ETFs at a watershed moment

It has been a remarkable year for exchange-traded funds (ETFs). More than $1 trillion of new money has flowed into the products over the course of 2017, taking the value of all outstanding ETFs close to $4.5 trillion. Not many industries can claim to have chalked up growth of 30% in the past year - yet that is what the ETF business has achieved.

But the bare numbers only tell part of the story. I believe we are at a watershed moment - and for a number of reasons.

Top of the list is liquidity. Institutional investors have woken up to the benefits of an asset class that combines the qualities of a primary market fund with the more traditional features of a secondary market security.

Thanks to Euroclear, ETFs now combine a global distribution model - featuring multiple listings in multiple currencies - with an efficient, and above all centralised post-trade infrastructure. By drawing on the settlement process we have long used for Eurobonds, there is now a well-tried international issuance model that is being used by increasing numbers of issuers.

At the last count, around 43% of Europe's ETF market had moved into Euroclear's international structure, which only went live in 2014. Adoption is set to continue at a steady pace.

As an aside, I'd like to think this is a prime example of Euroclear's ability to combine creative thinking with its technical skills as a leading market infrastructure to deliver a mould-breaking solution.

All of this has transformed liquidity - to such an extent that central banks and central counterparties (CCPs) are on the verge of accepting the higher quality, more liquid ETFs. These are seen as carrying less risk than some collateral-eligible corporate bonds.

Then there is MiFID II, which takes effect in January 2018. It is designed to bring new levels of transparency and competition to the funds market. By obliging banks and other intermediaries to spell out their charges on any investment product, it will highlight the low-cost advantages of ETFs.

MiFID II will also improve trading transparency in ETFs. There will be more information on price and trade volume. As a result, it will be easier to see where the liquidity lies.

A new generation with new demands

There is a bigger picture to consider, too. None of us yet knows quite what impact the so-called millennial generation will have on the investment business. But I am prepared to bet it will be significant.

This is a generation that wants immediacy. Simple, passive products such as ETFs fit perfectly with the rise of mobile technology - not only as a communication medium but as a transactional one, too.

It is a generation that also lacks trust in the system. It wants transparency and fairness. At the same time, many millennials look to combine their investing with social purpose. Environmental and social issues loom large in their thinking.

Many baby boomers might say they do the same. But a recent survey by US Trust showed that three-quarters of millennials put a high priority on social goals when they invested. Among baby-boomers the proportion was just one third.

Increasing numbers of ETF issuers now offer a stable of ESG products to address this demand. This is helping to build retail interest in ETFs which has lagged the US.

For the investment management industry, ETFs are becoming a must-have part of the product portfolio. (Gillian Tett's recent Financial Times article - Impact investing for good and market returns - confirm's this line of thinking). Active managers are entering the market, bringing new and creative thinking in areas such as smart beta or hedge fund strategies.

Recent years have seen a well-publicised shift from active to passive funds. That, I suspect, is set to continue - with ETFs grabbing an ever bigger share of the pot. This is a financial instrument whose time has come.