South Korean retail investors have poured 3.5 trillion won ($2.5 billion) into equity-linked structured notes (ELS) in July, the highest monthly total since April 2023, according to the Korea Financial Investment Association.
The surge in demand follows a historic 22% drop in the Kospi index during the month, prompting investors to seek high-yield alternatives amid market turmoil. Samsung Electronics, SK Hynix and LG Electronics have been the most common underlying stocks in recent ELS issuance, reflecting their prominence in local portfolios.
Meritz Securities issued a note linked to Samsung and SK Hynix offering an annualized coupon of 43.4%, though investors face potential capital loss if either stock falls 70% during the product's term and remains below its initial value at maturity. Kiwoom Securities offered a similar product tied to SK Hynix and LG Electronics, with coupons reaching 50%, while warning that losses could range from 30% to the total investment if conditions are not met.
Despite partial recoveries in August, shares of Samsung and SK Hynix remain at least 22% below their June peaks, underscoring lingering volatility. Regulators have responded by tightening rules on leveraged single-stock ETFs, which were cited as exacerbating market swings. Starting next month, the Financial Supervisory Service will require brokerages to issue additional warnings when ELS products approach knock-in barriers and to review offerings amid elevated risk conditions.
The renewed appetite for high-coupon ELS products mirrors past cycles where retail investors turned to structured notes during market downturns, only to face significant losses in subsequent corrections. The Korea Financial Investment Association noted that issuance could cool if volatility subsides, reducing the option premiums that fund elevated coupons.
