Anyone doubting the power of exchange traded funds (ETFs) need look no further than trading this week, when the sharemarket rallied by 2 per cent in just one day.

On Tuesday, the S&P/NZX50 index gained 176.94 points to 9225, driven by mostly by hefty gains in the two biggest stocks — a2 Milk and F&P Healthcare.

Brokers said the most likely cause appeared to be overseas ETFs buying in the New Zealand market, although it was difficult to be tell for certain.

"Two per cent in a day is a pretty phenomenal performance really, and that move was not based on any market news, economic news, or global news," David Price, director institutional equities at Forsyth Barr said. "It was just a basic rally with quite a lot of stock being chased."

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According to ETFGI data, it has taken just five years for the amount of money invested globally in exchange traded funds and products to more than double an an estimated US$5 trillion ($7 trillion).

"The numbers keep getting bigger in these passive funds," Price said. "The growth of them has been explosive."

ETF trades involve funds buying stocks in same proportion as their ranking on an index.

Brokers expect to see more volatility as a result of ETF trades when changes come into effect when some kiwi stocks gain entry to the FTSE Global Equity Index Series indices, which come into effect next Friday.

Fund managers say EFTs have their place but they say they tend to look good when markets are moving in the right direction.

The flipside is the stocks that are routinely targeted by ETFs tend to get hit harder than the rest in a market reversal.

"We have seen the market go one way for the last eight years. What will be interesting to see is how they react in a downturn," Price said.

JB Were's New Zealand equity manager Rickey Ward said this week's move appeared to reflect a market that was long cash and short equity, which may have accelerated the rally.

"Now you have a market that is becoming less liquid, but with still positive inflows from these passive funds from offshore, so you get a magnification of that problem that have had in past — and that is that we are a small market," Ward said.

The popularity of EFTs has sparked concerns that such funds are fuelling an unsustainable sharemarket bubble in the US, and will accelerate a market downturn when it comes.

ETFs have been around since the early 1990s, but their growth has accelerated since the global financial crisis, as low bank interest rates have forced investors to look elsewhere for better returns on their money.

NZX-Nasdaq tie-up

The NZX hopes its tie-up with the US exchange Nasdaq will pave the way for more listings.

The deal could allow Kiwi companies to more easily dual-list on the NZX and the Nasdaq and likewise allow some Nasdaq-listed companies to dual-list here.

New Zealand investors may get more access to investments like US exchange-traded funds through the deal.

NZX chief executive Mark Peterson said he hopedit would also make the NZX more attractive for prospective new listings.

The memorandum of understanding enables issuers listed on the Nasdaq's top-tier equity board, the Global Select Market, to apply for a secondary listing on the NZX under the foreign exempt issuer regime.

Under this regime, issuers comply with the primary rules of their home exchange, and are exempt from almost all NZX listing rules.

Shareclarity managing director Daniel Kieser said the Nasdaq move would add some creativity to the listing process.

"Even if no listings came of it, the NZX will be learning about the different risks and opportunities other exchanges are facing," Kieser said.

"And, I think there is a high likelihood that we will soon see more alignment and consolidation between the global exchanges, which these early engagements will help," he said.

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