As the exchange rate between the Korean won and the U.S. dollar, which had been trading between $1,300 and $1,400, has rapidly fallen below $1,300, the exchange-traded fund (ETF) market is seeing significant shifts. In particular, currency-hedged ETFs, which are insulated from exchange rate fluctuations, have seen an increase in returns, while currency-exposed ETFs, which are affected by exchange rate changes, have seen a decline in performance.

According to Koscom’s ETF Check on September 1, the best-performing ETFs among the 38 funds tracking the S&P 500 and NASDAQ 100 indices were all currency-hedged as of August 30. Currency-hedged ETFs are designed to mitigate the risks associated with exchange rate fluctuations by locking in the exchange rate of the underlying foreign assets when investing in foreign assets.

The ETF “TIGER SYNTH-S&P500 Leverage(H)” took first place with a monthly return of 4.44 percent as of August 30. This was followed by “RISE US S&P 500(H)” with a return of 2.45 percent, “KODEX US NASDAQ100 Leverage (SYNTH H)” with 2.41 percent and “KODEX US S&P500(H)” with 2.38 percent. In contrast, the return of most currency-exposed ETFs fell by around 1 percent, reflecting the decline in the exchange rate. Unlike currency-hedged ETFs, currency-exposed ETFs are directly affected by exchange rate fluctuations. They benefit from a rising exchange rate, but see their return fall when the exchange rate falls, as has been the case recently.

Experienced investors are already increasing their investments in currency-hedged ETFs. The Korean won’s exchange rate against the US dollar is widely expected to fall as the likelihood of US interest rate cuts increases. For example, 35.9 billion won (about $26.8 million) flowed into the currency-hedged KODEX US S&P500(H) ETF last month, representing more than a third of the total 95.4 billion won that flowed into the fund this year, all in August alone.

However, even in times of declining exchange rates, when currency-hedged ETFs are relatively popular, there are some important considerations for investors. One important factor is the cost associated with maintaining the fixed exchange rate in currency-hedged ETFs. Because these products invest in futures, there are additional costs for the investment firms that manage the funds, which of course leads to higher expenses for investors. As a result, long-term investments in currency-hedged products can become more expensive, potentially making it difficult to achieve the returns you want.

Interest in currency-hedged ETFs is likely to continue for some time, as it is very likely that the US Federal Reserve will make at least one further interest rate cut after the FOMC meeting in September.

A securities industry insider noted: “Investing in currency-hedged products can be a strategy when exchange rate volatility is high or difficult to predict. However, investors should keep in mind that returns from currency-hedged products will be relatively lower than those from currency-exposed products when the exchange rate rises.”