[PB Notebook] Reinforcing Your Investment Portfolio Through US Dollar Assets

Hyungki Lee, Head of PB Team at Shinhan PWM Seocho Center

Hyungki Lee, Head of the Private Banking Team at Shinhan PWM Seocho Center

As the KRW-USD exchange rate, which soared to 1,561 won last June, recently fell below 1,400 won, inquiries from customers about investing in US dollars have been steadily increasing in wealth management circles. In response to this phase of Korean won strength, more savvy investors are converting a portion of their assets into US dollars to reinforce their investment portfolios.

Securing a certain amount of dollar-denominated assets during a period of adjustment in the KRW-USD exchange rate is an excellent asset allocation strategy. To take it a step further, it is essential to develop a strategic plan for managing the accumulated dollar assets. Rather than simply leaving dollars in a foreign currency savings account, investors can achieve even greater results by establishing a “dollar management system” that grows assets and generates steady cash flow over time. In the field of wealth management, there are three main ways to generate continuous income through US dollar investments.

First, securing high-quality global assets through US market representative index exchange-traded funds (ETFs) is recommended. After converting won to dollars, it is wise to make scheduled, gradual purchases of index ETFs such as VOO (which tracks the S&P 500) and QQQ (which tracks the Nasdaq 100), which represent the US market, in line with market timing. Such index ETFs not only allow investors to benefit from the long-term growth of the world’s leading innovative companies, but also provide opportunities to receive dollar dividends each quarter. There are notable tax advantages as well. Capital gains from overseas stocks and ETFs are taxed separately at a rate of 22%, rather than being included in the comprehensive financial income tax in Korea. In addition, there is an annual basic exemption of 2.5 million won, making this a particularly useful method for high-net-worth individuals to achieve both asset growth and tax savings.

Second, the coupon-type US dollar annuity insurance offers both tax deferral and reinvestment benefits. US dollar annuity insurance guarantees an attractive long-term interest rate compared to local won-based products and also serves as a solid pillar for a cash-flow-generating portfolio by paying a fixed amount of dollars in coupon form every month. In the case of ordinary dollar deposits, interest income is subject to a withholding tax of 15.4% at the time of payment and becomes subject to comprehensive financial income tax when annual income exceeds 20 million won. However, for dollar annuity insurance, tax on interest earned during the investment period is deferred until the point when withdrawals exceed the total principal paid in. Meeting requirements such as a single payment under 100 million won or monthly payments under 1.5 million won (with a payment period of at least five years and the policy kept for at least ten years) means investors can reduce tax liability significantly. Moreover, by regularly reinvesting the monthly dollar coupons into high-quality US stocks or ETFs, investors can create a virtuous cycle of compounding returns—a “dollar compounding snowball” effect.

Third, investors can pursue tax savings by utilizing low-coupon US Treasury bonds. Purchasing US Treasury bonds with low coupon rates using held dollars can provide exceptional tax benefits. Under current tax laws, although interest income from bonds is taxable, capital gains from bond trading—such as profit earned by buying at a discount and receiving par value at maturity or selling before maturity—are exempt from taxation. Bonds with low coupon rates minimize tax liability on interest income, and gains at maturity can be realized tax-free, making this an attractive option for wealthy individuals seeking to maximize net returns. However, during periods of interest rate changes and volatility, it is preferable to focus on short- to mid-term bonds, rather than long-term bonds, to better manage price risks arising from changing monetary policies.

Holding 100% of your assets in KRW is akin to staking your entire future on the domestic economy and the value of the won. The recent adjustments in the exchange rate provide an excellent opportunity to reduce this concentration risk by diversifying currencies and fortifying your investment portfolio. Complete your smart dollar asset allocation by building a triple-dollar portfolio—comprising US index ETFs, US dollar annuity insurance, and US Treasuries. In the event of a global economic crisis and a decline in the value of the won, dollar assets will serve as a robust buffer, while monthly dollar income will strengthen your portfolio under normal market conditions.

Hyungki Lee, Head of PB Team at Shinhan PWM Seocho Center

This content was produced with the assistance of AI translation services.