Hedge funds are crushing it with a trade that anyone can replicate (EEM, VWO)

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June 15, 2017 12:24 PM

Markets Insider recently wrote about the most popular ETFs among hedge funds, and it turns out the two most popular funds have something in common.

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Hedge funds are using exchange-traded funds to make a killer bet.

Markets Insider recently wrote about the most popular ETFs among hedge funds, and it turns out the two most popular funds have something in common.

Vanguard and iShares both offer an emerging markets ETF, and hedge funds love the two products, according to data from Credit Suisse. What's more, the two funds are up more than 20% in the past 12 months.

Of the combined $81 billion in the two ETFs, hedge funds own $10.3 billion, or about 12.8%, according to Credit Suisse. This is a big bet on the two funds and emerging markets by extension.

By betting on emerging markets, hedge funds are betting on countries like Brazil, China and India. Emerging markets are ones that do not have mature markets set up, or lack strict standards like advanced markets. MSCI classifies 24 countries as emerging markets in its emerging markets index.

Emerging markets have been on the rise recently. The Vanguard FTSE Emerging Markets Fund invests in companies located in emerging markets around the world and has grown 23.0% in the last year.

Some of the top holdings for the fund include Tencent Holdings, Taiwan Semiconductor Manufacturing Co. and China Construction Bank Corp. The largest position in the Vanguard fund is in Tencent, which comprises 3.8% of the total fund. So far this year, Tencent has been a pretty good bet, as the company has grown 33%.

The iShares MSCI Emerging Markets Fund is also invested in Tencent, but also holds large shares in companies like Samsung, Alibaba and Baidu. The iShares fund has grown 26.89% this year.

Exchange-traded funds have proven hugely popular with investors. US-listed ETFs saw $283 billion in net inflows during 2016, taking aggregate assets under management to $2.5 trillion, according to Citigroup. The appeal is obvious. ETFs provide cheap and easy access to asset classes and sectors, and are as easy to buy and sell as a single stock.

Emerging markets are not a sure bet by any means. They have grown a lot over the past year, but even Vanguard warns that it's emerging markets fund is risky, and only appropriate for "long-term goals."

Comparing the recent explosive growth to historical returns seems to back up that assessment. Over the past decade, Vanguard's fund has grown 1.91% and iShares' has grown 2.04%. The general S&P 500 index grew about 69% in the same timeframe.

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