Exchange-traded funds won 2016.

“They won it in enormous ways,” said Matt Hougan, the CEO of Inside ETFs.

Hougan, along with Dave Nadig, the CEO of ETF.com, delivered their annual “State of ETFs” address to a full house at the 10th Annual Inside ETFs conference in Hollywood, Florida.

Among the major developments over the last year, Hougan and Nadig noted record inflows, massive gains against mutual funds, and even greater flows in favor of passive management.

The ETF industry saw record net inflows in 2017, with $284 billion in new money flooding into ETFs, smashing all previous annual records.

According to Hougan, that’s 20% more than in any year before and twice what it was five years ago.

Not only is this a record, Hougan said “it’s Michael Phelps in a shark suit. It crushed it.”

These record inflows “dramatically undersells” ETFs’ winning year. There were also massive gains against mutual funds.

Even as record amounts of money flooded into ETFs, more than $186 billion flew out of traditional mutual funds, creating a net one-year swing of $471 billion.

“Half a trillion dollars moving from mutal funds to ETFs in one year alone, and even that undersells it,” Hougan said.

There were also significant flows in favor of passive. Looking just at flows into active funds vs. passive funds (including ETFs), there was an $840 billion swing in assets.

Even as ETFs have dominated inflows, Hougan and Nadig said, advisors face major new challenges.

“We’ve seen this unbelievable entry (into ETFs) from everybody in the asset management (industry),” Nadig said.

For the past decade, advisors have had this huge tailwind at their back, with ETF fees falling more than 80% on average for broad asset class coverage, according to Nadig.

But now, everyone’s using ETFs.

“Everyone else has caught up,” Hougan added. “ETFs are the number one most recommended product by advisors.”

According to Hougan, being an ETF advisor is no longer good enough.

“Ten years ago if you were building a super-low cost, well-diversified portfolio, you were ahead of everyone,” he said. “Now you can get that in 15 seconds online.”

When Hougan and Nadig launched the Inside ETFs conference 10 years ago, there were less than 450 people in attendance.

“The first thing we did was ask people to raise their hands to say how many people own ETFs,” Hougan said. “I think there were 12 hands raised. Including mine was at my side.”

Hougan asked the room to do the same this year. “How many people in this room own ETFs? OK, that is everyone,” he said to a room full of raised hands. “That’s awesome. That’s great. But it should terrify you. Because 10 years ago if you were coming to this conference, you were ahead of everyone else. Now, ETFs are status quo.”

Hougan and Nadig suggested three ways to help advisors succeed now that ETFs have become so widely popular.

First, they suggested looking at smart beta ETFs. Advisors are gravitating to low-cost smart beta products. In this area, advisors can help investors control their behavioral impulses and use the products properly.

Second, Hougan and Nadig suggest active ETFs as another way to look and use exposure effectively.

“More and more active ETFs are coming to the market,” Hougan said. “There are already 168 [active ETFs] right now, and I think this number will double or triple in the years to come.”

Third, Hougan and Nadig suggest that advisors take environmental, social and governance factors seriously.

“It would be easy to dismiss this as the flavor of the month or the next thing the industry is trying to push out on advisors,” Nadig said. “Well, that’s not really true.”

The pair suggest that ESG can also be a way to win millennial clients.

— Check out Active Management Isn’t Dead but It Is Evolving: Vanguard’s Tom Rampulla on ThinkAdvisor.