimple's Shariah-compliant portfolio — use AAOIFI Standard 21 or near-identical methodologies. The screen has two stages.

Stage 1: Business-Activity Screen

A company is excluded if more than 5% of its revenue comes from: conventional interest-based finance and insurance, alcohol, tobacco, gambling, pork, adult entertainment, weapons and defence, or other haram activity.

ZSP verdict on Stage 1: FAIL. The fund holds dozens of companies where 100% of revenue comes from prohibited activities — not 6% or 10%, but the entirety of the business. JPMorgan Chase does not earn 5% of its revenue from interest-based lending; it earns virtually all of it from interest-based lending and financial services. Philip Morris does not earn a small fraction from tobacco; it is a tobacco company. These are not borderline cases.

Stage 2: Financial-Ratio Screens

Even for companies that pass the business-activity test, AAOIFI Standard 21 applies three financial-ratio screens:

ZSP's conventional bank holdings do not just fail these ratio tests — they fail them by multiples. A bank like JPMorgan has a balance sheet that is almost entirely interest-bearing debt and interest-bearing assets. Its debt-to-market-cap ratio and interest-income-to-revenue ratio are not close to the 30% and 5% thresholds; they are orders of magnitude above them. Other ZSP holdings — highly leveraged utilities, some capital-intensive telecoms — also breach the debt screen at the individual-company level.

The financial-ratio failure is secondary to the business-activity failure (a fund that fails Stage 1 is already non-compliant), but it reinforces the verdict: ZSP is not a borderline case where one holding barely misses one threshold. It fails comprehensively, across multiple screens, on a substantial share of its portfolio.

Why Purification Does Not Apply to ZSP

Purification is a well-established Islamic finance mechanism for handling small amounts of incidental non-permissible income. When a Shariah-compliant company earns, say, 2% of its revenue from interest on its cash reserves — below the 5% AAOIFI threshold — the investor donates that 2% share of their dividends to charity. The ETF provider publishes the annual purification ratio so investors know exactly what to give.

Purification works because the company is fundamentally compliant — its core business is halal, and the non-permissible income is incidental and minor. That is not ZSP's situation. You cannot purify away JPMorgan Chase. You cannot purify away Philip Morris. You cannot donate 13-18% of your dividends to charity and call a broad-market index fund halal — that is not what purification is designed for, and no credible Shariah board endorses that approach.

If you see an advisor or online commentary suggesting you can “just purify the haram portion” of a broad S&P 500 ETF, that is a misapplication of the concept. Purification handles rounding errors in compliant portfolios. It does not transform a non-compliant portfolio into a compliant one.

The Fee Premium for Halal S&P 500 Exposure — and Whether It Is Worth It

The most common objection from Canadian Muslim investors is the cost gap. ZSP charges approximately 0.09% in MER. The halal alternatives charge meaningfully more:

On $100,000, the annual fee difference between ZSP and SPUS is approximately $360. On a $220,000 RRSP, it is roughly $790. Over 25 years with 7% annual returns, the compounded fee drag on $220,000 is in the range of $25,000 to $30,000 — real money, but spread over a quarter century.

The cost gap exists because halal ETFs are smaller funds with higher operating costs per dollar managed. They also require active quarterly screening — every rebalance date, the provider re-runs the AAOIFI (or equivalent) screen and removes newly non-compliant companies. That costs more than passive index replication. The gap will likely narrow as halal ETF assets under management grow, but it will not disappear entirely because the screening process is inherently active.

Whether the premium is “worth it” is not a financial question — it is a values question. For a Muslim investor who considers Shariah compliance non-negotiable, the fee comparison is irrelevant because ZSP is not an option. The relevant comparison is SPUS versus HLAL versus Wealthsimple Halal versus a self-directed portfolio of individually screened stocks.

How Halal S&P 500 Alternatives Actually Perform

A common fear is that removing banks, insurers, tobacco, and defence companies from the S&P 500 guts its returns. The data does not support that fear. Shariah-screened US equity indices have historically tracked within 1-2% of the unscreened S&P 500 on an annualized basis — sometimes outperforming (because the excluded financial sector underperformed in certain periods), sometimes underperforming (because financials rallied).

The sector bias cuts both ways. Halal portfolios are overweight technology, healthcare, and consumer discretionary — the sectors that drove most of the S&P 500's gains in the 2020s. They are underweight financials and energy (many energy companies carry high debt ratios). In a tech-led bull market, the halal screen helps. In a financials-led recovery, it drags. Over a full market cycle, the performance gap is narrow enough that it should not drive the compliance decision.

The bigger performance risk for Canadian halal investors is concentration. With banks and insurers removed, halal US equity ETFs lean heavily into mega-cap tech — Apple, Microsoft, Nvidia, Alphabet, Amazon, Tesla, and Meta collectively represent an outsized share of the screened portfolio. That is not a Shariah problem; it is a diversification problem. Investors holding SPUS or HLAL should be aware that their portfolio behaves more like a US tech fund than a broad-market fund, and should diversify across geographies and asset classes accordingly.

Where to Hold Halal US Equity ETFs in Canada: RRSP vs TFSA vs Non-Registered

Account placement matters more for halal US equity ETFs than for ZSP, because the halal alternatives trade in USD on US exchanges:

• RRSP (best for US dividend ETFs): Under the Canada-US tax treaty, US withholding tax on dividends is waived inside an RRSP. HLAL and SPUS both pay dividends from US-listed companies, so the RRSP eliminates the 15% US withholding tax that would otherwise apply. At a 1.5% yield on $220,000, that saves approximately $495 per year.
• TFSA (best for growth): The TFSA does not qualify for the Canada-US tax treaty exemption, so US dividends face 15% withholding. But all capital gains are completely tax-free, regardless of your province. For a halal investor in a high-tax province where the top combined marginal rate is 53.53% in Ontario or 54% in Nova Scotia, tax-free capital gains on your highest-growth holdings is a significant advantage.
• Non-registered (use last): Capital gains are taxed at the 50% inclusion rate (the proposed tiered increase was cancelled in March 2025 — the rate remains flat 50% for all individuals in 2026). US dividends are taxed as ordinary income at your full marginal rate. This is the least tax-efficient home for halal US equity, but it is where money goes after your RRSP ($33,810 limit in 2026) and TFSA ($7,000 limit in 2026) are full.

Individually Screened Stocks: The DIY Alternative to Halal ETFs

Some Canadian Muslim investors skip ETFs entirely and build their own portfolio of individually screened US stocks. The appeal is lower cost (no MER) and full control. The AAOIFI screen can be applied stock-by-stock using free screeners like Musaffa or Zoya, which check the four tests against current financial data.

Companies that consistently pass AAOIFI screening include many of the largest S&P 500 names outside financials: Apple, Microsoft, Nvidia, Tesla, Alphabet, Amazon, and Meta typically pass the business-activity and financial-ratio screens (though each must be re-verified quarterly, as debt levels and cash positions shift). Johnson & Johnson, Procter & Gamble, and Costco also tend to pass — their revenue is halal and their balance sheets are relatively clean.

The DIY approach works well for investors with $100,000+ who are comfortable with rebalancing and quarterly screening. For smaller portfolios, the transaction costs and the concentration risk of holding 15-25 individual stocks (versus the 200+ in HLAL or SPUS) usually make the ETF route more practical.

Other S&P 500 ETFs: VFV, XUS, and XQQ All Fail the Same Screen

ZSP is not unique in its non-compliance — it is just the most commonly asked-about Canadian-listed S&P 500 ETF. The same verdict applies to:

• VFV (Vanguard S&P 500 Index ETF) — same 500 holdings, same screening failure
• XUS (iShares Core S&P 500 Index ETF) — identical index, identical problem
• XQQ (iShares NASDAQ 100 Index ETF) — fewer financials but still holds non-compliant names
• XEQT, VEQT, VGRO (all-in-one ETFs) — hold broad global indices including full financial sectors

The ticker and the fund provider do not change the Shariah ruling. Any unscreened broad-market index ETF holds conventional banks, insurers, and other haram-revenue companies by design. The only way to get halal large-cap US equity exposure through an ETF is to buy a purpose-built Shariah-screened fund. For a detailed walkthrough of applying the AAOIFI screen to a self-directed portfolio, see our DIY halal screening guide for a $200K RRSP.

The Verdict: ZSP Is Not Halal, and No Amount of Purification Changes That

ZSP fails AAOIFI Shariah screening comprehensively. It holds companies whose entire business is interest-based lending, companies that manufacture tobacco, companies that produce alcohol, and companies that build weapons. These are not marginal or debatable exclusions — they are the clearest cases in Shariah screening. The financial-ratio screens compound the failure, but the business-activity screen alone is disqualifying.

The practical path for Canadian Muslim investors who want S&P 500-like exposure is SPUS or HLAL in a self-directed RRSP (for the US withholding tax treaty benefit), or Wealthsimple's Halal portfolio for a managed CAD-denominated solution. The fee premium is real — roughly $360 to $400 per year on $100,000 — but it is the cost of compliance, and it is shrinking as halal ETF assets grow.

If you are currently holding ZSP in your RRSP or TFSA and want to transition to a Shariah-compliant portfolio, the mechanics are straightforward: sell ZSP (no tax event inside a registered account), convert to USD if buying HLAL or SPUS directly, and purchase the halal ETF. Inside an RRSP, there is no deemed disposition — the switch is tax-neutral. Inside a TFSA, same story. The only cost is the bid-ask spread and the currency conversion, both of which are one-time.