Equity-Linked Security (ELKS)

Key takeaways
* An equity-linked security (ELKS) is a debt instrument whose payments and/or return are tied to the performance of an equity benchmark (a stock, a basket of stocks, or an equity index).
* ELKS are structured products—often issued as bonds or notes—used by corporations and banks to raise capital.
* They typically offer higher yields than underlying equities, may include multiple distributions before maturity, and are often illiquid and not exchange-traded.
* Common forms include corporate ELKS, bank-offered market-linked certificates of deposit (CDs), and equity-linked notes (ELNs).

What is an ELKS?

An equity-linked security blends features of stocks and bonds. Although issued as debt, its interest payments or final payoff vary with the performance of an underlying equity benchmark. Investors may receive periodic payments whose amount depends on how the benchmark performs, and they usually receive return of principal at maturity (subject to the product’s terms).

ELKS are commonly structured for relatively short terms (often within one year), and issuers frequently design them to offer higher yields than the direct ownership of the underlying equity.

How ELKS work

• Issuer: Corporations, banks, or other financial institutions create ELKS—typically with help from investment banks—to structure payments tied to an equity benchmark.
• Payoffs: Can be fully variable (based on benchmark performance), include capped returns, or combine fixed and variable components. Payoff structures vary widely across products.
• Maturity and distributions: Many ELKS mature within about a year and may include one or more interim distributions before maturity.
• Liquidity: ELKS are often illiquid, not listed on exchanges, and may carry penalties or be non-redeemable before maturity.

Types of equity-linked securities

• Corporate ELKS: Issued by companies to raise capital; structured by investment banks to include specific provisions and payoff rules.
• Bank-offered ELKS / Market-linked CDs: Retail products from banks where interest is linked to an equity index or other benchmark. These may have minimum investment amounts and specific holding periods.
• Market-linked securities: Any security whose payments are linked to a market benchmark (equities, commodities such as gold, currencies, etc.). These offer exposure to a benchmark without direct ownership but can be structured in many ways.

Equity-Linked Notes (ELNs)

ELNs are a common form of equity-linked product. Typical features:
* Purchased at a strike price (sometimes at a discount to current market price).
* Payoff depends on whether the underlying reaches specified strike levels. If conditions are met, the issuer may deliver the underlying stock or an equivalent cash value.
* ELNs can provide customized exposure (e.g., downside protection, capped upside) depending on the structure.

Benefits and risks

Benefits
* Potentially higher yields than straightforward fixed-income or direct equity exposure.
* Flexible payoff structures that can be tailored to investor or issuer goals.
* Can provide targeted exposure to specific equities or benchmarks without direct ownership.

Risks
* Credit risk of the issuer—principal and contingent payments depend on issuer solvency.
* Limited liquidity—many ELKS are not tradable on exchanges and may be hard to sell before maturity.
* Complexity—structures can be difficult to value and compare.
* Capped upside or asymmetric payoffs—investors may forgo full upside in exchange for enhanced yield or downside protection.
* Market risk—returns depend on the performance of the chosen benchmark.

Examples

• A corporate ELKS tied to a company’s stock index used to raise corporate capital.
• A market-linked CD from a bank that pays interest based on the return of an equity index over the term.
• An ELN that pays a coupon and delivers underlying shares at maturity if the stock price falls below a strike, otherwise returns cash.

Conclusion

Equity-linked securities are flexible, structured debt instruments that provide returns linked to equity performance. They can offer attractive yields and tailored payoff profiles, but they introduce issuer credit risk, limited liquidity, and structural complexity. Investors should carefully review terms, caps, and contingencies and assess issuer creditworthiness before investing.