Equity-Linked Securities (ELKS) in Australia: 2025 Investor Guide

In the ever-evolving world of investment products, Equity-Linked Securities (ELKS) are drawing attention from Australian investors who seek a blend of steady returns and potential equity upside. With the financial markets in 2025 showing heightened volatility and regulatory shifts, understanding how ELKS work and how they fit into an Australian portfolio is more important than ever.

What Are Equity-Linked Securities (ELKS)?

Equity-Linked Securities are hybrid financial instruments that combine characteristics of fixed income and equity investments. Typically, an ELKS is a debt security whose payoff at maturity is linked to the performance of a specific stock or equity index. In essence, investors receive regular coupon payments, but their principal repayment depends on how the underlying equity performs over the security’s life.

• Coupon payments: Investors usually get a higher coupon than standard bonds, reflecting the additional risk.

• Principal at risk: At maturity, if the linked equity falls below a predetermined threshold, investors may receive shares instead of cash, often at a lower value.

• Customisable: ELKS can be structured to track Australian blue-chip shares, global indices, or even ESG-focused baskets.

For example, an ELKS might pay a 7% annual coupon, but if BHP’s share price drops more than 20% by maturity, the investor receives BHP shares instead of their original investment amount.

Why ELKS Are Gaining Popularity in Australia

Several factors are driving renewed interest in ELKS among Australian investors in 2025:

• Market volatility: With the ASX experiencing swings amid global economic uncertainty, ELKS offer a way to earn enhanced income while accepting measured equity risk.

• Low interest rates: Despite gradual increases, savings and term deposit rates remain below inflation, pushing yield-seekers toward alternatives like ELKS.

• Regulatory clarity: ASIC’s 2024–25 guidance has clarified disclosure obligations for structured products, making ELKS more transparent and easier to compare.

Institutional players, such as superannuation funds and wealth managers, are also incorporating ELKS into diversified strategies to generate income without fully committing to equities during uncertain times.

Key Benefits and Risks for 2025 Investors

ELKS can enhance returns, but they are not for every investor. Here’s what to consider in the current environment:

Benefits

• Enhanced yield: ELKS typically pay higher coupons than government or corporate bonds.

• Downside buffer: Many ELKS are structured with a protective barrier—if the underlying equity doesn’t breach it, investors get their full principal back.

• Customisation: Issuers offer ELKS linked to a range of equities, from ASX giants to global tech titans, allowing for tailored strategies.

Risks

• Equity risk: If the linked share or index falls sharply, investors could receive less valuable shares at maturity.

• Complexity: The payoff structure can be difficult to understand, especially for new investors.

• Liquidity: Most ELKS are not as easily traded as shares or ETFs, and early exit may mean selling at a loss.

• Credit risk: If the issuer defaults, investors may lose both coupon and principal.

For instance, in 2024, some ELKS linked to the ASX 200 provided solid returns, but those tied to underperforming sectors (like discretionary retail) delivered shares worth less than the invested principal. This highlights the importance of understanding the underlying asset and structure.

Regulatory and Market Trends: What’s New for 2025?

The landscape for ELKS in Australia is evolving. Key developments this year include:

• ASIC’s Structured Product Disclosure Reforms: From March 2025, new rules require clearer disclosure of risks, fees, and underlying asset performance scenarios. This is designed to protect retail investors and ensure product suitability.

• Green ELKS: With the push for sustainable investing, several issuers now offer ELKS linked to ESG indices or companies with strong environmental credentials.

• Digital distribution: Major banks and fintechs are launching online platforms for direct ELKS investment, reducing costs and increasing accessibility for retail investors.

These changes mean investors have more options and greater transparency, but also need to stay informed as new products and regulations emerge.

How to Assess if ELKS Are Right for Your Portfolio

Before adding ELKS to your investment mix, consider:

• Your tolerance for equity risk and willingness to accept shares in place of principal.

• The reputation and financial health of the issuer.

• How ELKS fit into your overall diversification and income strategy.

• Fee structures and potential tax implications for hybrid securities in Australia.

Consulting recent product disclosure statements and using ASIC’s MoneySmart tools can help you compare offerings and understand the fine print.