As the won-to-dollar exchange rate (won-dollar rate) broke through the 1,460-won range and continued to soar, the returns of currency-unhedged exchange-traded funds (ETFs) that reflect exchange-rate movements are far outpacing those of currency-hedged products. Funds from investors seeking foreign-exchange gains are also flocking to unhedged products.
On Dec. 6, according to the Korea Exchange (KRX), over the past month (Nov. 5 to Dec. 5) the ETF "TIGER U.S. Nasdaq 100," which tracks the U.S. Nasdaq 100 index, rose 2.36%. During the same period, the currency-hedged "TIGER U.S. Nasdaq 100 (H)" ETF fell 0.02%, showing a clear gap in returns.
Products tracking the U.S. Standard & Poor's (S&P) 500 index showed a similar pattern. While the "KODEX U.S. S&P 500" ETF rose 3.45%, the hedged "KODEX U.S. S&P 500 (H)" ETF rose only 1.23%.
In the Seoul foreign-exchange market on the 5th, the won-dollar rate ended weekly trading at 1,468.8 won, down 4.7 won from the previous trading day. After surpassing the 1,460-won range in mid-November, the rate has been moving around the 1,470-won range this month.
Currency-hedged ETFs, which carry an "H" in their names, fix the exchange rate and reflect only share-price gains in returns. In contrast, unhedged products add foreign-exchange gains from dollar strength, widening the return gap to more than double over the past month.
In a high-exchange-rate environment, funds seeking foreign-exchange gains are pouring into unhedged products. According to ETFCheck, over the past month, the "TIGER U.S. Nasdaq 100" ETF saw a net inflow of 342.9 billion won, while the hedged "TIGER U.S. Nasdaq 100 (H)" recorded a net outflow of 19.3 billion won during the same period. The "KODEX U.S. S&P 500" ETF also attracted 197.7 billion won, but 3.9 billion won flowed out of the hedged "KODEX U.S. S&P 500 (H)."
However, with some expecting the sharp rise in the won-dollar rate to gradually ease, it is uncertain whether unhedged products will maintain their edge. Kwon A-min, a researcher at NH Investment & Securities, said, "The backdrop to the weak won lies in the gap in gross domestic product (GDP) growth rates," adding, "Considering the authorities' willingness to intervene, it will not be easy to break through the 1,500-won level."