Exchange losses split returns by 11 percentage points, but retail investors are choosing currency exposure over hedging

[Financial News] Even as the sharp drop in the won-dollar exchange rate has widened exchange losses for U.S. stock investors, individual money is still flowing into dollar assets. In the securities industry, analysts say the main driver is the strength of the U.S. stock market, while the lower exchange rate is also fueling buying sentiment by raising expectations of future foreign-exchange gains if the won rebounds.
According to the financial investment industry on the 27th, from July 2 through the previous day, KODEX U.S. S&P 500 ETF fell 9.08%, while KODEX U.S. S&P 500 hedged ETF rose 2.18%. Over the same period, TIGER U.S. S&P 500 fell 8.76%, while TIGER U.S. S&P 500 hedged ETF gained 2.01%, widening the return gap to 10.77 percentage points.
Although both products track the same S&P 500 index, the plunge in the won-dollar exchange rate pushed the gap in returns to more than 11 percentage points depending on whether currency risk was hedged. The benchmark won-dollar rate hit a year-to-date high of 1,554.40 won on July 2, then fell 171.30 won, or 11.0%, to 1,383.10 won on Aug. 26. As a result, the won-denominated returns of products fully exposed to exchange-rate movements dropped sharply.
Despite that, retail investors are buying currency-exposed products far more aggressively than hedged ones. From July 2 to Aug. 26, individuals bought a net 1.1552 trillion won of TIGER U.S. S&P 500 and 628.9 billion won of KODEX U.S. S&P 500. A total of 1.7841 trillion won flowed into those two products alone. By contrast, KODEX U.S. S&P 500 hedged ETF and TIGER U.S. S&P 500 hedged ETF recorded combined net sales of about 6.8 billion won during the same period.
In the securities market, analysts say demand for U.S. benchmark index ETFs has been driven by a flight from the domestic stock market's sharp decline and by the strength of U.S. equities. They add that the recent drop in the exchange rate has further boosted buying sentiment by allowing investors to purchase dollar assets at a lower won price than before.
Lee Jin-wook, who oversees ETF management at Korea Investment Management Co., Ltd., said, "There is some connection to the exchange-rate advantage, but the main drivers are flight demand from the domestic stock market's sharp decline and the record-setting rally in U.S. equities." He added, "The weaker exchange rate has made the entry point more attractive by allowing investors to buy the same assets more cheaply."
The view that the weaker won could create an opportunity for future foreign-exchange gains is also showing up in U.S. dollar deposits. The balance of dollar deposits at the five major banks rose by $914.626 million, or 13.6%, from $67.30238 billion on July 2 to $76.44864 billion on Aug. 26.
A securities industry official said, "There are products at securities firms, such as exchange-rate-linked derivative trust products, that allow investors to bet on exchange-rate movements, but they are not widely used by retail investors." The official added, "Most securities firm products are structured so investors choose whether to take exchange-rate exposure or hedge it, so if individuals want to directly seek foreign-exchange gains from a future rise in the exchange rate, using a U.S. dollar deposit or a foreign currency account is the most intuitive option."
There are also forecasts that the won-dollar exchange rate could fall further. In the securities market, analysts expect dollar supply from Samsung Electronics and SK hynix's expanded shareholder returns, along with a weaker global dollar trend, to support won strength. However, they also note that the actual amount converted into foreign currency is limited and that dividend-related remittance demand could emerge later, which may cap the downside.
Kwon A-min, a researcher at NH Investment & Securities, said, "In terms of shareholder return size alone, it is similar to past ADR-related themes, but considering the won held on hand and domestic operating cash flow, the actual foreign-exchange conversion ratio is only around 40% to 50%." She added, "Dividend-related remittance demand after payouts also needs to be considered, but at the current level, there is room for an additional decline of about 40 to 50 won, and I see 1,340 to 1,350 won as the first support line."

[email protected] Bae Hangeul Reporter