[Practical Finance] Stocks Are Scary... Is There Any Safe Investment?

Increase in Issuance of Principal-Protected ELB and DLB
4-10% Returns Possible... Various Structured Products

As the stock market recently experienced a sharp decline reminiscent of the 2020 COVID-19 pandemic level, concerns have increased, leading to heightened interest in safe investment options. Quick-moving investors are already turning their attention to principal-protected Equity-Linked Bonds (ELB) and Derivative-Linked Bonds (DLB). ELBs and DLBs are popular among investors seeking stable financial strategies because they guarantee the principal while offering higher returns than bank deposit products.

According to the Korea Securities Depository on the 14th, the amount of ELBs issued from the beginning of this year until the end of last month reached 13.0335 trillion won, nearly a 90% increase compared to 6.863 trillion won in the same period last year. This amount is also more than 40% higher than the 9.2638 trillion won issued in Equity-Linked Securities (ELS) during the same period. While ELS issuance was overwhelmingly higher than ELB last year, the atmosphere reversed following the Hong Kong ELS loss incident. DLB issuance also exceeded 8 trillion won.

ELBs and DLBs are products that guarantee the invested principal and provide returns if certain conditions are met. When the underlying assets are stock indices or individual stocks, the product is an ELB; when the underlying assets are commodities, exchange rates, or interest rates, it is a DLB. Although similar to ELS in that returns depend on the price fluctuations of the underlying assets, ELBs and DLBs are considered relatively stable products because they return the principal even if the conditions are not met.

The annualized yield of ELBs varies widely from the 4% range to over 10%, depending on the underlying assets and structure. Considering that recent deposit interest rates are around 3-4%, ELBs offer relatively higher returns. The maturity period is typically around one year, shorter than the 2-3 years typical of ELS.

ELBs are broadly divided into High-Five type and Range type. The High-Five type provides returns if the underlying asset meets the conditions on the early redemption evaluation date or maturity date. On the specified date, if the underlying asset "high-fives" the promised condition, returns are paid.

An example of a High-Five type product is the ‘ELB 357’ issued by Kyobo Securities last month. Kyobo Securities ELB 357 uses Woori Financial Group common stock as the underlying asset and pays a pre-tax monthly return of 0.46% (annualized 5.52%) if the evaluation price of the underlying asset on each monthly return evaluation date is at least 85% of the initial reference price. This product added a monthly payment option to the existing High-Five type.

The Range type determines the yield based on the movement of the underlying asset during the subscription period. A recent example is ‘ELB 3331’ sold by Mirae Asset Securities. Mirae Asset Securities ELB 3331 guarantees a pre-tax annual return of 4% if the KOSPI 200 index, the underlying asset, rises more than 15% at maturity compared to the reference price. If the change is zero or rises 15% or less, it provides an annual return equal to 1.1 times the increase plus an additional 1 percentage point. For example, if the KOSPI 200 rises 15%, a 17.5% return can be expected. This allows investors to enjoy high returns while maintaining principal protection if conditions are met.

Recently, considering the unstable stock market situation, ELBs structured to generate returns when the underlying asset falls have also appeared. Kiwoom Securities launched a ‘Down-Touch type ELB’ on the 5th, which pays returns if the Standard & Poor’s (S&P) 500 index falls below a certain level. Kiwoom’s 725th Down-Touch type ELB pays a pre-tax annual return of 10.2% at maturity if the closing price on any of the four quarterly observation dates falls below 93% of the initial reference price even once. The 726th Down-Touch type ELB has the same structure but pays a pre-tax annual return of 7.2% if the S&P 500 index falls below 97% of the reference price. This reduces the potential downside and lowers the yield.

However, it should be noted that ELBs are not 100% principal-protected products. Since ELBs are issued by securities companies, they are not covered by deposit insurance up to 50 million won like bank deposit products. If the issuing securities company goes bankrupt, there is a possibility that the principal may not be returned. Products issued by medium to large securities companies with relatively lower credit risk are considered safer. Also, if the return conditions are not met and only the principal is returned, investors must bear the opportunity cost loss until maturity.