Currency-Hedged or Unhedged ETF — Which One?

You open your Korean brokerage app to buy a US stock ETF, and two products with almost identical names show up. One has an H at the end, the other doesn't. Both hold S&P 500. So why are there two of them, and which one should you pick? Let's start with how exchange rate movements actually get added to your return.

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How exchange rate gets layered onto your return

Say you buy a US stock ETF from Korea. You're paying in won, but that money eventually buys dollar-denominated assets. So your return reflects two things at once.

First, how much the US stock itself moved. Second, how much the USD-KRW exchange rate moved over the same period.

Suppose the S&P 500 rises 10% in a year. If the exchange rate doesn't move, your return is 10%. But if the dollar strengthened 5% over the same period, your return comes out to about 15.5%. The other direction, with the dollar 5% weaker, your return shrinks to about 4.5%. Same underlying asset move, very different end result depending on which way the currency went.

The split between hedged and unhedged comes down to one question: do you want to take that currency move or not.

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What a hedged ETF actually does

The H tacked onto the name stands for Hedge. The fund locks the currency move inside the product.

The manager rolls forward FX forwards equal to the fund's assets. Whichever way the exchange rate moves, the won-based return barely registers any FX effect. So if you hold a hedged S&P 500 ETF and the index is up 10%, your return lands close to 10% no matter where the won-dollar pair went.

Hedging comes with two costs though.

First, hedging cost itself. FX forwards have to be rolled, and when there's a wide rate gap between Korea and the US, the spread eats into your return. When Korean rates are below US rates, hedging gets more expensive.

Second, the expense ratio sits a bit higher than the unhedged version. Running the hedge takes work, and that cost is passed through.

So hedged ETFs trade currency volatility for a small annual fee.

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How the unhedged version works

Unhedged is the opposite. The fund doesn't block the exchange rate move — it passes it straight through.

Your return = the asset's own move + the currency move, stacked. If the currency moves your way, your return amplifies. If it moves against you, your return shrinks.

The unhedged side has two advantages.

First, no hedging cost. The expense ratio runs lower than the hedged version too. Over a long horizon, that cost gap compounds into something that's hard to ignore.

Second, the dollar tends to act as a buffer during crises. Crises like 2008 and 2020 usually push the won weaker and the dollar stronger. US stocks fell, but the dollar appreciation softened the won-based loss. There's a track record of that pattern.

The flip side is that when the currency moves against you, your return shrinks even though the asset went up. And nobody can call the FX direction in advance, so year-to-year results swing more.

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Which one fits which situation

The answer depends on your time horizon and what role this asset plays in your portfolio.

Short horizons lean hedged. If this is money you'll spend in 1 to 3 years, FX swings sit on top of your asset return in a way that feels like extra noise. If you want to track the asset itself without the FX layer, hedged is the cleaner pick. People close to drawing down retirement money tend to lean hedged for the same reason.

Long horizons lean unhedged. Over 10 to 30 years, hedging cost compounds into a real drag. And FX rates don't drift in one direction forever — they mean-revert over long periods, which dilutes the FX effect on the asset itself. On top of that, you get the crisis buffer of dollar strength.

If crisis protection matters more, the unhedged side carries more weight. If your portfolio is already heavy in Korean assets, holding the US slice unhedged keeps overall balance better. The won tends to weaken during crisis periods, and that dollar appreciation steadies your overall portfolio.

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Splitting between the two is also an option

You don't have to pick one side. A common approach is to hold a mix.

If you have 100 in US assets, you split — some hedged, some unhedged. The ratio depends on your time horizon and risk tolerance. 7 to 3, 5 to 5, whatever feels right to you.

That split smooths out the result regardless of FX direction. One side covers when the other side gets hit. Year-to-year volatility from the currency component drops. It's a simple but reliable approach for asset allocation.

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Wrapping up in one line

Hedged blocks currency moves and steadies your result in exchange for a small annual cost. Unhedged passes the currency through — bumpier year to year, but cheaper over the long run with a built-in crisis buffer. Short money leans hedged, long money leans unhedged as a starting point. Look at your time horizon and how much of your portfolio is already in won-based assets, and pick the ratio that fits you.

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• This information is not investment advice.
• Past performance does not guarantee future results.
• Backtest results are simulations and may differ from actual trading outcomes.