ELS attracting investors

By Yoon Ja-young

Record low interest rates are seeing retail investors expand their exposure to equity-linked securities (ELS) and equity-linked trusts (ELT) for higher gains even at heightened risks.

The financial supervisor plans to strengthen monitoring of these products to protect consumers.

An ELS is a hybrid fixed-income instrument whose investment return is determined by the performance of an underlying equity such as stock indices, a basket of stocks or a mix.

For instance, an ELS product issued by Yuanta Securities in September has the KOSPI 200 index and HSCEI as the underlying equities. The investors are offered 7.85 percent annual investment return if neither of them falls below 85 percent of the original indices after three years. There also can be early redemption if the indices meet certain preset conditions.

According to the Financial Supervisory Service, the balance of the ELS issued by securities companies stood at 48.5 trillion won as of June, up 21.9 percent from six months ago.

The figure is bigger than the balance of the installment type securities funds, which hovers around 35 trillion won.

The ELS debuted in the local financial market in 2003, following revision of the securities trade act. The market has been growing explosively recently, with ELS issued in September recording 8.3 trillion won, the biggest ever.

Yuanta Securities attributed the expansion to a growing number of retirement pension, trust and insurance products investing in ELS. “Amid the low interest rate, they seem to think there is no good alternative,” said Lee Joong-ho, an analyst at Yuanta Securities.

As the central bank cut the key rate to 2.25 percent in April, the real interest rate after tax stands at less than 2 percent. Investors regard ELS as a mid-risk, mid-return investment tool, offering around 7 percent annual investment return.

Among the ELS issued in September, those linked with indices overseas recorded 6.2 trillion won. It is also notable that nearly half of them have two underlying equities.

Amid the rise of ELS, banks are also increasing sales of ELT, which invests in ELS. The balance of ELT at banks stands at 18.4 trillion won as of June, up 30.5 percent from six months ago.

The Financial Supervisory Service, however, said it will strengthen supervision on banks in their ELT sales, concerned that banks may be giving insufficient explanation about the products while their customers are less likely to be acquainted with these products compared with stock investors. The individuals bought 95.4 percent of the ELT sold by banks.

Analysts, however, stress that these products are not without risks. For instance, there are a number of ELS products that have stocks of Hyundai Motors as the underlying equity.

As it lost more than 10 percent from the peak, investors fear that they may lose part of the principal if the index falls further.