A historic stock selloff has prompted South Korea’s retail investors to gravitate toward complex structured products, as this risk-seeking group persistently seeks avenues to enhance returns. Equity-linked securities offering annualised coupons ranging from 40 per cent to 50 per cent have garnered renewed interest from retail investors. Sales increased to over a three-year peak in July, driven by notes associated with Samsung Electronics Co. and SK Hynix Inc. The boom arises as regulators have taken steps to mitigate the intense retail demand for single-stock leveraged exchange-traded funds, which were identified as a contributing factor to the heightened market volatility observed during the benchmark Kospi’s 22 percent decline last month. This indicates that one of the most significant market downturns in recent history has had minimal impact on retail investors’ willingness to take risks, but has instead shifted the types of products they opt to pursue. The recent drawdown seems to have established a favourable entry point for ELS products, which provide coupons as long as the underlying stock or index remains within predetermined ranges.
However, the products can entail significant downside risk during sharp market declines, as evidenced by the considerable losses associated with China-linked notes that were previously favoured by Korean investors. “ELS issuance usually rises after a correction or volatility shock, when entry prices look better and coupons increase,” said Maxence Visseau. “Buyers appear comfortable with Samsung and SK Hynix moving sideways or falling moderately because they believe the shares will avoid a major collapse. The danger is confusing strong companies with safe entry prices.” In July, approximately 3.5 trillion won of ELS products were sold, marking the highest volume since April 2023, as reported by the Korea Financial Investment Association. Earlier this month, Meritz Securities Co. issued an ELS linked to Samsung and SK Hynix, providing an annualised yield of 43.4 percent. That comes with equity-like risk: investors can lose their principal if either stock plunges 70 percent during the life of the note and remains significantly below its starting price when the product matures, according to the terms. Kiwoom Securities Co. has issued an ELS linked to SK Hynix and LG Electronics Inc., providing annualised coupons of up to 50 percent, while revealing potential losses ranging from 30 percent to 100 percent if the structure does not fulfilll its payout criteria.
While shares of Samsung and SK Hynix have experienced an uptick in August, they continue to be down by at least 22 per cent each from the all-time highs recorded in June. The two market heavyweights are poised to deliver unprecedented shareholder returns, bolstered by the escalating demand for their high-bandwidth memory chips essential for powering data centers, which has significantly enhanced their balance sheets. That also likely strengthens the argument for ELS associated with their shares. The structured products have posed challenges for Korean investors on several occasions historically — notably during the 2016 Brexit surprise, the 2020 oil market slump, and the 2021-2024 downturn in the Chinese stock market, each event significantly impacting the market landscape. In 2024, South Korea’s financial watchdog announced that an investigation revealed that several of the nation’s largest broking firms had misrepresented high-risk structured products associated with China to retail investors.
“The key thing is that for any product, you need to disclose the risk involved,” said Patrick Ho. “You want some way to participate in upside and get some protection on the downside.” Beginning next month, the Financial Supervisory Service will enhance its scrutiny of structured products, mandating that brokerages alert ELS investors as products near knock-in levels. Additionally, there will be a review of offerings if market conditions substantially elevate risks for investors. David Elms stated that he anticipates a reduction in ELS issuance as implied volatility decreases, which in turn lowers the option premiums that enable issuers to provide appealing coupons. The Kospi 200 Volatility Index has experienced a significant reduction, nearly halving from its late June levels; however, it remains more than double the five-year average.
