This article is by Bloomberg Intelligence analyst Eric Balchunas. It appeared first on the Bloomberg Terminal. 

Exchange-traded funds may extend their boom in 2017 after taking in about $700 billion during the past three years. Beyond this momentum, catalysts that could speed up flows into ETFs include the rise of smart-beta and robo-advisers, as well as the Department of Labor’s “Conflict of Interest” rule on retirement-plan advisers, due in April. ETFs have sparked some concern over their high volume. About $20 trillion worth of shares traded in 2016, earning market makers almost as much as issuers.

U.S. President-elect Donald Trump’s surprise victory also has prompted ETF investors to readjust their portfolios. Trump’s policies on the DOL rule and the Federal Reserve could have short-term impacts on ETF flows.

ETFs drive passive revolution as exodus out of active picks up
Exchange-traded funds are leading a passive revolution, as investors dump active mutual funds and pile into index funds and ETFs. This trend has intensified during the past three years, with an almost $2 trillion swing out of active funds and into passive ones. Both ETFs and index funds track indexes. ETFs are used actively and attract a variety of institutions and traders, while index funds are predominantly buy-and-hold retail investors.

Trillion-dollar swing to passive investing rattles active funds
Almost $1 trillion swung out of actively managed funds and into passive funds in the past year — the biggest dollar move on record — as investors continued to reject active management in favor of index-tracking mutual funds and ETFs. The latter led the way with $286 billion, while index funds took in an estimated $200 billion. About $400 billion is estimated to have come out of active mutual funds, with hedge funds on pace for $100 billion in outflows.

Hedge funds had $87 billion in outflows through November.

Institutional adoption of ETFs at 1% offers potential for growth
Institutions are increasingly turning to ETFs for a variety of uses, such as cash equitization, investment-manager transitions, portfolio rebalancing, liquidity sleeves and lending revenue. However, despite some optimistic survey data, only about 1% of the $100 trillion in institutional assets are allocated to ETFs. An increase in use of just a couple of percentage points would translate into trillions of dollars.

One hurdle for institutional ETF growth is the ability to utilize implied liquidity. Most institutions tend to use only ETFs that trade a lot. But unlike stocks, an ETF’s holdings can be used to create new shares. Learning how to source this liquidity might help expand institutions’ use of ETFs.