Ants Returning to ELS

Recovery of Pre-COVID-19 Circulation Volume
Improved Investment Sentiment Due to Index Recovery
Funds Exceeding Target Amount Also Attracted

[Asia Economy Reporter Minji Lee] Investors who had been reluctant despite annual returns exceeding 10% are returning to equity-linked securities (ELS). After the spread of the novel coronavirus disease (COVID-19), distrust in ELS and an increase in investors seeking higher returns through individual stock investments caused a sharp decline in ELS issuance. However, recently, issuance volume has recovered to pre-COVID-19 levels.

According to the monthly ELS issuance status on September 14 from the Korea Securities Depository's SaveRO, the ELS issuance amount in September was 3.7752 trillion KRW (3.4754 trillion KRW in Korean won, 299.8 billion KRW in foreign currency), recovering to a level similar to the March issuance amount of 3.8674 trillion KRW (3.7072 trillion KRW in Korean won, 160.2 billion KRW in foreign currency). Compared to the previous month (2.2916 trillion KRW), it increased by 64.7%. Although it is only half compared to the beginning of the year before the COVID-19 outbreak, issuance volume is analyzed to be increasing in a trend aligned with the stock market recovery.

ELS are derivative products that pay an agreed-upon return if stock indices or specific company stock prices move within a range set by securities firms. Broadly, they are divided into index types using Euro Stoxx 50, S&P 500, and Hang Seng China Enterprises Index (HSCEI), and stock types using underlying assets such as Samsung Securities, Tesla, and POSCO. In March, securities firms lost trust due to margin call incidents caused by major stock market crashes and were unable to smoothly issue ELS. However, as indices showed signs of recovery, they actively resumed issuance.

Investor sentiment toward ELS has also improved. This is because investors who subscribed at the March low mostly succeeded in early redemption by September. As of last month, the early redemption amount was 7.271 trillion KRW (including foreign currency), a 221% increase compared to the previous month (2.2639 trillion KRW). For example, Samsung Securities offered a high annual return of 11.1% in early April for index-type ELS based on HSCEI, S&P 500, and Euro Stoxx 50. This product met the automatic early redemption conditions on September 29 and was redeemed with a return of about 5.5%. Mr. Park (53 years old), who subscribed to this product, said, "I was afraid to invest in individual stocks, and I decided to invest thinking the price would rise until maturity. For those seeking stable medium returns, there seems to be no better product than ELS."

As early redemptions increased, securities firms' issuance capacity also expanded. In July, financial authorities imposed restrictions on ELS issuance by weighting the debt amount reflection ratio when the outstanding balance of ELS and derivative-linked securities (DLS) exceeded 50%. However, with increased redemptions, securities firms were able to issue new ELS. Researcher Jeong In-ji from Yuanta Securities said, "As early redemptions occurred, the outstanding issuance balance likely decreased from the securities firms' perspective. From the investors' perspective, if the KOSPI fell below 1500 but early redemption succeeded, trust in ELS would have increased, making reinvestment likely."

The securities industry expects interest in ELS to grow further as indices fluctuate within a certain range. With reduced volatility, ELS may be more attractive than individual stock investments in terms of stability and returns. Currently, the KOSPI 200 index has been fluctuating around the 300 level since August. A securities industry official explained, "The index's potential for growth seems lower than before, increasing interest in ELS. If the index remains stable, interest rates could decrease further, as seen with the adjustment from 10% to 6% annual returns."

Products attracting more money than the amount raised by securities firms are also noticeable. NH Investment & Securities' 'ELS 19912,' which closed recruitment on the 18th of last month, attracted a total of 13.2 billion KRW for a 10 billion KRW target, exceeding a 1:1 competition ratio. It uses Euro Stoxx 50, S&P 500, and KOSPI 200 as underlying assets and offers a 5% annual return. Among small and medium-sized firms, Yuanta Securities' 'MY ELS No. 4619' recorded a competition ratio of 77:1, attracting about 77 billion KRW for a 1 billion KRW target. Despite being the same index type, it offered a 6.3% annual return and nine early redemption opportunities, drawing high interest.

This content was produced with the assistance of AI translation services.