A historic stock selloff has driven South Korea’s retail investors toward complex structured products, as they seek to boost returns amidst market volatility. In July, sales of equity-linked securities offering annualized coupons of 40% to 50% surged to a three-year high, particularly those tied to Samsung Electronics Co. and SK Hynix Inc.
The shift comes as regulators attempt to curb retail demand for single-stock leveraged exchange-traded funds, which have been blamed for exacerbating market swings during the Kospi’s 22% drop last month. Despite the market rout, retail investors' appetite for risk remains undeterred, with a preference for new financial products.
Equity-linked securities (ELS) have become attractive following recent market corrections, offering coupons as long as the underlying stock or index stays within preset ranges. However, these products carry significant downside risks, as evidenced by past losses on China-linked notes. In July, 3.5 trillion won of ELS products were sold, the highest since April 2023, according to the Korea Financial Investment Association.
“ELS issuance usually rises after a correction or volatility shock, when entry prices look better and coupons increase.”
Maxence Visseau, Chief Investment Officer at Arkevium Capital
Meritz Securities Co. recently issued an ELS tied to Samsung and SK Hynix, offering a 43.4% annualized yield. However, investors face equity-like risks, potentially losing their principal if either stock falls 70% during the note's term and remains low at maturity. Similarly, Kiwoom Securities Co. has issued an ELS tied to SK Hynix and LG Electronics Inc., with potential annualized coupons of up to 50% but also disclosing possible losses of 30% to 100% if payout conditions are unmet.
Despite a rise in Samsung and SK Hynix shares in August, they remain over 22% below their June all-time highs. Both companies are planning record shareholder returns, supported by strong demand for their high-bandwidth memory chips, which may further bolster ELS linked to their shares.
“The key thing is that for any product, you need to disclose the risk involved.”
Patrick Ho, Chief Investment Officer for North Asia at HSBC Private Bank and Premier Wealth
The structured products have previously caused issues for Korean investors, notably during the 2016 Brexit, the 2020 oil slump, and the 2021-2024 China stock downturn. In 2024, South Korea's financial watchdog found that some brokers misrepresented risky China-linked products to retail investors.
Background
The structured products have brought trouble for Korean investors on a number of occasions in the past — with the 2016 Brexit surprise, the 2020 oil market slump and the 2021-2024 China stock slump dealing a blow to the market. In 2024, South Korea’s financial watchdog said a probe found that some of the country’s largest brokers misrepresented risky China-linked structured products to retail investors.
Starting next month, the Financial Supervisory Service will tighten oversight of structured products, requiring brokerages to warn investors as products approach knock-in levels and review offerings if market conditions heighten investor risk. As implied volatility declines, ELS issuance may ease, reducing option premiums that allow issuers to offer attractive coupons. Investors should watch how regulatory changes and market conditions impact the issuance and performance of structured products in the coming months.
