The won-dollar exchange rate, which had hovered above the 1,500 level, has recently declined, splitting the returns of domestic exchange-traded funds (ETFs) that track US indexes. Currency-hedged funds avoided the foreign exchange shock and sharply narrowed their losses, while currency-exposed funds saw their declines widen as they were also hit by falling share prices from a correction in US tech stocks.
According to the Korea Exchange on the 27th, "TIGER US S&P500," which tracks the US Standard & Poor's (S&P) 500 index, fell 4.17 percent this month, while the currency-hedged "TIGER US S&P500(H)" rose 0.29 percent. The return gap was 4.46 percentage points. "KODEX US S&P500" also fell 4.73 percent, but "KODEX US S&P500(H)" rose 0.36 percent, a difference of 5.09 percentage points. The TIGER and KODEX currency-exposed products tracking the Nasdaq 100 index fell 9.39 percent and 9.34 percent, respectively, while the currency-hedged versions declined just 4.57 percent each, gaps of 4.82 and 4.77 percentage points.
Analysts in the securities industry attribute the larger declines in currency-exposed products to foreign exchange losses compounded by concerns over the profitability of artificial intelligence (AI) investments. Currency-exposed ETFs reflect both the price of the underlying asset and fluctuations in the won-dollar exchange rate. When the won strengthens, the won-converted value of dollar assets declines, adding foreign exchange losses on top of falling US stock prices. Conversely, currency-hedged funds are structured to offset exchange rate fluctuations through instruments such as forward contracts. Amid the effects of a high exchange rate, currency-exposed products posted returns 1.76 to 2.22 percentage points higher than currency-hedged ones in the second quarter of this year, but the performance between the products reversed with the shift to won strength.
The won-dollar rate, which rose to 1,555.8 won on the 2nd of this month—the highest since the 2008 financial crisis (based on the daytime trading close)—fell 87.3 won (5.61 percent) to 1,468.5 won on the day. The market cites as reasons for the won's strength the demand to convert the $26.5 billion (about 40 trillion won) raised through SK hynix's American depositary receipt (ADR) listing, as well as dollar-selling by exporters who perceive the exchange rate to be at a peak. Also contributing was a shift by foreign investors, who sold off 143 trillion won in the domestic stock markets (KOSPI, KOSDAQ and KONEX markets) in the first half, from net selling (1.17590 trillion won) during the 1st through the 10th of this month to net buying (1.6178 trillion won) during the 13th through the 27th.
The securities industry has also raised the possibility that the US Federal Reserve's benchmark interest rate decision on the 29th and Middle East instability could spur a dollar rebound. Some observers say that if the exchange rate rises again, the won-converted value of dollar assets held by currency-exposed funds would increase, potentially dampening the gains of currency-hedged funds. However, some analysts say that won strength could continue over the medium term. "As changes in various conditions, including narrowing gaps in external economic conditions and interest rates, accumulate, they are expected to act as factors driving the won-dollar exchange rate lower," said Kim Jin-sung, a researcher at Heungkuk Securities.
