Managing Currency Risk in Overseas Investing
When you invest in a U.S. ETF, one more risk—currency risk—is added on top of stock risk. This is not necessarily a bad thing. What matters is understanding how to handle it.
What Is Currency Risk
Two risks exist when investing in overseas assets.
1. Asset risk: movements of the asset itself, such as a fall in the stock price 2. Currency risk (FX risk): changes in the value of that currency against the Korean won
Example: a stronger dollar (a rise in the KRW/USD rate) makes the same dollar asset worth more in won. A weaker dollar (a falling rate) is the opposite.
Over the long run, exchange-rate movements work in both directions and offset each other to some degree. But over the short and medium term, exchange rates have a large impact on returns.
The History of the USD/KRW Rate
Major moves in the USD/KRW rate: Before 1997: around 750–850 won 1997–1998 IMF foreign-exchange crisis: 850 won → 1,900 won (up 125%) Mid-2000s: 1,250 won → the 900-won range (weak dollar) 2008 financial crisis: the 900-won range → 1,500 won (surge) 2020 COVID: temporarily around 1,280 won 2022–2023: 1,200 won → around 1,450 won
For overseas-asset investors, these exchange-rate moves directly affected asset returns. During the IMF period, holders of U.S. assets had small losses in won terms even when the asset fell, because the exchange rate rose.
This is past exchange-rate data and does not predict future rates.
How to Manage Currency Risk
1. Use currency-hedged ETFs: ETFs marked "(H)" or "hedged" minimize exchange-rate movements using futures and the like. This adds about 0.5–1% per year in cost.
2. Currency diversification: holding assets in various currencies such as the dollar, euro, and yen diversifies the risk of a specific currency.
3. Long-term holding: over the long run, FX effects tend to offset. In 20+ year investments, the asset's own performance dominates over the exchange rate.
4. Natural hedge: for people with dollar income (employees of exporters, dollar earners), dollar assets serve as a natural hedge.
This service shows returns both with and without the FX effect, so you can check the exchange-rate effect directly.
Frequently Asked Questions
Q. Is hedging always advantageous?
No. If you hold a currency-hedged ETF during a period of dollar strength, you give up the currency gain. During the strong-dollar period of 2022–2023, unhedged ETFs significantly outperformed hedged ETFs. Conversely, hedging was advantageous during periods of dollar weakness. Because the direction of exchange rates is hard to predict, it is hard to declare which is better for long-term investing.
Q. There's a forecast that the won will keep weakening—does that make overseas investing unconditionally advantageous?
Exchange-rate forecasting is hard even for experts. If won weakness persists, holding dollar assets is advantageous, but the opposite can also happen. Rather than betting on an exchange-rate outlook, maintaining global diversification from a long-term perspective and accepting the FX effect naturally can be a more stable strategy.
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📋 Results are based on historical data; past returns do not guarantee future returns.
📋 This service is provided for educational purposes to help you understand investing, not as investment advice.