Investor A and Investor B invested in exchange-traded funds (ETFs) tracking the S&P 500 index on August 1. A chose 'KODEX U.S. S&P 500 (H)', while B opted for 'KODEX U.S. S&P 500'. Although both products are based on the same underlying asset, their returns diverged significantly.
From August 1 to August 25, A's cumulative return was +2.46%, while B's return was -8.69%. The difference in performance was attributed to the '(H)', which indicates a hedged product. As the won-dollar exchange rate fell in August, B's investment in an unhedged product suffered losses.
This month, the performance of ETFs investing in overseas assets has varied significantly based on whether they are hedged against currency fluctuations. The rapid decline of the won-dollar exchange rate to the 1300s has impacted returns for investors. Even ETFs investing in the same underlying assets are showing stark differences in performance due to exchange rate movements.
According to the Seoul foreign exchange market, the won-dollar exchange rate closed at 1384.8 won on August 26. After soaring to over 1560 won in early June, the rate has steadily declined, reaching the 1300s on August 19 for the first time in nearly 11 months.
The drop in the won-dollar exchange rate has significantly affected the investment market. For investors in overseas stocks or ETFs, a falling exchange rate directly impacts their returns. Experts advise carefully considering whether to choose hedged or unhedged products.
The distinction between hedged and unhedged products is evident from their names. The '(H)' suffix in ETF names indicates a hedged product designed to mitigate the risks associated with exchange rate fluctuations. These products utilize derivatives such as forward contracts or currency futures to offset some of the impacts of won-dollar exchange rate changes. In contrast, unhedged ETFs, which lack the '(H)', reflect both the price movements of the underlying foreign assets and the fluctuations in the exchange rate in their returns.
The presence or absence of hedging directly correlates with returns. When the won-dollar exchange rate falls, the won-denominated value of overseas assets, such as U.S. stocks and bonds, decreases. Consequently, unhedged ETFs may show lower returns even if the prices of the underlying assets rise.
A prime example is the overseas index-tracking ETFs. Despite both 'KODEX U.S. S&P 500 (H)' and 'KODEX U.S. S&P 500' investing in the same underlying asset, the performance gap has widened to 11.15 percentage points due to the hedging status.
A similar trend is observed in bond products. Since July, 'ACE U.S. 10-Year Treasury Active (H)' has decreased by 2.20%, while the unhedged 'ACE U.S. 10-Year Treasury Active' has dropped by 12.61%. The performance gap between the two products reached 10.41 percentage points.
The same pattern is evident in dividend stock ETFs. The hedged 'SOL U.S. Dividend Dow Jones (H)' rose by 9.53% during the same period, while the unhedged 'SOL U.S. Dividend Dow Jones' fell by 2.08%. The performance gap here was 11.61 percentage points.
Hedged products are generally more advantageous during periods of won appreciation, as they help mitigate losses from falling exchange rates by partially fixing future applicable rates through derivatives.
Conversely, during periods of won depreciation, unhedged products may yield higher returns. Unhedged products benefit from both the price appreciation of the underlying assets and the gains from a rising dollar value. Even if the prices of the underlying assets decline, an increase in the dollar value can offset some of the losses.
When selecting hedged products, investors should also consider the costs associated with hedging. Hedged ETFs utilize derivatives to stabilize future exchange rates, and the interest rate differential between South Korea and the U.S. is factored into these costs. Particularly when U.S. interest rates are higher than those in South Korea, the cost burden of hedging can increase.
A financial industry official stated, "If you believe the won will appreciate in the short term, hedged products can be a viable option to reduce currency losses. However, long-term investors should also weigh the potential for exchange rate increases and the associated hedging costs."
* This article has been translated by AI.
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