The context of a smart beta ETF in Malta : an analytical study

Abstract

Smart Beta is an innovative product where passive strategies are combined with active strategies. Smart Beta strategies seek to passively follow indices, while considering alternative weighting schemes, such as, volatility, liquidity, quality, value, size, and momentum. A Smart Beta ETF is an ETF that uses a rule-based system for selecting investments that are to be included in the portfolio. The demand for Smart Beta ETF has been increasing across the markets. In Malta, this concept is relatively new, and not many investors are aware of such a product. As such, this product is not present locally. The creation of a Smart Beta ETF with an underlying Maltese index would open up a new area for Maltese investors, where retail investors would be able to invest in a product that passively follows indices, while at the same time considering alternative weighting according to the investor’s preference. This study aimed to answer two research questions: 1. Is it practical to set up a Smart Beta ETF with an underlying Maltese index? 2. Are investors willing to invest in a Smart Beta ETF? The objective of this study was to obtain a better idea of whether it is possible to set up a Smart Beta ETF with an underlying Maltese index. This study sought to analyse the practicality of a Smart Beta ETF in Malta, whether investors are willing to invest in such a product. The objectives of this study were achieved by conducting in-depth interviews with investment managers and distributing online surveys among local investors. This study concluded that a Smart Beta ETF with an underlying Maltese index would be possible, but not practical to set up due to different obstacles that would need to be overcome. This study also concluded that investors are still unsure whether they would be willing to invest in a Smart Beta ETF. This conclusion emphasises that investors would first need to be better educated on the subject. Several recommendations were thus provided, based on the findings of this study. The recommendations focus on ways to improve financial knowledge among investors, and methods on how to mitigate the problems of illiquidity and lack of options in terms of securities.