With the won-dollar exchange rate falling sharply recently, currency-hedged exchange-traded funds (ETFs) are drawing attention again. Currency-hedged ETFs are designed to reduce the impact of exchange-rate fluctuations and track the returns of the underlying index, so they can deliver relatively higher returns than currency-unhedged products in a strong-won phase.
On the 12th, according to the Korea Exchange (KRX), a comparison of five ETFs from KB, Samsung, Mirae Asset, Kiwoom and Hanwha Asset Management among U.S. S&P 500 index-tracking ETFs listed in Korea that have currency-hedged versions showed that from July 1 to Aug. 11 the average return of currency-hedged ETFs was 3.35%. During the same period, the average return of currency-unhedged ETFs was -5.01%, widening the gap in returns by more than 8 percentage points depending on whether hedged.
The gap was also clear in products tracking the Nasdaq 100 index. During the same period, KODEX U.S. Nasdaq 100 (H) posted a return of -1.02%, more than 8 percentage points higher than the currency-unhedged KODEX U.S. Nasdaq 100 (-9.45%).
Although they track the same index, returns diverged sharply because the won-dollar exchange rate plunged. On the 11th, the won's exchange rate against the dollar closed at 1,413.5 won, down 6 won from the previous trading day. After rising to 1,552.5 won on the 1st of last month, the won-dollar rate fell by more than 100 won in about a month as demand for currency exchange tied to SK hynix's American depositary receipt (ADR) issuance and the easing of foreign investors' selling of domestic stocks overlapped. It is an unusually steep decline.
Currency-hedged products are designed to partially offset gains and losses from exchange-rate fluctuations when the won-dollar rate moves. In phases when the won is strong, they can reduce losses from a falling exchange rate, delivering relatively higher returns than currency-unhedged products. Conversely, when the won is weak, they cannot fully capture the additional gains from a rising exchange rate.
Experts say that while the won-dollar rate could fall into the high-1,300-won range in the short term, it is likely to rebound as bargain hunting flows in after a rapid drop. Kwon A-min, a researcher at NH Investment & Securities, said, "If dollar supply dominance continues, there is room for a further decline into the high-1,300-won range."
However, Choi Gyu-ho, a researcher at Hanwha Investment & Securities, noted, "The recent strength of the won is due to limited supply-demand factors such as ADR exchanges and export corporations' negotiations, so it is premature to judge it as a structural trend reversal," adding, "In the short term, we expect a rebound in the exchange rate as supply and demand normalize, and in the midterm, policy stances aimed at curbing excessive weakness in Asian currency will limit the upside of the won-dollar rate."