The increasing volatility in the exchange rate between the US dollar and the Korean won has prompted a notable surge in interest for currency-hedged exchange-traded funds (ETFs) in 2025. As global economic conditions fluctuate, investors are increasingly aware of the potential risks associated with currency exposure, particularly for those engaged in international investments. The depreciation of the Korean won against the US dollar has led to heightened concerns regarding capital erosion, prompting a strategic pivot towards financial instruments that mitigate this risk.
Currency-hedged ETFs serve as an effective mechanism for investors seeking to shield their portfolios from adverse fluctuations in exchange rates. By employing various hedging strategies, these funds aim to neutralize the impact of currency volatility on investment returns. In an environment characterized by unpredictable shifts in monetary policy and geopolitical tensions, such as those observed between South Korea and its trade partners, these ETFs have gained traction among both institutional and retail investors. The appeal lies not only in capital preservation but also in enabling investors to focus on underlying asset performance without worrying about currency risk.
According to Koscom's ETF Check on September 1, the top-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 fixing the exchange rate of the underlying foreign assets when investing in foreign assets. The government plans to slash the size of the foreign exchange stabilization fund in 2025 to 140.3 trillion won ($104.6 billion), from 205.1 trillion won allocated this year. The cut reflects the deepest reduction in the fund was since it was established in 1967 to counter excessive volatility in the won.
“Impact of reduction would be minimal as the foreign exchange reserve is now more than three times short-term external debt of South Korea” said Min Gyeong-won, an economist at Woori Bank in Seoul. “If the won falls, corporations would sell dollars from their FX deposits. If the currency rises, dollar demand of mom and pop investors for overseas stock investment would follow.”
The won’s swings have put South Korean authorities on edge this year. In April the finance ministry’s international finance bureau and Oh Kum-hwa, director general of the Bank of Korea’s international department, issued a joint text message, saying they were closely watching exchange rate movements after the currency fell to 1,400 per dollar — the lowest since 2022.
The government has extended the currency’s trading hours since July as part of the nation’s push to get its stocks and bonds included in more global indexes, though greater volatility is also possible during times of lower liquidity.
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