Market Analysis2025-11-10
KRW Breaks 1,460 Level: Time to Reassess Currency Hedging for U.S. ETF Investors
The KRW/USD exchange rate has broken above 1,460 won for the first time in seven months, accelerating foreign capital outflows. U.S. ETF investors should now reassess their currency gain strategies and hedging approaches.
Admin한국경제
The KRW/USD exchange rate surged to 1,461.50 won, jumping 28.50 won in just one week. With foreign investors continuing to net-sell Korean equities and China's economic slowdown dimming the export outlook, downward pressure on the Korean won is intensifying. For Korean investors holding U.S. ETFs, this moment represents both an opportunity to lock in currency gains and a critical juncture to manage the risk of future exchange rate losses. During periods of high currency volatility, it is essential to review your currency exposure using an asset allocation calculator and adjust your hedging ratios using a rebalancing calculator.
Causes of KRW Weakness and the Outlook Ahead
The primary driver of KRW weakness is foreign capital outflows. Since the start of November, foreign investors have net-sold approximately 1.5 trillion won in Korean equities, extending their streak to seven consecutive months of net selling. This reflects the impact of U.S. interest rates staying higher than expected, widening the Korea-U.S. rate differential and boosting the appeal of dollar-denominated assets. Concerns that China's economic slowdown will worsen Korea's export outlook and shrink its current account surplus have added further downward pressure on the won. Analysts are warning of a short-term overshoot toward 1,480 won. If the U.S. Federal Reserve shows no urgency to cut rates and China's stimulus measures fall short of expectations, KRW weakness is expected to persist for some time. That said, government and Bank of Korea stabilization measures, along with increased dollar supply from export companies, are likely to cap excessive gains above the 1,500 won level.
Currency Gains and Losses for U.S. ETF Investors
KRW weakness presents a double-edged reality for U.S. ETF investors. The roughly 12.3% rise in the exchange rate from around 1,300 won at the start of the year to the current 1,460 won has delivered meaningful currency gains on dollar-denominated assets. For example, an investor who put 100 million won (approximately $76,923) into SPY at the beginning of the year would have earned an additional 12.3 million won from the exchange rate effect alone. If SPY also rose +22% from its year-start level, the total gain would come to approximately 34.3 million won — the sum of 22 million won from price appreciation and 12.3 million won from currency gains. However, if the exchange rate falls going forward, currency losses will emerge in reverse. A return to 1,300 won would translate into roughly an 11% currency loss, potentially wiping out equity gains. For bond ETFs such as AGG or TLT, where price volatility is lower, exchange rate movements have an even greater relative impact. Even if AGG gains +3%, adding the 12.3% currency gain brings the total return to +15.3% — but a reversal in the exchange rate could push that total return into negative territory.
Pros and Cons of Currency Hedging Strategies
Currency hedging is a strategy that eliminates exchange rate risk. By locking in the KRW/USD rate through currency-hedged ETFs or forward contracts, investors give up potential currency gains but also shield themselves from currency losses. The primary advantage of hedging is reduced portfolio volatility. With only equity price movements to monitor, return forecasting becomes more straightforward, and if the won strengthens, hedging prevents currency losses and protects the pure asset return. Hedging is particularly well-suited to assets that prioritize stability, such as bond ETFs. AGG and TLT target annual returns of roughly 3–5%, and a 10% swing in the exchange rate could completely erode those gains. On the other hand, the drawbacks of hedging are the cost and the foregone currency upside. Annual hedging costs of 1–2% apply and rise in line with the Korea-U.S. interest rate differential. In an environment of continued KRW weakness like the present, the opportunity cost of missing out on currency gains is significant. Moreover, over the long run, exchange rates tend to mean-revert, meaning that for investors with a horizon of ten or more years, exchange rate fluctuations are likely to cancel out. Accordingly, long-term investors may find it rational to invest without hedging.
Hedging Strategy Guide by Asset Class
Currency hedging strategies should be tailored to the asset class and investment horizon. For equity ETFs (SPY, QQQ, VOO), long-term investors (10+ years) are generally better off without hedging. The high expected return of equities (8–10% annually) tends to offset exchange rate fluctuations, and avoiding the 1–2% annual hedging cost adds to the benefit. For short- to medium-term investors (1–5 years), a 50% partial hedge is worth considering — a middle ground that preserves some currency upside while buffering against a sharp won appreciation. For bond ETFs (AGG, TLT, IEF), hedging is recommended across all time horizons. Since bonds are held for stability and low volatility, a 10% exchange rate move fundamentally undermines the purpose of bond investing. The rate should be locked in using currency-hedged bond ETFs or forward contracts. For dividend ETFs (SCHD, VYM), a middle-ground approach with 50–70% partial hedging is appropriate. This allows investors to reliably capture the 3–4% dividend yield while maintaining some currency exposure for long-term growth — a balanced approach.
Currency Exchange Strategy at Rebalancing Time
If you are planning to rebalance at the current exchange rate of around 1,460 won, the timing of currency conversion deserves careful consideration. Selling dollar-denominated assets and converting to won while the rate is near a peak allows you to realize currency gains. For example, if you are rebalancing by selling some SPY to buy AGG, one approach is to convert the SPY sale proceeds to won, wait for the exchange rate to fall, then convert back to dollars at the lower rate to purchase AGG — thereby locking in currency gains and re-entering at a more favorable rate. Conversely, if you expect the exchange rate to rise further, it may be more advantageous to execute the rebalancing while remaining in dollars. You could hold dollar cash or make a short-term investment in a money market fund such as SGOV to capture additional currency appreciation. Use an asset allocation calculator to review the weighting of your KRW and USD assets, and simulate how your portfolio value would change under different exchange rate scenarios. Use a rebalancing calculator to account for conversion costs and transaction fees when determining the optimal time to rebalance and convert currency.
Conclusion
KRW weakness presents U.S. ETF investors with both a currency gain opportunity and a risk management challenge. Tailor your hedging strategy to your asset class and investment horizon, and choose your currency conversion timing carefully when rebalancing. Use an asset allocation calculator to review your currency exposure, and use a rebalancing calculator to incorporate exchange rate scenarios and build the optimal portfolio.
Related Portfolios
#[KO] 리밸런싱 계산기#[KO] 자산배분 계산기#Exchange Rate#[KO] 환헤지#AGG ETF
Related Articles
Have any questions?