Domestically listed ETFs tracking the US S&P 500 or NASDAQ 100 are split into currency-hedged products with (H) at the end of their names and unhedged products without that notation, even when they follow the same index. The difference in won-denominated returns between the two comes not from the index but from the won/dollar exchange rate. It is not possible to determine in advance which is more advantageous, but the structure that creates the difference can be calculated precisely. This article covers that structure, the hidden costs, and decision criteria based on the nature of the account.
What the (H) Means — Notation Rules and Operating Principles
Samsung Asset Management's Kodex ETF Investment Guide classifies ETFs investing in overseas assets with (H) at the end of their name as currency-hedged and those with no notation or (UH) as currency-unhedged. An unhedged ETF's won-denominated return reflects both the underlying asset price movement and the exchange rate change. A currency-hedged ETF, on the other hand, uses derivatives such as forward contracts to offset currency movements, so it is designed to keep the won-denominated return close to the index performance regardless of how the dollar moves.
Putting numbers to the structure makes the difference clear. Below is a simplified example of the won-denominated performance of each type when the index and exchange rate move independently (before management fees and hedging costs, assuming 100% hedging ratio).
| Scenario | Index Return (%) | Won/Dollar Change (%) | Unhedged Performance (%) | Hedged Performance (%) |
|---|---|---|---|---|
| Index rises + won strengthens | +10 | -5 | +4.5 | +10.0 |
| Index rises + won weakens | +10 | +5 | +15.5 | +10.0 |
| Index falls + won weakens | -10 | +5 | -5.5 | -10.0 |
| Index falls + won strengthens | -10 | -5 | -14.5 | -10.0 |
The unhedged performance is calculated as (1 + index return) × (1 + exchange rate change) − 1. As the table shows, there is a cushion in the unhedged product where won weakness (rising exchange rate) softens losses when the index falls. The recurring tendency for the dollar to strengthen during sharp US market declines is the core argument for those who prefer unhedged exposure. Korea Economic Daily also noted that in US stock investing, the choice between unhedged and hedged is not a matter of preference but a judgment call on this offsetting structure.
The True Cost of Hedging — The Premium Created by the Korea-US Rate Differential
Hedging is not free. A currency-hedged ETF repeatedly rolls over short-term forward contracts to lock in the exchange rate; the swap point — the difference between the spot rate and the forward rate — continuously accumulates as either a cost or a gain. KB Financial Group's explanation of currency-hedged ETFs notes that during periods when US rates are higher than Korean rates, holding a hedged product is akin to forgoing higher-yielding dollars in favor of won, meaning the interest rate differential can generate hedging costs.
Simplified: when the interest rate differential between the two countries is 2 percentage points per year, a force applies that sets hedging costs at around 2% annually. Even if the index rises 8% per year, the won-denominated return on a hedged product could be reduced to around 6% after costs. On top of that, hedged products often carry higher total expense ratios than unhedged ones due to the additional work of managing the hedge, and costs arising from the swap point are quietly deducted from returns without appearing in the total expense ratio figure. This is why long-term performance charts comparing (H) and unhedged products of the same index gradually diverge during periods when the rate differential widens.
A currency hedge is insurance that eliminates the exchange rate variable, and the premium is billed as the size of the Korea-US interest rate differential.
Decision Framework — Account Type and Exchange Rate Position
For a pension account with a long investment horizon and regular contributions, exchange rate fluctuations tend to average out over time, and the diversification effect of unhedged exposure — where dollar strength during US market crashes acts as a buffer — is relatively prominent. Conversely, for funds with a defined target over a few months, eliminating the exchange rate variable to improve the predictability of the outcome makes the hedged option more useful. The right answer changes depending on the account's timeline, even for the same product.
That said, the conditions under which this judgment breaks down should be stated clearly. The preference for unhedged exposure weakens when the won/dollar exchange rate is trending structurally downward (won strengthening) from a high level, as exchange rate losses erode index gains. Conversely, the preference for hedged exposure strengthens when the Korea-US rate differential narrows (making the premium cheaper) and weakens when it widens again. Ultimately, the choice hinges on how you read two variables: where the current exchange rate sits relative to historical ranges, and which direction interest rates in both countries are heading.
In practice, there is also a middle path. Asset managers often list both hedged and unhedged versions of the same index, allowing a partial hedging strategy — holding both types in equal portions to defer the judgment on exchange rate direction altogether. Also, in accounts like pension savings plans (연금저축) and individual retirement pensions (IRP) that transact in won without currency exchange, the (H) notation in domestically listed ETF names is effectively the only switch that determines currency exposure — making it a habit to check the product name notation the defining decision for the entire account's currency allocation.
What to Watch
- Korea-US benchmark rate differential — the primary variable determining hedging cost size; narrowing gaps ease the cost burden on hedged products, widening gaps increase it
- Won/dollar exchange rate position — if it is near the upper end of the historical range, examine the exchange loss risk of entering unhedged; if near the lower end, examine the opportunity cost of hedging
- Product name notation and total expense ratio — even for the same index, check the (H) presence, total expense ratio, and hedging ratio (100% fixed or partial) in the investment prospectus
- Account timeline — whether it is pension/long-term accumulation funds or short-term funds with a defined use date changes the answer for the same product