SP Funds S&P 500 Sharia Industry Exclusions ETF
Ticker: SPUS

SP Funds Dow Jones Global Sukuk ETF
Ticker: SPSK

SP Funds S&P Global REIT Sharia ETF
Ticker: SPRE

Annual Report

November 30, 2023

SP Funds

SP Funds

Dear Shareholders,

“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Shelby M.C. Davis

The last few years with their volatility bears testimony to the veracity of this quote. After being hit by COVID in 2020, which led to a sharp decline and a “V” shaped recovery, global equity markets performed strongly in 2021 but faced strong macro-economic headwinds in 2022. By the end of 2022, extremely high inflation started jeopardizing four decades of central-bank credibility, and aggressive global monetary tightening, featuring jumbo-sized rate hikes, triggered declines in interest rate sensitive asset prices. However, broad stock markets performed well in 2023 on the promise of restoration of price stability.

As we mentioned in our last letter to shareholders, asset markets can often navigate rising bond yields if the reason is better prospects for economic growth. Despite some unease about the pace of and size of the hikes the markets proved to be resilient. Although the inflation proved to be “sticky” and the developed world interest rates exploded upwards, global stocks performed better compared to the other asset classes in 2023. However, the bonds in all the sub-sectors, including sovereigns, corporates and emerging markets faced a challenging environment in 2023. Commercial and residential real estate also faced headwinds because of jumbo size rate hikes.

As we have reached near the end of the interest rate hike cycle, downside for valuations may be limited. Additional risk comes from a potential recession impacting corporate revenues, wage inflation and additional financial costs eroding net margins. A drop in corporate earnings may result in another leg down for markets, while there is a little room for valuation expansion. The 10-year Treasury yield, at 3.88%¹ (December 28, 2023), positive in real terms and is above long-term inflation expectations. We expect the Federal Reserve to keep pause to assess the impact of a lag impact on consumption and labor market and may start cutting rates in the second half of 2024.

This leaves us slightly cautious on the near-term outlook, but moderately positive for the medium-term with macro-risks offset by the benign cycle outlook. The consensus from strategists for the year end 2024 is a positive for the year. This view is underpinned by estimates of aggregate earnings per share for the companies in the S&P 500 Index that will come in at $264 in 2024 and forward valuations of 19X of forward earnings per share.

Challenges to the global economy include the effect of aggressive central-bank rate hikes, persistent inflation and geopolitical challenges. Other risks include China’s growth issues, U.S. politics and the lingering effects of the Ukraine war. Although there are risks that inflation could reassert itself if the labor market tightness is not addressed or geopolitical tensions intensify, we anticipate directionally lower inflation in 2024 as the major contributors to inflation have all begun to turn. For the developed world, The International Monetary Fund (IMF) now forecasts moderate economic growth of 2.9% in 2024, followed by just 2.3% in 2025.

The SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)

The SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)² (the “Sharia ETF”), a faith-based, broad market equity fund, was launched on December 17, 2019, with a view to providing a broad exposure to Sharia-compliant U.S. stocks. The Sharia ETF seeks to track the performance of the S&P 500 Shariah Industry Exclusions Index, which is a subset of the S&P 500^® Index (the “S&P 500”). The Sharia ETF offers high-income potential at 0.87%³, while offering a good relative defensive characteristic and a strong growth profile. The Sharia ETF has enjoyed widespread industry recognition early in its life. The Sharia ETF is the only Sharia-compliant, broad market U.S. equities fund in the market indexed to S&P Dow Jones Indices LLC and is among a handful of all the Sharia-compliant equity ETFs. The Sharia ETF has received strong reviews from industry pundits as published in financial media. The Sharia ETF performed well since inception under a variety of different market conditions, with a 70.00%⁴ since inception gain (as of December 18, 2023), outperforming the S&P 500 (48.48%) by 21.52%. This period included a global sell off during COVID, a quick recovery afterwards and the inflation and higher interest rates driven bear market in 2022 and 2023. The Sharia ETF gained 34.23%⁵ for the calendar year 2023, more than the gain for the S&P 500 Index (26.85%) for the same period because of lower leverage and better quality of income statement, balance sheet, cash flows and business transparency. This higher than the market performance in this year was despite abnormally higher inflation and its impact on the stock valuations. The Sharia ETF has a higher sector exposure to the technology and health care sectors because sharia compliance screens out financial stocks from its investment universe. This results in a large cap growth tilt for the Sharia ETF which made it more susceptible to interest rate increases but the performance of Sharia ETF defied the rate increases in 2023 as most of the stock market gains in 2023 came from price to earnings multiple expansion.

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In 2024, we believe the focus is shifting to corporate profits which remain well above their long-term trend and may soon encounter headwinds from slowing economic growth, especially if a recession were to happen. We remain cautiously bullish about the economic outlook with risks being balanced by positive cyclical outlook. The market recovery may be bedraggled by persistent inflation, geopolitical issues and swoon on quantitative tightening but may be helped by easing monetary policy. The stocks of the companies included in the Sharia ETF’s portfolio tend to have significantly lower leverage than the broader market because sharia negative screens are screening out the companies with debt-to-market capitalization ratios of more than thirty percent. Also, the exclusion of more fundamentally cyclical sectors gives Sharia investing style a higher quality tinge. Further any ease in monetary policy may benefit higher valuation stocks. This should increase the Sharia ETF’s upside potential because of the higher quality and growth profile.

Wallstreet analysts are projecting earnings growth of 10.0% and revenue growth of 13.1% in 2024, with a forward P/E ratio of 19.5, which is above the 10-Year Average (17.6) and the five-year average of 18.9. At the sector level, the Information Technology (27.1) and Consumer Discretionary (24.6) sectors have the highest forward 12-month P/E ratios, while the Energy (11.0) and Financials (14.4) sectors have the lowest forward 12-month P/E ratios. The trailing 12-month P/E ratio is 23.6, which is above the 5-year average of 22.5 and above the 10-year average of 20.9. Analysts project 9.5% increase in P/E ratio next 12 months. The bottom-up target price for the S&P 500 is $5,234, which is 9.5% above the closing price of $4,781.

In 2023, the Sharia ETF’s assets under management grew by 99% from $169.6 million to over $337.5 million⁶ as of December 18, 2023⁷. Importantly, the Sharia ETF’s assets grew consistently through the interest rate hikes of 2023, which we believe demonstrates investor confidence in Sharia ETF’s resilience.

The Sharia ETF’s Sharia investing style utilizes negative screening against companies which are engaged in socially injurious activities like alcohol, gambling, interest or weapons. The Sharia ETF also filters out the companies with higher leverage. Generally, higher leverage is used to counter agency problems in the companies with governance issues, which when screened out, results in constituents having relatively better corporate governance. The companies with higher carbon emissions, including oil and gas and utilities-related companies are capital intensive and are also filtered out by Sharia screens.

We thank you for the assets you have entrusted with us and deeply value our relationship. For any questions about the Sharia ETF please contact your financial advisor or one of our shareholder associates. You may also visit our website at www.sp-funds.com or reach us via email at [email protected].

Past performance does not guarantee future results.

SP Funds

The SP Funds Dow Jones Global Sukuk ETF (SPSK)

Dear Shareholders,

The SP Funds Dow Jones Global Sukuk ETF (the “Sukuk ETF”)⁸, a faith-based, fixed income fund, was launched on December 27, 2019, with a view to providing a broad exposure to global sukuks, which are financial certificates that are designed to be Sharia-compliant. The Sukuk ETF seeks to track the performance of the Dow Jones Sukuk Total Return (ex-Reinvestment) Index, which is a diversified mix of sukuks from emerging market sovereigns, corporations and supranational agencies. The Sukuk ETF, though mandated to be investment grade, has an average rating of its constituents at A. It offers a high-income potential at 2.96%⁹, while offering potential long term capital preservation.

For the decade before 2021, a set of shared assumptions between market participants and policy makers helped create a somewhat benign investment environment for bonds. A rise of inflation after COVID which earlier was deemed to be “transitory,” creating a perception that policy may allow accommodative and stable rates for a long period of time. Ample monetary liquidity provided a tailwind for fixed income markets in 2021. These key assumptions and relationships came into question in 2022 and 2023. The destination of transitory inflation was challenged, casting central bank policy into tightening mode and uncertainty in the U.S. and Europe. Unprecedented amounts of liquidity also started to drain from the financial system, creating market risks. Developed and emerging markets (“EM”) currencies performed poorly in 2022 and 2023 in response to higher U.S. Treasury yields. Rising yields contrasted with tumbling prices and capital losses for fixed income. The unprecedented bond market falls, seen over the last three years, can be attributed to three key factors. First, the low starting point in yields provided minimal income to offset capital losses. Secondly, major central banks’ most aggressive calendar year hiking cycle on record. Finally, the fallout from the pandemic resulted in the highest inflation in 40 years. Cash positions ballooned as fixed income markets struggled with liquidity. A fourth-quarter rally saved bonds from an unprecedented third straight annual loss in 2023, following the worst-ever decline a year earlier. Fueling those gains were expectations that the Fed is likely finished with rate increases and will cut borrowing costs next year - a view that gained traction when policymakers unexpectedly penciled in 75 basis points of easing in their December economic projections amid signs that inflation continued to cool.

Inflation being more elevated than the previous decade, yields - both real and nominal - on higher quality bonds now stand at their highest levels in 15 years. This not only makes them look cheap in absolute terms, but also relative to other asset classes, particularly equities. Additionally, with growth and inflation slowing, and most developed central banks at or near the end of their hiking cycle, historically this has been when investing in bonds has been the most rewarding. Fiscal dynamics in the U.S. and other developed markets remain problematic, while high inflation is set to linger, and geopolitical tensions add another layer of uncertainty. In terms of valuations, both in an absolute sense and relative to other asset classes, bonds screen as cheaply as they have in the last decade and in the top quartile in terms of their attractiveness over the last 20 years. That doesn’t mean a rally is necessarily imminent, but the higher yields do offer a significant cushion in terms of income to offset any further price declines.

The U.S. economy has shown remarkable resilience over the last 18 months despite a number of headwinds. In the face of the most aggressive rate hiking cycle witnessed in a generation, markets have grappled with a regional banking crisis, soaring energy costs, a persistently strong dollar, and geopolitical uncertainty. This economic strength can be attributed to two primary factors. Firstly, the drawdown of consumer excess savings accumulated during the COVID crisis, which has rapidly diminished from its peak of $2 trillion. And secondly, the implementation in 2022 of federal investment programs, namely the CHIPS and Science Act (approximately $280 billion) and the somewhat ironically named Inflation Reduction Act ($781 billion). The economic tailwinds provided by these factors over the past 18 months are unlikely to be replicated in the coming quarters. What’s more, the full effect of the “long and variable lags” associated with monetary policy, as acknowledged by the Fed, has yet to be fully felt. With more than 500 basis points in rate hikes since the beginning of 2022, bond yields have more than tripled. In a highly indebted economy, it would be rather optimistic to assume that there will be no unintended consequences. We have begun to see some of the consequences of higher interest rates. Financing costs for businesses have continued to move higher in response to the increasing Fed funds rate. We are also starting to see signs of stress from the previously bulletproof consumer. With pandemic savings close to exhausted and the savings rate now back below 4%, the bottom decile since 1960, consumers are increasingly relying on debt. Credit card balances have recently reached an all-time high above $1 trillion dollars and delinquencies, while low, are rising. The labor markets remain strong but are showing signs of decelerating. There are signs that investor concerns will shift away from higher rates and towards deteriorating fundamentals and credit risk in 2024.

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Unlike Ronald Reagan, as bond investors we do worry about the size of government budget deficits, which are large for this stage of the economic cycle. And the market is beginning to take notice. Nowhere does this have greater significance than in the U.S., where the deficit is beyond that seen at any time in the pre-pandemic era. Worryingly, there seems to be few signs of curtailment any time soon. While pandemic support measures have now all but ended, longer-term ‘green’ subsidies, including those offered by the Inflation Reduction Act, (which is helping to fund the decarbonization effort) have now taken up the fiscal baton. Meanwhile, reshoring in the form of the CHIPS Act, motivated by a protection of national interests (part of a broader deglobalization trend), and the requirement to support an aging demographic are adding fuel to the fiscal fire. The problem being that financing this level of debt is getting significantly more expensive.

All this points to structurally higher bond yields, but also to a greater level of market divergence as regional fiscal trends differ. This presents interesting cross-market opportunities. Let’s take the eurozone, for example. Unlike the U.S., the fiscal narrative here is one of consolidation which warrants a preference for European bond exposure over the U.S. Transitioning to a new era where financing costs are higher, is likely to perpetuate a vicious cycle, adding to the stock of debt in the years to come. After years of price-insensitive buyers (i.e., central banks) dominating demand for debt, they are retreating because of quantitative tightening. This means greater reliance upon price-sensitive buyers of debt, who expect greater compensation for holding a bond over a longer period (higher “term premia”). This should lead to a steepening of yield curves, meaning a growing difference between long-term and short-term bond yields. Indeed, we see value in strategies that benefit from yield curve steepening across a number of markets. More broadly, the higher coupons generated not only provide a cushion against capital losses, but also offer a genuine alternative to other income-generating asset classes (including equities) for the first time in many years.

We currently assign a high probability to an economic ‘soft landing’, but it’s difficult to ignore the warning signs around a potential ‘hard landing’ as tighter financial conditions bite. With central banks all but finished raising interest rates, the start of a rate cutting cycle in 2024 would be a real support for bonds. Corporate default rates will likely rise, although with balance sheets relatively robust, we are not expecting them to spike significantly. Nevertheless, the transition to higher funding costs may be much faster in some economies compared to others. The pass-through from higher interest rates is felt much more quickly in Europe, where bank lending is far more prevalent than capital market funding, which is favored in the U.S. As a result, we expect there to be greater market dispersion, not just on a regional basis, but at an issuer level too, as investors will want to be compensated for allocating to more levered corporates. This creates opportunities to generate outperformance from careful bond selection. Although the higher income offered by certain cyclical assets does provide a cushion against losses, given the risks around a potentially sharper slowdown, we prefer to play it relatively safe. A preference for investment grade (IG) over high yield, with an allocation to covered bonds, government related and securitized debt remaining a favored high quality, lower beta way of adding yield to a portfolio.

Following a pro-active hiking cycle that has taken the average real policy rate as high as 7%, several EM central banks are now regaining the right to ease. We expect these rate cuts to be moderate in most EM countries given the risks associated with diverging too much from the U.S. Fed, which still appears committed to a tight monetary stance. The Sukuk ETF yielded price return of 3.96%¹⁰ for the period December 27, 2022 through December 27, 2023, which outperformed a similar duration and quality bond index, the J.P. Morgan Emerging Market Bond Global Index (EMBI)¹¹.

Bond yields slumped following the Fed’s pivot toward cutting interest rates next year. Wallstreet analyst forecasts for future interest rates are depending on when cuts begin and at what pace, the market may be getting somewhat ahead of itself. Though there may be consolidation for some time, we still look for the 10-year yield closer to 3% than 4% by the end of 2024. Differences between yield forecasts also take into account views on how long the Fed will continue to let its holdings of Treasuries run-off at the pace of $60 billion per month as it moves to offload bonds bought during the pandemic. So-called quantitative tightening, or QT, puts upward pressure on longer-term yields by requiring more debt be sold to service the U.S.’s massive fiscal deficits. And regardless of the pace of the Fed’s balance-sheet unwind, investors are divided over the economic outlook that will ultimately steer policymakers’ path. The prospects of a soft landing, the stickiness of inflation, and the power of the central bank’s policy are all hard to predict. With that, there will be a stronger case to add duration and quality exposures, which should prove valuable in a weak economic backdrop and when an eventual pivot toward rate cuts occurs. We believe that makes the case to start building longer duration and emerging markets quality positions like the Sukuk ETF. Such an environment may be favorable for the Sukuk ETF because of its diversification with exposure to assets that are biased to outperform during the expected economic outcomes. Such a balanced mix potentially allows the investors to preserve capital in severe market downturns and participate in stronger market periods.

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Comparing the dividend yield on the S&P 500 against the Sukuk ETF and bond yields appears very attractive, making a case for allocation to fixed income assets compared to equities from a portfolio perspective. The Sukuk ETF may also benefit as a diversifier of a fixed income portfolio, which it has proved to be in 2022 and 2023.

The exodus of investors from emerging market debt in 2022 continued in 2023. Record outflows and depressed net new issuance have made the asset class severely under-represented in global investors’ portfolios. Despite this challenging flow backdrop, Emerging Market (“EM”) bonds and currencies have started to perform reasonably well. Tightening global financial liquidity, U.S.-induced fixed income volatility, broad U.S. Dollar strength, China’s disappointing growth trajectory and recent geopolitical dislocations have all been absorbed well by various EM fixed income sectors recently. Spreads in dollar-denominated IG debt barely moved, while both EM dollar high yield and local currency debt generated positive total returns in 2023. We expect this recovery in performance to gain traction in 2024. This is because several dollar and local currency-denominated debt markets remain firmly supported by not only their attractive levels of yields, but also disciplined monetary policy frameworks which have brought inflation under control, improved balance of payments and led to lower reliance on short-term foreign capital. These macroeconomic adjustments are likely to lead to EM economies outperforming their developed counterparts in terms of growth. With higher yields generating substantial carry for EM and Sukuk investors, as well as reduced new issue supply and attractive valuations, we see potential for strong returns over the coming year. Sukuk returns can also benefit from opportunities in local markets and EM corporate bonds. Many EM corporate issuers retain industry-leading balance sheets and are in a position to retire debt at discount levels, potentially improving their credit profile. Idiosyncratic opportunities are present across the quality spectrum and the long-term attributes of the asset class remain compelling, especially as oil price improvement may result in spread compression in Middle East sovereign spreads. A case in point is that Saudi Arabia generates around 800 million U.S. Dollars from selling oil every day. That should result in credit spread tightening for Sukuks far more than the EM sovereign debt. We continue to view the overall credit risk of the Sukuk ETF as attractive.

The Sukuk ETF has enjoyed widespread industry recognition early in its life. ETF.com awarded the Sukuk ETF as the Best New International/Global Fixed Income ETF – 2019¹². GIFA Islamic Social Finance Award 2020 shortly followed by naming the Sukuk ETF as the “Most Innovative Sukuk Product” of the year in 2020.¹² In 2023, the Sukuk ETF’s assets under management increased from $72.4 million at December 27, 2022 to $157.6 million as of December 27, 2023, a gain of 117.63% (after a gain of 95.73% in 2022). Importantly, the Sukuk ETF’s assets grew consistently through the market turmoil earlier in the year, which we believe demonstrates investor confidence in the Fund’s resilience. Based on both quantitative and qualitative factors, we can proudly report that the Sukuk ETF overcame the multitude of market hurdles it faced. Strong performance, substantial asset growth and industry recognition highlight the Sukuk ETF’s accomplishments in this year.

We thank you for the assets you have entrusted with us and deeply value our relationship. For any questions about the Sukuk ETF please contact your financial advisor or one of our shareholder associates. You may also visit our website at www.sp-funds.com or reach us via email at [email protected].

Past performance does not guarantee future results.

SP Funds

The SP Funds S&P Global REIT Sharia ETF (SPRE)

Dear Shareholders,

The SP Funds S&P Global REIT Sharia ETF (the “Global REIT ETF”)¹³, a faith-based, high income real estate investment trust (“REIT”) fund, was launched on December 29, 2020, with a view to providing a broad exposure to global REITs, which are designed to be Sharia- compliant. The Global REIT ETF seeks to track the performance of the S&P Global All Equity REIT Sharia Capped Index¹⁴, which is a diversified mix of REITs from developed and emerging markets. The Global REIT ETF is diversified in terms of different real estate sectors and contains technology and Tower REITs. It offers high-income potential, while offering potential capital preservation relative to the broad market.

2023 was highlighted by increasing concerns about a slowing economy, inflation, and rising short- and long-term interest rates. Commercial real estate markets remained in a state of transition as investor pessimism became pervasive. Higher interest rates and spreads severely impacted transactions as buyers and sellers adjusted to the new rate environment. At the same time, the Fed normalized monetary policy to dampen inflation. This resulted in losses for most non-equity REITs as 30-year fixed mortgage rates neared 7%. For the second consecutive year, rising borrowing costs were the most significant factor impacting REITs in 2023. Global REITs saw a turnaround rally of 18.9% over the last two months of 2023, leading the asset class to end the year with an increase of 10.8%. Nonetheless, global REITs underperformed compared to global equities, lagging by 1,359 basis points. The overall volume of purchases and sales remained low due to high interest rates and scarce capital. Banks and other lenders tightened or practically halted activity in the property markets, as a result of the twin challenges of higher rates and 1H23 turmoil in the banking sector. This led buyers that otherwise may have been active in commercial real estate (CRE) to largely step back from transaction activity. Given this narrative, investors assessed REITs capital indiscriminately and punitively, with investment-grade debt trading below par and equities mainly priced at discounts to net asset value. Industry analysts believe investment-grade REITs with low leverage and ample liquidity will be in a position to select premium properties at discounted prices as sources of capital remain expensive and scarce for poorly-capitalized owners and developers. Negative headlines about empty downtown office spaces—stemming from the shift to remote work—may also have impacted investor sentiment. Altogether, these drivers contributed to a sideways performance year. Yet despite these challenges, many REITs continued to show strong fundamentals, driven by increased rental income. Commercial real estate supply-and-demand dynamics remained generally favorable in 2023. Moreover, in most parts of the real estate market, REITs’ balance sheets remained well positioned to weather the current market environment. Office utilization levels were again on the up. Industrial and office properties also gained as U.S. GDP expanded. Lodging/resorts and retail property markets stabilized. Office occupancy began to stabilize from early 2021 on the demand for office space. Demand for apartments rebounded quickly in 2022/2023 with falling vacancy rates and an acceleration in rent growth across most metro areas. There were, however, lingering concerns about potential longer-lasting effects of the pandemic on how people use commercial real estate, especially due to work-from-home trends impacting overall demand for office space.

REITs lackluster stock performance in 2023 was despite impressive operational results with record high earnings and resilient balance sheets. The sectors with the strongest funds from operations growth in 2023 were lodging/resorts, self-storage, and residential. The Global REIT ETF gained 9.74% in calendar year 2023, mainly driven by exposures to the data, lodging and health care REITS.

Overall, market fundamentals for the commercial real estate space performance metrics remain healthy, with strong demand for leased space pushing down vacancy rates and driving rent growth higher, even as supply remained at relatively high levels in some sectors. On the other hand, REITs have effectively managed both the amount of debt they have outstanding as well as the structure of the debt outstanding. As the debt ratios of REITs have declined substantially since the financial crisis in 2008-2009, both book and market leverage of the REIT industry are near their lowest point on record. REIT balance sheets continued to remain strong heading into a period of slower growth, high inflation, and significantly higher interest rates. We see the Global REIT ETF as well positioned for strong relative performance and stability. Such an environment is expected to be further favorable for the Global REIT ETF because of its diversification with exposure to assets that are biased to outperform during the expected economic outcomes. Such a balanced mix potentially allows it to preserve capital and participate in stronger market periods.

Although we expect inflation to taper off in 2024 to its long term rate of 2%, disruptions to energy and food production may keep inflation higher than the Federal Reserve target rate of inflation. Concerningly, price increases in other services, which largely reflect labor costs, are continuing to rise, suggesting that energy, food, and supply chain related inflation may be propagating throughout the economy. REITs

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¹³https://www .sp-funds.com/spre/

¹⁴https://www.spglobal.com/spdji/en/indices/equity/sp-global-all-equity-reit-shariah-capped-index/#overview

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have historically outperformed the stock markets during times of high inflation. This is because REITs have high operating margins of around 60%. Additionally, underlying assets of REITs in the Global REIT ETF are perceived as an inflation hedge. REITs present both an attractive yield and a potential hedge against buying power decline. Furthermore, higher rents can be an inflation buffer. We remain optimistic on the outlook for the Global REIT ETF given its now attractive yields and yield pick-up relative to traditional fixed income and equity.

The real estate industry is moving beyond what it perceives as cyclical headwinds — i.e., rising interest rates, declining gross domestic product (GDP), sinking deal flows — and taking a long-term approach to real estate assets. However, global REITs are forecasted to rise in value more than 10 percent cumulatively over the next two years, despite increases to property taxes, payroll costs and interest expenses. Global REITs are currently priced with a high-teen valuation discount. The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024. There was a $10.3 billion outflow for global REITs from dedicated mutual funds and exchange-traded funds, which came on the heels of an $18 billion outflow in 2022. However, in December 2023, global REITs experienced an inflow of $271 million. While the asset class has experienced a 35 percent decline in trading multiples since the start of 2022, globally, REITs have seen cumulative earnings growth of more than 15 percent. Even though economic growth is forecasted to be slower in 2024, we believe REIT earnings will prove resilient supported by annual contractual rent increases, positive releasing spreads upon expiration and the lease-up of vacant space. Continuing strength of labor markets, with wage growth and new job openings, suggest that increased labor force participation may provide a buffer for consumer spending that can bolster economic growth which should be supportive of REIT valuations.

Dividend yield is an important component of a REIT’s total return. The particularly high dividend yields (4.17%)¹⁵ of the REIT sector are, for many investors, the primary reason for investment in this sector. The large cap REIT premium (relative to small cap REITs) significantly increased during 2023. As of January 1, 2024, publicly-listed U. S. equity REITs traded at a median discount to consensus net asset value per share estimate of -10.7%. That means that as interest rates are cut, these REITs may revert to their NAVs which may provide a performance kicker for the Global REIT ETF in 2024.

With the Fed at, or near, the end of its tightening cycle, REITs are well-situated for outsized performance in 2024, as the gap between REIT implied and private appraisal-based cap rates will likely close or converge in 2024. While public real estate valuations have adjusted, private real estate valuations probably will see further declines in 2024. Equity REITs’ well-managed balance sheets likely will enable them to navigate economic uncertainty in 2024. As property transactions return, REITs’ solid balance sheets could give them meaningful advantages in acquisitions and growth over private real estate.

Some of the Global REIT ETF’s major subsectors have shown promising long-term growth potential. Data centers—where cloud providers turn to meet their massive storage needs—are one such area. The rise of artificial intelligence is accelerating the demand for these interconnection sites, which benefit from restricted supply and strong pricing power. Equinix (EQIX), a dominant data center operator around the world, is a digital infrastructure provider that has illustrated this theme. Another theme that could have legs is health care real estate—particularly senior housing, which could enjoy a potential tailwind from demographics. A rapidly aging population in the U.S. and some other developed nations should support demand for quality assisted living and memory-care facilities. These facilities generally cater to older individuals who can afford to pay rent out-of-pocket for their rooms. Welltower (WELL) is a senior-housing REIT that has exemplified this trend. Both operate facilities in Canada and the UK, along with the U.S., and both are also invested in other health care properties such as outpatient rehab centers, medical offices, and life-science research spaces. Finally, the nationwide shortage of affordable housing has created opportunity in the lower-cost manufactured-housing market. This sector includes RV resorts and mobile-home communities, including ones aimed at retirees. These business models can offer particularly favorable economics, since the owner/operator simply owns the land under the homes, collects rent, and doesn’t need to invest much. One prime beneficiary of the strong long-term demand for manufactured housing has been Equity LifeStyle Properties (ELS), which owns and operates hundreds of residential communities, resorts, marinas, and campgrounds across the country. Favorable supply-and-demand dynamics have also benefitted shopping centers—which lease their space to commercial and retail tenants. On the demand side, retailers have proved surprisingly eager to open new stores. In terms of supply, new property development has been scarce due to the lack of construction lending, limited available land, and other forces. In 2023, available retail space fell to its lowest level in at least 18 years. This has given property owners increased bargaining power and allowed them to push through big increases in asking rents—benefitting their bottom lines of stocks included in the Global REIT ETF.

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The commercial real estate mortgage market has been marked by higher interest rates and stricter underwriting standards. U.S. public equity REITs have not been immune from the current mortgage market turmoil, but industry data for the third quarter of 2023 show that they have limited their exposure to these challenges by maintaining low leverage ratios and focusing on fixed rate and unsecured debt. The average REIT leverage ratio in the third quarter was around 36%. REIT balance sheet strength and access to capital markets may position them well to make more acquisitions as property transaction volume increases in 2024. The equity REIT weighted average term to maturity has generally increased since the Great Financial Crisis; it is now 6.5 years. These lengthy maturity terms mean REITs have not needed to refinance as much, and in turn, their distributable cash flows have not been as stressed by the high interest rate environment. Further analysis and comparison to the 10-year Treasury show that REIT debt costs have only increased marginally. From the fourth quarter of 2021 to the third quarter of 2023, the U.S. 10-year Treasury yield increased by 262 basis points to 4.2%. Meanwhile, the public equity REIT weighted average interest rate on total debt rose by 67 basis points to 4.0%.

Over time, REITs notably increased their fixed rate and unsecured debt. On average, the percentage of total debt at a fixed rate for U.S. public equity REITs was 90.9%. This commitment to fixed rate debt highlights REITs’ long-term investment perspective. REITs’ use of unsecured debt has also grown consistently since 2013, reaching 79.3% of total debt in the third quarter of 2023. In addition, nine of the 13 REIT property sectors had unsecured-to-total debt percentages greater than 75% in the third quarter of 2023. This is unsurprising, given that more than 85% of public equity REITs have an investment grade bond rating. The REITs with low leverage policies are helping the sector handle tighter credit conditions and higher interest rates. These disciplined balance sheets have also made these REITs well-prepared for market uncertainty while paving the way for potential opportunistic real estate acquisitions.

As of December 29, 2023, the Global REIT ETF’s assets under management increased from $40.7 million in 2022 to over $82.5 million, a growth of 92% (after a 90% increase in 2022). Importantly, the Global REIT ETF’s assets grew consistently through the REIT underperformance earlier in 2022, which we believe demonstrates investor confidence in the Global REIT ETF’s resilience. The Global REIT ETF has enjoyed widespread industry recognition early in its life, as this was the only Sharia-compliant REIT ETF available globally at the time of its launch.

We thank you for the assets you have entrusted with us and deeply value our relationship. For any questions about the Global REIT ETF please contact your financial advisor or one of our shareholder associates. You may also visit our website at www sp-funds.com or reach us via email at [email protected].

Past performance does not guarantee future results.

SP Funds

Past performance does not guarantee future results.

Before investing you should carefully consider each Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by visiting www.sp-funds.com. Please read the prospectus carefully before you invest.

As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate each Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. Each Fund is newer with a limited operating history.

Islamic religious law commonly known as Sharia has certain restrictions regarding finance and commercial activities permitted for Muslims, including interest restrictions and prohibited industries, which reduces the size of the overall universe in which each Fund can invest. The strategy to reduce the investable universe may limit investment opportunities and adversely affect each Fund’s performance, especially in comparison to a more diversified fund.

Equity securities, such as common stocks, are subject to market, economic and business risks that may cause their prices to fluctuate.

Investments in foreign securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets.

Sukuk are financial certificates that are similar to conventional bonds but are structured to comply with Sharia law and its investments principles, which, among other things, prohibit charging or paying interest. Because no collateral is pledged as security for sukuk, purchasers of sukuk are subject to the risk that an issuer may not meet its payment obligations or that an underlying asset may not perform as expected or lose value. There may be times when the market is illiquid and it is difficult for the Sukuk ETF to make an investment in or dispose of sukuk.

A real estate investment trust (REIT) is a security of a company that invests in real estate, either through real estate property, mortgages and similar real estate investments, or all of the foregoing. The Global REIT ETF is expected to be concentrated in REITs. Through its investments in REITs, the Fund is subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems and natural disasters.

Duration is a measure that helps approximate the degree of price sensitivity of a bond to changes in interest rates and is adjusted to account for the change in cash flows of the bond’s embedded option.

The debt ratio is the total debts compared to the total assets of a company.

Net asset value is the net value of an investment fund’s assets less its liabilities, divided by the number of shares outstanding.

Market price is the price at which investors can buy or sell an ETF on an exchange.

The S&P 500^® Shariah Industry Exclusions Index is designed to measure the constituents of the S&P 500® Shariah, excluding companies within certain GICS^® sub-industries.

The Dow Jones Sukuk Total Return (ex-Reinvestment) is designed to track the performance of global Islamic fixed income securities, also known as sukuk. The index measures an investment (excluding reinvestment) in U.S. dollar-denominated, investment-grade sukuk that have been screened for Shariah compliance.

The S&P Global All Equity REIT Sharia Capped Index serves as a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets.

Bloomberg Global Aggregate Bond Index. The Bloomberg Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices.

The S&P 500 Total Return Index is a total return index that reflects both changes in the prices of stocks in the S&P 500 Index as well as the reinvestment of the dividend income from its underlying stocks.

Indexes are unmanaged and cannot be invested in directly. Although index returns were gathered from reliable sources, the Funds cannot guarantee their accuracy or completeness.

Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice.

Sharia ETF

This chart illustrates the performance of a hypothetical $10,000 investment made on December 17, 2019 (commencement of operations), and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The chart assumes reinvestment of capital gains, dividends, and return of capital, if applicable, for a fund and dividends for an index.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (425) 409-9500. The Fund’s expense ratio was 0.49% as of November 30, 2023.

Sukuk ETF

This chart illustrates the performance of a hypothetical $10,000 investment made on December 27, 2019 (commencement of operations), and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The chart assumes reinvestment of capital gains, dividends, and return of capital, if applicable, for a fund and dividends for an index.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (425) 409-9500. The Fund’s expense ratio was 0.59% as of November 30, 2023.

Global REIT ETF

This chart illustrates the performance of a hypothetical $10,000 investment made on December 29, 2020 (commencement of operations), and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The chart assumes reinvestment of capital gains, dividends, and return of capital, if applicable, for a fund and dividends for an index.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (425) 409-9500. The Fund’s expense ratio was 0.59% as of November 30, 2023.

SP Funds

⁽¹⁾Represents cash and other assets in excess of liabilities.

Sharia ETF

Sharia ETF

Sharia ETF

Sharia ETF

Sukuk ETF