Won's rally puts more than 10 points between Korea's hedged and unhedged S&P 500 funds

An unhedged fund's return in won combines the move in U.S. share prices with the move in the dollar. A stronger won shrinks the value of those shares on conversion even when they rise ^[7]. The ordering held over the past month too: the hedged RISE, KODEX and TIGER S&P 500 funds gained 1.26% to 1.40%, while the unhedged TIGER and SOL funds gained 0.90% and 0.89% ^[8]. The 10.67-point quarterly gap between TIGER's two versions ^[6] equals almost six years of hedging at the industry's average cost ^[18].

About half the new money went to S&P 500 funds listed without the hedge ^[20]. ETF CHECK ranks TIGER U.S. S&P 500 third with 663.9 billion won and KODEX U.S. S&P 500 seventh with 361 billion won ^[3]. Seoul Economic Daily tags the hedged share classes with an (H), and neither of those names carries one ^[5]. Together they took 1.02 trillion won of the four funds' 2.019 trillion won ^[1][19]. The TIGER fund among them lost 7.04% over the quarter ^[5]. The KODEX and TIGER Nasdaq 100 funds took the other 994.1 billion won ^[21]. The report does not give the Nasdaq funds' returns, so it cannot show whether the choice of index moved results as much as the hedge did.

Kim Sang-yul, head of global ETF management at Mirae Asset Global Investments, calls the won's climb a normalization after its first-half slide ^[10]. "We judge that the pace of the decline to the 1,340-won range was somewhat excessive, and in the short term a rebound looks more likely," he said ^[11].

If the rebound Kim expects arrives ^[12], unhedged holders recover at most about 4.5%, because no rate in the 1,300s sits more than that above 1,340 ^[22]. Even that rebound would return less than half of the quarter's gap ^[23]. A won that keeps strengthening widens the hedged funds' lead. A flat rate leaves hedged holders paying for cover they did not need. The industry says that cost builds up when won interest rates sit below dollar rates ^[9].

I think the quarter argues against switching wholesale into hedged funds, or rather against switching on the strength of one quarter. The gap came from a single currency move that Mirae Asset's ETF head calls somewhat excessive, and the hedge's cost comes due every year. The industry advice Seoul Economic Daily reports is to adjust part of an allocation and keep the rest ^[14]. Kim's own list of currency drivers is the counter-case: the Korea-U.S. interest rate gap, the semiconductor export cycle, corporate demand for currency conversion and foreign buying of Korean stocks ^[13]. If those push the won stronger than the 1,340 range, the hedged funds keep winning and this view is wrong.

On the stocks themselves Kim is positive. "This rally has been driven by earnings growth rather than multiple expansion, so as long as earnings estimates hold up or are revised higher, there is still room for further gains," he said ^[15]. He still recommends "a staggered or regular-installment buying approach" ^[16].