Korean Retail Investors Chase 40% Yields in Structured Products After Market Rout

South Korean retail investors are aggressively buying complex equity-linked securities offering annualized coupons of 40% to 50% following a historic market selloff. Sales of these structured products reached 3.5 trillion won in July, the highest volume recorded since April 2023, according to the Korea Financial Investment Association.

The surge in demand is heavily concentrated in notes tied to major technology giants like Samsung Electronics and SK Hynix. For instance, Meritz Securities recently issued an equity-linked security tied to both companies with a 43.4% annualized yield. However, investors face the risk of losing their principal if either stock plunges 70% during the note’s life and remains sharply below its starting price at maturity.

This appetite for risk persists even as regulators attempt to cool down retail speculation. Authorities recently moved to restrict single-stock leveraged exchange-traded funds, which were blamed for amplifying the benchmark Kospi’s 22% plunge last month. The pivot to these structured products indicates that while the market rout altered the instruments retail traders choose, it has not diminished their willingness to take on substantial risk.

The underlying appeal of Samsung and SK Hynix remains rooted in strong fundamentals. Both companies are preparing record shareholder returns driven by surging demand for high-bandwidth memory chips used in data centers. Although their shares have recovered somewhat in August, they remain down at least 22% from their June all-time highs, creating what some traders perceive as an attractive entry point.

Market professionals warn that this strategy carries hidden dangers. Maxence Visseau, chief investment officer at Arkevium Capital, noted that buyers seem comfortable with moderate price declines, assuming the shares will avoid a major collapse. He cautioned that investors risk confusing strong companies with safe entry prices.

Regulatory Scrutiny and Historical Risks

Structured products have a troubled history among Korean retail investors. Previous market shocks, including the 2016 Brexit vote, the 2020 oil slump, and the prolonged China stock downturn, triggered hefty losses on similar notes. In 2024, South Korea’s financial watchdog found that major brokers had misrepresented the risks of China-linked structured products to retail clients.

In response to these recurring vulnerabilities, the Financial Supervisory Service will tighten oversight of structured products starting next month. Brokerages will be required to warn equity-linked security investors when their products approach knock-in levels and must review offerings if market conditions significantly elevate risk.

The current boom in high-yield issuance may be short-lived. David Elms, head of diversified alternatives at Janus Henderson Group, expects issuance to ease as implied volatility declines. While the Kospi 200 Volatility Index has nearly halved from late June peaks, it remains more than double its five-year average, currently sustaining the high option premiums that make these aggressive coupons possible.