As wealth in the Muslim world increases, so does demand for international investments and indices that comply with Islamic law, known as Shariah. In fact, there is a Canadian stock index that can now be thrown into the mix.

Standard & Poor’s Corp., which has produced a worldwide series of stock indices to provide performance benchmarks for Muslim investors and institutional inves-tors, has now launched its newest Islam-based index: the S&P/TSX Shariah 60.

Daily data for the new index have been published since late May, though the index has been calculated back to late 2007. (See accompanying chart.)

As the index’s name implies, it is a variant of the TSX 60 index, which represents the large-cap segment of the Canadian equities market, but with certain key differences.

“Shariah has certain strictures regarding finance and commercial activities permitted for Muslims,” the S&P news release says.

As a result, the Shariah 60 lacks all the TSX 60’s financials sector (recently, 31% of the TSX 60), all the industrial sector (5%), all telecommunications services (5.6%) and all utilities (1%), for one reason or another.

Among the forbidden industries under Shariah law are alcohol, embryonic or stem-cell research and cloning, financials, gambling, advertising and media (newspapers are allowed), tobacco and the trading of gold and silver as cash on a deferred basis.

In addition to industry compliance, each company in the index must meet several financial ratios. For instance, a company’s leverage must include debt less than one-third of the market value of its equity, as measured over a 36-month period.

Cash holdings must meet two criteria: accounts receivable must be less than 49% of the market value of the equity; and cash plus interest-bearing securities must be less than 33% of the market value of the equity. Both ratios are averaged over a 36-month span.

In order to ensure that the companies in the index meet Shariah law, S&P has put together a Shariah supervisory board. This board consists of scholars of Islam who serve to interpret business issues and recommend actions related to S&P’s indices.

The board members include: Muhammad Ali Elgari, who has a PhD in economics from the University of California; Abdul Sattar Abu Ghuddah, who has a PhD in Islamic law from Al Azhar University in Cairo; Nazih Hammad, who has a PhD in Islamic law from the University of Cairo; and Mohammad Amin Ali-Qattan, who has a PhD in Islamic banking from Birmingham University in Britain.

The S&P release notes that its Shariah indices have tracked their source indices well. Despite the exclusions — or, perhaps, because of them — the S&P/TSX Shariah 60 has matched its source index since inception.

From the weekly closing peak on May 16, 2008, to the weekly closing on May 15, 2009, the Shariah 60 and its parent 60 index were down by the identical amount (34%). Relative standard deviation of weekly closings, which permits comparison of two sets of highly differentiated sets of numbers, has been slightly higher for the Shariah 60 index — 0.21, vs 0.19 for the source index.

The S&P/TSX Shariah 60 has achieved this with 25 stocks, compared with the full 60 for the source index. This means the largest stocks in the S&P/TSX Shariah 60 account for a larger portion of the index than their regular sector weighting in the S&P/TSX 60.

The S&P/TSX Shariah 60 started with these as the top 10 stocks, shown with their S&P/TSX Shariah 60 weighting: EnCana Corp., 12.5%; Research in Motion Ltd., 12.4%; Potash Corp., 9.2%; Barrick Gold Corp., 9.2%; Suncor Energy Inc., 8.6%; Goldcorp Inc., 7.2%; Petro-Canada, 5.6%; Talisman Energy Inc., 4.6%; Canadian Oil Sands Trust, 3.6%; and Cameco Corp., 3.3%. IE