Is it too late? How to invest in dollar futures ETFs amid the high exchange rate [Invest 360]

The won-dollar exchange rate has entered the 1,530-won range, reaching its highest level since the 2008 global financial crisis. With the value of U.S. stocks held by Korean investors surpassing 316 trillion won (approximately $208 billion), attention is turning to dollar futures exchange-traded funds (ETFs) that can capitalize on a stronger dollar.

According to Seoul Money Brokerage Services, the one-month won-dollar non-deliverable forward (NDF) contract traded in New York overnight closed at 1,533 won Thursday. During trading, the rate climbed as high as 1,536 won, widening its gains. The exchange rate has held above 1,500 won for 13 consecutive trading days since May 15, surpassing the previous record of 11 consecutive trading days set in February and March 2009, when the aftershocks of the global financial crisis were still being felt.

Korean investors' dollar-denominated asset holdings have grown rapidly amid the high exchange rate environment. According to the Korea Securities Depository's Seibro platform, the value of U.S. stocks held in custody this month stood at $206.34 billion (approximately 316.73 trillion won), up roughly $42.7 billion from $163.58 billion (approximately 251.10 trillion won) at the end of last year.

The custody figure represents the value of foreign securities that domestic investors have purchased and deposited with the Korea Securities Depository. The rise in the exchange rate has inflated the won-denominated value of dollar assets, contributing to the increase.

Instability in the Middle East has been a key driver of the exchange rate's rise. Overnight exchanges of attacks between the United States and Iran deepened concerns about the durability of the truce and pushed up international oil prices. The resulting inflation fears fed upward pressure on government bond yields. The yield on the 10-year U.S. Treasury note approached 4.5 percent, while the 30-year yield moved toward 5 percent.

Min Gyeong-won, an economist at Woori Bank, said the exchange rate Thursday was expected to fluctuate mainly in the low-to-mid 1,530-won range, with upward pressure from a stronger dollar and net selling of Korean equities by foreign investors, while selling at the highs would cap further gains. "As end-of-war negotiations between the United States and Iran drag on, the market is becoming increasingly sensitive to Middle East risk," he said.

The sustained high exchange rate has also drawn attention to dollar futures ETFs. Leading products in this category include KODEX US Dollar Futures, KIWOOM US Dollar Futures, KIWOOM US Dollar Futures Leverage, KODEX US Dollar Futures Leverage and TIGER US Dollar Futures Leverage.

These ETFs are designed to profit from a rising won-dollar exchange rate. They generate returns when the rate rises but incur losses when it falls. They can be bought and sold freely through a brokerage account like ordinary shares and are not subject to securities transaction tax. Investors can also gain exposure to a rising exchange rate without directly converting their money into dollars.

The stronger dollar has also boosted returns on currency-exposed U.S. ETFs listed in Korea. From May 15, when the exchange rate began climbing above 1,500 won, through June 2, currency-exposed versions of most major U.S. ETFs listed domestically outperformed their currency-hedged counterparts.

The currency-exposed version of TIGER US S&P500, one of the leading products, posted a return of 3.35 percent over the period, while its hedged counterpart, TIGER US S&P500(H), returned 1.64 percent. KODEX US S&P500 similarly saw its currency-exposed version return 3.34 percent against 1.55 percent for the hedged version.

A similar pattern emerged among ETFs tracking the technology-heavy Nasdaq 100. TIGER US Nasdaq 100 returned 4.84 percent in its currency-exposed version and 3.03 percent in its hedged version, while KODEX US Nasdaq 100 posted returns of 4.88 percent and 3.07 percent, respectively.

Currency-exposed ETFs directly reflect exchange rate movements, allowing investors to capture both share price gains and currency appreciation when the won-dollar rate rises. Currency-hedged ETFs — identified by an "H" in their names — insulate returns from exchange rate fluctuations, letting investors avoid currency losses when the won strengthens.

Market analysts believe that if Middle East risks persist, upward pressure on the dollar could intensify. Park Sang-hyeon, a researcher at iM Securities, said that if the Strait of Hormuz blockade drags on due to a breakdown in end-of-war negotiations, fears of an oil supply shortage could send international crude prices sharply higher. "High oil prices would amplify inflation pressure, which would likely translate into rising government bond yields and a stronger dollar," he said.

He added that if oil prices climb above $130 per barrel, stagflation concerns for the global economy could grow. "There is also a possibility that the dollar will continue to strengthen as safe-haven demand intensifies," he said.