South Korean small investors just lived through one of the worst stretches in the country's stock market history. The Kospi tumbled 22% in a single period, and regulators spent weeks trying to soothe the panic.
Instead of retreating, investors are lining up for products that promise annual returns of 40% to 50%.
These notes pay large coupons as long as the underlying stocks stay within set price ranges. The catch is that those ranges can break, and when they do, investors can face severe losses.
The latest ELS wave leans heavily on Samsung Electronics and SK Hynix, two chipmakers whose shares have swung sharply.
Most products are tied to expectations that Samsung and SK Hynix stocks will keep climbing. The firms have benefited from strong demand for high-bandwidth memory chips, and their balance sheets look solid. That is the optimistic story.
The cautious story: Even after a recent rebound, both stocks are still at least 22% below their June peaks. So investors are betting prices have bottomed out and will drift higher or hold steady. That is a real bet, not a sure thing.
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If they fall too much, investors can lose most or all of their money.
Brokerages will now be required to alert investors when products approach levels that can trigger losses, and they must reassess the products' risk.
"ELS issuance usually rises after a correction because entry prices look better and coupons increase," said Maxence Visseau, chief investment officer at Arkevium Capital.
"You want some way to participate in upside, and get some protection on the downside," said Patrick Ho of HSBC Private Bank.
The Kospi 200 Volatility Index now sits at about half its late-June reading.
But the product is essentially selling insurance. You earn a fat premium for agreeing to absorb losses if Samsung or SK Hynix drops sharply.
If the bet works, investors earn a windfall. If it fails, they can lose most of their money.
When markets get wild, disciplined investors stay the course. The ELS products now on sale are not a safe haven - they are a leveraged bet on two volatile stocks, dressed up as a bond.
The recent surge in ELS sales also recalls earlier episodes of mis-selling, when brokers marketed complex notes to retirees without fully explaining the downside. That history led to tighter rules, but the current products still carry considerable risk. The Kospi's sharp fall shows how quickly sentiment can shift, and the chip stocks that anchor these ELS are sensitive to global tech cycles.
Any downturn in memory-chip demand could push the underlying shares through the trigger levels, converting a promised coupon into a principal loss. For investors chasing yield, the lesson is that a 40% coupon is not free money - it is a premium for accepting real risk.
When the market drops, smart investors stay the course, so claim the Always Be Buying E-Book now.