[Investment Barometer] ETFs Gaining Attention Amid a Strong Won

ETF Returns Tracking U.S. Indices Diverge Amid Exchange Rate Volatility

5 Percentage-Point Gap Between Unhedged and Hedged ETF Returns

Dollar Inverse ETFs Surge on Dollar Weakness...Double Inverse Products Gain 12%

Export-Focused ETFs

Amid changing global monetary policy trends and supply-demand fluctuations in the foreign exchange market, the KRW-USD exchange rate has continued to fluctuate, making calculations more complex for investors in Exchange-Traded Funds (ETFs). Exchange rate movements can create significant differences in ETF returns depending on the investment target, hedging strategies, and asset classes. According to securities industry analysts, during periods of foreign exchange volatility, investors should consider adjusting the proportion of overseas unhedged products or export stocks, and diversify their portfolios with hedged products or dollar inverse ETFs.

According to the Seoul foreign exchange market on September 10, the KRW-USD exchange rate closed at 1,336.1 won in weekly trading (as of 3:30 p.m.), down 9.5 won from the previous trading day. The KRW-USD exchange rate fell back into the 1,330 won range on September 7 for the first time in about two years, continuing its recent downward trend. It has declined by 14.31% compared to the July high of 1,559.2 won.

Unhedged vs. Hedged ETFs: Returns Differ Sharply with Exchange Rate Fluctuations

ETFs investing in overseas assets are generally divided into unhedged and hedged types, depending on how they factor in currency fluctuation risks in their portfolios. Unhedged ETFs, which do not have a special notation at the end of the product name, reflect not only the price fluctuation of the underlying assets (stocks or bonds) but also KRW-USD exchange rate movements in their overall returns. If the KRW-USD exchange rate rises (stronger dollar), currency gains are added to the base asset returns, maximizing yields. Conversely, even if the price of the underlying asset rises, a falling exchange rate (stronger won) results in currency losses, decreasing the final return in won or even leading to a loss.

Hedged ETFs, denoted by an (H) at the end of the product name, eliminate currency risk in advance through methods such as forward contracts. The returns of hedged products are linked solely to the price movement of underlying assets, regardless of exchange rate trends.

The effect of exchange rate declines on ETF performance is especially pronounced in the returns of flagship ETFs that track the same index. Over the past month, there has been a gap of more than 5 percentage points in the returns of major ETFs tracking leading U.S. indices, depending on their hedging status. For the U.S. S&P 500 index, unhedged ETFs such as TIGER U.S. S&P 500 (-5.74%), KODEX U.S. S&P 500 (-5.79%), ACE U.S. S&P 500 (-5.72%), and RISE U.S. S&P 500 (-5.73%) all recorded declines of over 5%. In contrast, hedged ETFs such as KODEX U.S. S&P 500(H) (-0.49%), TIGER U.S. S&P 500(H) (-0.70%), and RISE U.S. S&P 500(H) (-0.49%) managed to shield returns from the effects of currency declines over the same period. The same trend was observed among ETFs tracking the U.S. Nasdaq 100 index: unhedged ETFs such as TIGER U.S. Nasdaq 100 (-5.15%), KODEX U.S. Nasdaq 100 (-5.13%), ACE U.S. Nasdaq 100 (-5.14%), and RISE U.S. Nasdaq 100 (-5.08%) dropped by more than 5%, while hedged ETFs like KODEX U.S. Nasdaq 100(H) (0.09%) and TIGER U.S. Nasdaq 100(H) (0.02%) were flat.

For both S&P 500 and Nasdaq 100, unhedged ETFs saw their losses deepen to the 5% range due to additional currency losses from the KRW-USD decline, whereas hedged (H) ETFs successfully blocked losses from the weaker dollar, maintaining the native returns of the indices.

The ETFs that benefited most during the exchange rate decline were those directly betting on a weaker dollar. As the dollar's weakness became prominent, major dollar inverse ETFs posted returns in the 6% range over the past month: KIWOOM U.S. Dollar Futures Inverse rose 6.19%, KODEX U.S. Dollar Futures Inverse climbed 6.12%, and RISE U.S. Dollar Futures Inverse increased by 6.01%. Leveraged "double inverse" ETFs, designed to track double the decline, posted around 12% returns: KIWOOM U.S. Dollar Futures Inverse 2X rose 12.16%, KODEX U.S. Dollar Futures Inverse 2X gained 12.02%, and TIGER U.S. Dollar Futures Inverse 2X was up 11.92%.

Conversely, U.S. Dollar Futures ETFs dropped by more than 5%, and leveraged products tracking double the change saw losses in the 10% range.

KRW Strength Turns Cosmetics and Other Export Theme ETFs Downward

The drop in exchange rates is also affecting export stocks with high overseas market exposure and their related ETFs. In particular, cosmetics ETFs, which had performed strongly during the recent correction, have now weakened in response to exchange rate movements.

According to ETF Check, SOL Cosmetics TOP3 Plus fell 10.08% over the past week, marking the largest drop among all ETFs except leveraged and inverse products. TIGER Cosmetics slipped 8.23%, followed by HANARO K-Beauty at 8.12% down.

When the value of the won rises (exchange rate drops), there is a translation loss upon converting dollar-denominated revenues from abroad into won, resulting in decreased book revenue and operating profit. This means KRW strength is unfavorable for exporters. While the benefit of reduced import prices for raw materials appears with a time lag, the removal of the illusion of strong overseas performance and profit-taking related to the falling exchange rate creates immediate pressure on stock prices.

Kim Myung-joo, an analyst at Korea Investment & Securities, said, "As the won continues to strengthen, concerns are growing in the market about the earnings of the cosmetics sector, which is a key export industry." She added, "As of July this year, U.S.-bound shipments accounted for 21.8% of total cosmetics exports. If the KRW-USD exchange rate drops by 5%, the operating margin in the cosmetics sector could fall by about 0.7 to 0.8 percentage points."

This content was produced with the assistance of AI translation services.