As the KOSPI index has surged more than 40% this year alone, an unusual rally has triggered a series of early redemptions in products such as equity-linked derivative bonds (ELB). Generally, the higher the price of the underlying asset, the higher the yield, but if the stock price crosses the rise/fall limit (knock-out barrier) even once, a "knock-out" occurs, and investors receive only a low fixed return.
According to the financial investment industry on the 28th, 11 out of 37 ELBs tracking the KOSPI 200 that Mirae Asset Securities launched last year have been knocked out.
The "Mirae Asset Securities 3534" ELB, issued by Mirae Asset Securities at the end of Feb. last year, was designed with a maximum annual yield of 8% and a knock-out condition at 115%. Considering that the initial reference for the underlying KOSPI 200 was 346.4 points, if it exceeds 744.7 points by maturity, investors can earn only a 2% yield on principal. On Jan. 27, however, the KOSPI 200 rose to 745.1 points, triggering a knock-out.
Unlike equity-linked securities (ELS), ELBs are principal-protected products that place most of the investment in bonds, which are safe assets. The typical maturity is one year, and although expected returns are lower than ELS, there has been steady demand from investors seeking returns higher than time deposits in the 2% to 3% range annually. However, if a knock-out occurs, the product is redeemed with a limited level of return instead of the maximum yield.
The "NH Investment & Securities 2651" ELB, launched by NH Investment & Securities in Apr. last year, was also knocked out (exceeding 120% of the initial reference price) on the 28th of last month due to a sharp rise in the KOSPI 200. Although the maximum yield was 12%, investors had to settle for a 2% yield.
Over the past year, the KOSPI index has soared 124.9% from the 2,650 level to the 5,960 level, while the KOSPI 200 jumped more than 150% from 351.9 to 886.9. Given the KOSPI 200's composition of the top 200 stocks by market capitalization, the swing appears to have been larger in a large-cap-led rally.
A Mirae Asset Securities official said, "The ELB products that were knocked out were designed to be advantageous only if the KOSPI 200 moved sideways within 115% for a year," adding, "Investors who wanted to increase the likelihood of protecting principal and thought the KOSPI would move sideways for a year subscribed, but it's not easy to get that right."
As the stock market, which had stayed in a box range, began to rise faster than expected since last year, cases are increasing in which the structures of some ELB products designed on the assumption of sideways movement are instead working against investors. Experts said that as market volatility has grown, investors should closely examine product structures and conditions before investing.
An official at a major securities firm said, "ELBs are products that can maximize returns when the market moves sideways," adding, "If the index climbs steeply as it did this year or late last year, investors could instead see their yields fall sharply."
Kim Yun-jo, Head of Team for the derivatives market at the Financial Supervisory Service, said, "We are encouraging firms to design products by comprehensively considering the volatility of the indexes and underlying assets they use," while adding, "We cannot block the launch of products that do not violate the guidelines."
Kim added, "If product descriptions and the like are difficult to understand or could be misunderstood, we are taking steps such as presenting our views at the level of the financial authorities."