Experts advise that investing in open-ended exchange-traded funds (ETFs) is preferable to currency-hedged ones. Although the won to dollar exchange rate attempted to surpass 1,500 won at the end of last year and the beginning of this year and has since stalled somewhat, the analysis indicates that the strong dollar trend will likely continue in the long term.
According to the financial investment industry on the 27th, the Nasdaq Composite Index, centered on U.S. tech stocks, rose 28.64% last year, while the ETF 'KODEX Nasdaq 100 TR', which is based on this index, increased by 45.69%. Thanks to the reflection of changes in dollar value, the revenue yielded was nearly 20 percentage points higher than that of the underlying asset.
In contrast, the revenue of the currency-hedged ETF 'KODEX Nasdaq 100 (H)', which incurs certain expenses to lock in the exchange rate at a specific level to mitigate risks from exchange rate fluctuations, was limited to 23.43%. Last year, the value of the U.S. dollar surged, and due to the currency hedge contract, it failed to ride this wave. The expenses from the currency hedge also diminished the revenue.
The same applies to products investing in another representative U.S. index, the Standard & Poor's (S&P) 500. The open-ended 'KODEX U.S. S&P 500 TR' had a revenue of 44.03% last year, whereas the currency-hedged 'KODEX U.S. S&P 500 (H)' was at half that level, 21.70%.
This is why advice is emerging that open-ended options are advantageous when investing in representative U.S. indices. A representative from an asset management company noted, "For South Korean investors, investing in open-ended ETFs could provide significant benefits," adding, "The likelihood of the dollar rising is increasing, so the open-ended option will likely yield better returns in the long run."
While the outlook suggests that the strong dollar will continue for the time being, the scale of investments in currency-hedged ETFs remains large. The assets of the top five companies in market share—Samsung, Mirae Asset, KB, Korea Investment Trust, and Shinhan Asset Management—amount to 707 billion won for the currency-hedged Nasdaq 100 ETF and 1.1639 trillion won for the currency-hedged S&P 500.
Experts believe that the value of the U.S. dollar will continue to rise in the long run, as the U.S. potential growth rate is higher than that of South Korea. The potential growth rate refers to the maximum increase rate of a country's gross domestic product (GDP) achieved without adverse effects like inflation, utilizing all available production factors such as labor, capital, and resources. Last year, the Organization for Economic Cooperation and Development (OECD) estimated South Korea's potential growth rate at 2.0%, while that of the U.S. was 2.1%.
Choi Ye-chan, a researcher at Sangsangin Investment & Securities, stated, "As the fundamentals of our economy (such as economy, soundness, and supply-demand) have relatively worsened, the won to dollar exchange rate is expected to maintain a high level," adding, "Considering structural undervaluation factors like population structure and division, along with domestic political instability and protectionism stemming from Trump, the exchange rate could rise to 1,500 won."
The method to confirm whether it is currency-hedged is simple. If the ETF name includes '(H)', it is a currency-hedged type; if this indication is absent, it is an open-ended type. Experts suggest considering switching to the open-ended type from defined contribution retirement pension or individual retirement pension (IRP) accounts at the beginning of the year.
However, the economy can be affected by unforeseen circumstances, so the current outlook may not hold true in the future. While many experts currently predict a strong dollar, this could change at any time. A representative from the securities industry noted, "Even with just a month’s time frame, various variables can change," explaining, "This is why long-term forecasts are particularly challenging."