Sharp swings in the Kospi have left most equity-linked deposits maturing this year paying only their minimum guaranteed rates — well below ordinary fixed deposits — contrary to investors' initial expectations. Analysts say the products' complex structures call for careful consideration before investing. [Image generated with ChatGPT]
Sharp swings in the Kospi have left most equity-linked deposits maturing this year paying only their minimum guaranteed rates — well below ordinary fixed deposits — contrary to investors' initial expectations. Analysts say the products' complex structures call for careful consideration before investing. [Image generated with ChatGPT]

As volatility in the Kospi has intensified, equity-linked deposits — known as ELDs, whose interest rates are tied to the KOSPI 200 index — have been locking in returns at their minimum guaranteed levels. The products drew strong inflows on the promise of principal protection with upside potential, but surging market swings have left many subscribers earning less than they would have from an ordinary fixed deposit, raising questions about the products' investment appeal.

An analysis of KOSPI 200-linked ELD products issued since last year by the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — found that nearly all products whose terms have matured settled at the bottom of their advertised rate bands. All five banks offer ELD products except Woori Bank.

For products that matured and had their rates finalized this year, confirmed annual returns ranged from just 1.60 percent to 3.00 percent. With bank fixed-deposit rates on the rise, subscribers ended up receiving far less interest than ordinary depositors. Fixed deposits with 12-month maturities listed on the Korea Federation of Banks website currently offer 2.55 to 3.30 percent annually when preferential rates are applied. The result is that the incentive to take on the added complexity of a stock-linked product has effectively disappeared.

The reason so many bank ELD products have slid to their minimum rates lies in the products' demanding conditions and structural design.

An ELD, or equity-linked deposit, is a principal-protected instrument whose interest is determined by the movement of a specific index or share. Investors get their principal back at maturity and can earn additional returns if the underlying asset rises. Deposits are protected up to 100 million won ($64,300) per person under the Depositor Protection Act.

Early redemption triggers fees that can erode the principal. A product type known as the "upside knock-out" structure voids the maximum-return condition — triggering a knock-out — if the index rises above a set threshold even once during the observation period, leaving the investor with only the minimum rate. As markets have surged in recent months, knock-out events have multiplied, creating a paradox in which subscribers fail to capture the gains they expected even as the broader market climbs.

Against this backdrop, some banks have begun redesigning their ELD structures to widen the rate bands. A recent KOSPI 200-linked product from NongHyup Bank — its Index-Linked Deposit No. 26-5 (Return Type II) — offers individual investors a maximum annual rate of 9.45 percent (9.30 percent for corporate investors) if the index rises between 0 and 45 percent, with a 2.70 percent rate applying outside that range. Where a swing of 30 to 35 percent was once enough to trigger the minimum rate, the new product extends that ceiling to 45 percent.

For investors who still want ELD exposure amid high market volatility, "upside-pursuit" products — which pay the maximum rate regardless of how far the index climbs, with no upper cap — are cited as an alternative. Even so, their baseline minimum rates are significantly less attractive than those of knock-out structures.

"Among wealthy older investors, many sign up for ELD products because direct stock investment feels too risky but they still want to ride a rising market," a banking industry official said. "But when market swings exceed the product's conditions, as they do now, investors need to keep in mind that they may end up receiving a minimum rate lower than a standard fixed deposit and manage their money accordingly."


won@heraldcorp.com