[Derivative Products ABC] Curious About 'ELS,' the National Investment Buzzword...

[Asia Economy Reporter Ji-hwan Park] As the ultra-low interest rate phenomenon becomes increasingly pronounced, interest in ELS (Equity-Linked Securities) investments, known for medium risk and medium returns, continues steadily.

ELS refers to securities whose investment returns are determined based on the price of specific stocks or stock index levels. Recently, the scope has been expanding to include linkage with real assets such as commodities and gold, as well as inflation indices and bond indices.

About 100 trillion won worth of ELS were sold last year. Among domestic ELS sales, index-linked products overwhelmingly dominate. Most products are linked to indices such as KOSPI 200, Hong Kong’s H, the U.S. S&P 500, and Europe’s Eurostoxx 50.

In particular, ELS has been a popular choice among investors seeking investment options that outperform bank deposit interest rates. Assets are invested in high-quality bonds to preserve principal, while a portion is invested in derivatives such as stock index options to achieve high returns. The maturity is usually three years, with early redemption opportunities every six months if certain conditions are met before maturity, allowing investors to receive interest and principal. For example, if the underlying asset, the U.S. S&P 500 index, does not fall below 90% of the initial price after six months, the principal and promised interest are paid.

Generally, ELS are classified into three types: principal-guaranteed, partial principal-guaranteed, and conditional principal-guaranteed. Conservative or stable investors prefer principal-guaranteed types, aggressive investors prefer partial principal-guaranteed types, and very aggressive investors prefer conditional principal-guaranteed types.

However, ELS carries the risk of principal loss. This is why paying close attention to the underlying assets of the investment is crucial. Even "principal-guaranteed ELS" are not covered by depositor protection, so if the issuer goes bankrupt, the principal can be lost.

Also, if early redemption is not received, a large sum of money may be locked until maturity, and if early redemption is requested, fees may cause principal loss.

There are also tax-related burdens. This applies when the invested ELS does not get early redeemed at the predetermined six-month intervals and yields profit at the three-year maturity. If the promised profit is paid all at once at the three-year maturity, it may affect the comprehensive financial income tax for that year.