Increasing volatility in the US dollar-Korean won exchange rate boosts interest in ‘currency-hedged ETFs’

As the exchange rate between the Korean won and the US dollar, which has been hovering around the upper 1,300s, has rapidly fallen to the lower 1,300s, significant shifts are taking place in the exchange-traded fund (ETF) market. In particular, currency-hedged ETFs, which are insulated from exchange rate fluctuations, have seen an increase in returns, while currency-exclusive ETFs, which are affected by exchange rate changes, have experienced a decline in performance.

According to Koscom’s September 1 ETF Check, the best-performing ETFs of the 38 funds tracking the S&P 500 and NASDAQ 100 indices were all currency-hedged as of August 30. Currency-hedged ETFs are designed to reduce the risks associated with currency fluctuations by locking in the exchange rate of the underlying foreign assets when investing in foreign assets.

For example, the “TIGER SYNTH-S&P500 Leverage(H)” ETF ranked first with a monthly return of 4.44 percent as of August 30. It was followed by “RISE US S&P 500(H)” with a return of 2.45 percent, “KODEX US NASDAQ100 Leverage (SYNTH H)” with 2.41 percent and “KODEX US S&P500(H)” with 2.38 percent. On the other hand, most currency-exclusive ETFs saw their returns decline by around 1 percent, reflecting the decline in the exchange rate. Unlike currency-hedged ETFs, currency-exclusive ETFs are directly affected by exchange rate movements. They benefit from a rising exchange rate, but see their returns diminish when the exchange rate declines, as was the case recently.

Savvy investors are already increasing their investments in currency-hedged ETFs. The Korean won’s exchange rate against the US dollar is widely expected to fall as the likelihood of US rate cuts increases. For example, 35.9 billion won (about $26.8 million) flowed into the currency-hedged KODEX US S&P500(H) ETF last month. This is more than a third of the fund’s total inflow of 95.4 billion won this year, all in August alone.

However, even in a period of falling exchange rates when currency-hedged ETFs are relatively popular, there are some important considerations for investors. One important factor is the cost of maintaining the fixed exchange rate in currency-hedged ETFs. Because these products invest in futures, additional costs are incurred by the securities companies that manage the funds, which naturally leads to higher expenses for investors. As a result, a long-term investment in currency-hedged products can become more expensive, potentially making it difficult to achieve the desired returns.

Interest in currency-hedged ETFs is expected to continue for some time, as there is a good chance that the US Federal Reserve will implement at least one more rate cut after the FOMC meeting in September.

An industry insider noted: “Investing in currency-hedged products can be a strategy when exchange rate volatility is high or difficult to predict. However, investors should be aware that returns from currency-hedged products will be relatively lower compared to currency-exposed products if the exchange rate rises.”