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Structured Products Cheat Sheet
Equity-Linked Note (ELN)
August 26, 2025
What is an Equity-Linked Note?
Equity-linked notes (ELNs) are a type of structured investment product where the returns are tied to the performance of an equity-related underlying. This could be a single stock, an equity index, or a basket of equities. ELNs come in various forms, offering different levels of risk and capital protection. Some are designed to maximize upside potential, while others may focus on preserving capital.
Key Learning Points
- ELNs are structured financial products that typically include derivatives and are engineered to meet specific risk-return objectives
- There are various types of ELNs, each with different risk profiles and levels of capital protection
- ELNs blend characteristics of fixed income and equity investments so may offer fixed income-like features, such as capital protection in PPNs, but returns are ultimately linked to equity performance
- ELNs provide equity market exposure without direct ownership, access to restricted markets, customizable risk-return profiles, and capital protection options.
- ELNs are tied to the performance of the equity-related underlying, so returns will fluctuate with market movements
How ELNs Work
ELNs fall under the broader category of structured financial products. These are pre-packaged investments that typically include derivatives and are engineered to meet specific risk-return objectives. ELNs, in particular, are structured to provide exposure to equity markets without direct ownership of the underlying assets.
What Types of ELNs Exist?
There are various types of ELNs, each with different risk profiles and levels of capital protection:
Participation Notes (Keynotes)
These allow investors to gain exposure to equity performance without owning the underlying asset. They are especially useful in markets with investment restrictions. However, they typically offer no capital protection, meaning investors are exposed to both gains and losses.
Principal Protected Notes (PPNs)
Also known as capital protected or capital guaranteed notes, these ensure the return of the investor’s initial capital at maturity, regardless of the asset’s performance. The trade-off is reduced participation in potential upside, as part of the investment is used to secure the capital guarantee.
Equity-Linked Note Caps, Participation Rates, and Leverage
ELNs blend characteristics of fixed income and equity investments. They may offer fixed income-like features, such as capital protection in principal protected notes (PPNs), but their returns are ultimately linked to equity performance. This hybrid nature allows investors to gain equity exposure with varying degrees of downside risk.
Fixed Income with Equity Exposure
ELNs blend characteristics of fixed income and equity investments. While they may offer fixed income-like features, their returns are ultimately linked to equity performance. This hybrid nature allows investors to gain equity exposure with varying degrees of downside risk.
Capital Protected Investments
Principal Protected Notes (PPNs) are the primary form of capital protected ELNs. They guarantee the return of the initial investment at maturity, making them suitable for risk-averse investors. However, this protection comes at the cost of limited upside potential.
Benefits of Equity-Linked Notes
Equity market exposure without direct ownership
They allow investors to gain exposure to the performance of equity-related assets—such as individual stocks, indices, or baskets—without directly owning them. This is particularly useful in markets where direct investment is restricted.
Access to restricted markets
Participation notes (also called keynotes) enable foreign investors to access markets they otherwise couldn’t invest in directly. For example, an investor restricted from buying Indian equities can still benefit from their performance via a keynote.
Customizable risk-return profiles
ELNs come in various forms, offering different levels of risk and capital protection. This flexibility allows investors to choose products that align with their investment goals—whether they prioritize upside potential or capital preservation.
Capital protection options
PPNs, a type of ELN, guarantee the return of the investor’s initial capital at maturity, regardless of how the underlying asset performs. This makes them attractive to risk-averse investors seeking equity exposure with downside protection.
Balanced investment strategy
By combining elements of fixed income and equity investments, ELNs offer a hybrid strategy. Investors can benefit from potential equity gains while managing risk through structured features like capital guarantees or capped participation.
Risks of Equity-Linked Notes
Market risk, ELNs are tied to the performance of equity-related underlyings (e.g. stocks, indices, baskets), so their returns fluctuate with market movements.
In the case of Participation Notes (Keynotes), there is no capital protection, meaning investors are fully exposed to potential losses of the underlying asset.
Lack of capital protection. Many ELNs, especially participation notes, do not guarantee the return of the initial investment. If the underlying performs poorly, investors can lose part or all of their capital.
Reduced upside in protected products. Principal Protected Notes (PPNs) offer capital protection, but this comes at a cost: investors receive reduced participation in the upside. A portion of the investment is allocated to securing the capital guarantee, which limits the potential for high returns.
Regulatory and access limitations. Keynotes are often used in markets where direct investment is restricted. While this provides access, it also introduces regulatory and jurisdictional risks, especially in emerging markets.
What is the Difference Between CLN and ELN?
The primary difference between Credit-Linked Notes (CLNs) and ELNs lies in their underlying assets. CLNs are typically linked to the credit risk of a particular entity or a basket of entities, whereas ELNs are linked to the performance of equity-related assets.
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Conclusion
Equity-Linked Notes (ELNs) offer a unique investment opportunity by combining the benefits of equity exposure with the structured features of fixed income products. They provide investors with the flexibility to choose products that align with their risk-return preferences, whether they prioritize capital preservation or potential upside.
While ELNs can be an attractive option for gaining access to restricted markets and customizing investment strategies, it’s important to be aware of the associated risks, such as market fluctuations and lack of capital protection in certain types. By understanding the various forms of ELNs and their respective benefits and risks, investors can make informed decisions that align with their financial goals.