Equity-Linked Notes (ELNs) have emerged as a hot topic in Australia’s investment circles, promising a blend of equity exposure and capital protection. With regulatory tweaks, a shifting market landscape, and growing appetite for structured products in 2025, it’s time to unpack what ELNs offer, who they suit, and the latest rules every Australian investor needs to know.
What Are Equity-Linked Notes and Why Are They Popular Now?
An Equity-Linked Note is a structured investment product that typically offers a fixed coupon and a payout linked to the performance of an underlying stock or equity index. Unlike direct share investment, ELNs can provide partial downside protection, making them appealing in volatile or uncertain markets.
- Structure: Investors lend money to an issuer (usually a bank) for a set term. The return is tied to the movement of a chosen stock or index.
- Returns: You may receive enhanced yields if the underlying stock performs within a defined range, or the note may convert to shares if certain conditions are met.
- Risks: While some principal may be protected, ELNs still carry credit risk (if the issuer defaults) and market risk (if the stock moves unfavourably).
In 2025, Australian investors are increasingly drawn to ELNs for two reasons: the search for yield in a lower-interest-rate environment, and a desire to hedge or diversify equity exposure without going all-in on shares.
2025 Regulatory Updates and Market Trends
Regulatory bodies, led by ASIC, have sharpened their focus on structured products this year. In April 2025, new product intervention powers were used to ensure greater transparency around ELN risks and fees. Key changes include:
- Enhanced Disclosure: Issuers must now provide clearer, jargon-free explanations of payoff structures and worst-case scenarios.
- Suitability Assessments: Financial advisers face stricter rules to ensure ELNs are only recommended to clients who fully understand the risks, especially retail investors.
- Marketing Restrictions: ASIC has limited the promotion of high-risk or exotic ELN variants to wholesale investors only.
These shifts aim to prevent mis-selling and ensure investors aren’t blindsided by complex structures. The upshot? ELNs are now more transparent, but investors must still read the fine print—especially around early redemption clauses and potential for conversion to shares at unfavourable prices.
Who Should Consider ELNs and How to Evaluate Them
ELNs aren’t for everyone. They suit investors who:
- Have a neutral to moderately bullish outlook on a specific stock or index.
- Seek higher yields than term deposits or bonds, but can accept the risk of ending up with shares if the market falls.
- Are comfortable with the credit risk of the issuing bank or financial institution.
When weighing an ELN, savvy investors consider:
- Issuer Creditworthiness: Stick to reputable banks or institutions with a strong track record.
- Underlying Asset Selection: Choose assets you’re comfortable owning if the ELN converts to shares.
- Payoff Structure: Understand the exact conditions for coupon payments, capital protection, and conversion triggers.
- Liquidity: ELNs are generally illiquid—be prepared to hold until maturity.
For example, a major Australian bank in 2025 recently issued an ELN linked to the ASX 200. If the index stays above a set barrier, investors pocket a 7% annual coupon. If it drops below, they receive shares at a predetermined price—potentially below market value.
Real-World Scenarios: ELNs in Action
Case 1: Lisa invests $100,000 in an ELN tied to BHP Group shares. The note offers a 6% coupon if BHP stays above $40 per share over 12 months. If BHP falls below $40, Lisa receives BHP shares at $40—regardless of the lower market price.
Case 2: A wealth manager structures an ELN for SMSF clients, linking returns to a diversified basket of ASX blue-chips. The product is pitched as a way to boost income, but with full disclosure of potential conversion and issuer credit risk as per ASIC’s 2025 guidance.
The Bottom Line: Are ELNs Right for You in 2025?
Equity-Linked Notes can be a useful addition to a diversified portfolio, especially for income-seeking investors who understand the trade-offs. The 2025 regulatory reforms have made them safer and more transparent, but not risk-free. If you’re considering ELNs, weigh the returns against the potential for unwanted equity exposure, credit risk, and limited liquidity.
