As the KOSPI index topped the 3,600 mark for the first time ever and showed strength, issuance of equity-linked securities (ELS) tracking the KOSPI also surged. With the index jumping, early redemptions followed one after another, and many investors who got their money back were found to be reinvesting in ELS with similar structures.
Securities firms are moving to win customers by rolling out differentiated ELS, such as products targeting investors seeking "high risk, high return" or products focused on risk defense.
However, ELS are non-principal-guaranteed investments that are most advantageous when the underlying asset price stays within a certain range, so investors should be cautious because losses can occur if the index unexpectedly plunges.
According to the Korea Securities Depository (KSD) on the 15th, among 2,462 ELS issued over the past three months (Jul. 11–Oct. 10), those that included the KOSPI200 index as an underlying asset were the most numerous at 1,310. They accounted for 3.5092 trillion won (63.3%) out of the total issuance amount of 5.5428 trillion won. This is also an increase of 773.4 billion won (28.3%) from the same period a year earlier (2.7358 trillion won).
An ELS is a derivative that pays back principal and interest if the underlying asset price does not fall below a preset price until maturity. The maturity is typically three years, and the underlying assets are evaluated every six months; if early redemption conditions are met, the principal and interest are paid. If the price of the underlying asset falls below the threshold before maturity, principal losses may occur.
Until the first half of this year, the EuroStoxx 50, a European blue-chip index, and the U.S. Standard & Poor's (S&P) 500 were the No. 1 and No. 2 ELS underlyings. But as the stock market rose recently, ELS using the KOSPI200 as the underlying asset quickly climbed from No. 3 in the first half.
The start of U.S. interest rate cuts and rebounds in domestic and overseas stock markets helped revive demand for ELS. In particular, as the domestic market surged in the second half, a large number of ELS linked to the KOSPI200 were redeemed. As a result, investors looking to roll over funds moved en masse into newly issued ELS with similar structures.
In the second half of this year (Jul. 1–Oct. 10), the most redeemed ELS were those using the KOSPI200, S&P 500, and EuroStoxx 50 indexes as underlyings. A total of 887 products worth 2.6816 trillion won were redeemed. Compared with the same period last year, when 732 ELS using the three indexes were redeemed for 1.9898 trillion won, both the number of products (21%) and the redemption amount (35%) increased.
Eighty-four ELS that solely track the KOSPI200 were also redeemed during this period, totaling 99.3 billion won. The average investment period was eight months, meaning many were redeemed early compared with the average set maturity of 36 months. The annualized return was 6.15%, which is relatively low when simply compared with the KOSPI200 (22.3%) and KOSPI (17.5%) index gains during the period.
From the perspective of securities firms, when investor sentiment is strong, sales of related ELS increase. Securities firms are strategically changing product structures to reflect investor demand and launching them.
Shinyoung Securities focused on risk defense by tightening redemption conditions. On the 2nd of this month, Shinyoung Securities issued the "Plan-Up 12534" ELS using the KOSPI200 as a single underlying asset, setting a target annual yield of 5.8% and a knock-in (loss) threshold at 55% of the reference price.
On Mar. 3, Shinyoung Securities set the "Plan-Up 12534" ELS using the KOSPI200 as the underlying with an annual yield of 5.5% and a knock-in threshold of 55%. While the knock-in threshold is the same, the yield has actually risen despite benchmark rate cuts. However, the early redemption criteria were generally raised from 90% (6·12 months), 85% (18·24 months), and 80% (30·36 months) of the initial reference price to 95% (6 months), 90% (12 months), 85% (18·24 months), 80% (30 months), and 75% (36 months).
NH Investment & Securities targeted investors seeking high returns. On the 2nd, NH Investment & Securities launched ELS No. 24135 that tracks the KOSPI200 index and SK hynix common stock, setting a target annual yield of 16.1% and a 45% knock-in threshold. Compared with an ELS of the same structure released in January this year with an annual yield of 12.3% and a 40% knock-in threshold, the knock-in threshold was eased and the yield was raised significantly.
Experts advise caution when investing in ELS if the underlying asset price has risen sharply. If you subscribe at a high price level, the potential for losses also increases if prices correct later. Most ELS knock-in ranges are around 50% of the reference price.
While it is not common for the KOSPI to suddenly be cut in half, investors should note that products with two or more underlyings can run into trouble if even one of them drops sharply.