Executives of the semiconductor and memory chip company SK hynix attend the company's opening bell ceremony at the Nasdaq market on the day of their initial public offering in New York City on July 10.REUTERS/YONHAP
Korean retail investors are paying roughly 30 percent more to own SK hynix in New York rather than in Seoul — a premium for a stock they could buy at home, in their own currency.
The premium, which stood at 14 percent upon its U.S. debut and further widened to nearly 50 percent last month, is unusually large even compared to other American depositary receipts (ADR) listed in the United States, such as Taiwan Semiconductor Manufacturing Company (TSMC). Regardless, local investors continue to pile into Nasdaq-listed SK hynix ADRs, betting that the premium will stay elevated.
The ADR premium reflects several factors, including the absence of currency risk for dollar-based investors, an asymmetrical arbitrage mechanism that effectively benefits ADR buyers, and potential inclusion in major U.S. indexes — all amid surging demand for AI chips.
At least one Wall Street analyst has called Koreans' mass buying of the ADR “absolutely crazy,” while describing such price discrepancies as a symptom of a bubble.
SK hynix was the second-most purchased overseas stock among Korean investors from July 10, the day of its U.S. listing, through Monday, with net purchases totaling $877.36 million. The most-purchased stock was the Direxion Daily Semiconductor Bull 3X ETF, with net purchases of $1.923 billion.
The buying spree comes despite the U.S.-listed shares trading at a premium, as many retail investors are drawn to the ADR's more accessible per-share price. The ADR closed at $155.37 on Monday — equivalent to roughly 215,000 won — and represents one-tenth of a Seoul-listed common share, which closed at 1.67 million won the same day.
Imbalance of arbitrage mechanism
A major driver of U.S.-listed SK hynix's premium includes the imbalance of the arbitrage mechanism for investors in Seoul and New York.
While holders of the Korean-listed stock aren't able to convert their shares into the ADR, due to the limits of ADR issuance, ADR holders can cancel their receipts and receive the underlying Seoul-listed shares, providing an arbitrage mechanism that can help support the premium.
But ADR holders have little incentive to convert into the cheaper Seoul-listed shares, as doing so would mean giving up the premium. None of the ADRs issued so far have been converted into the Korean-listed shares, according to the Korea Securities Depository.
As the imbalance in the arbitrage mechanism favors ADR holders, Korean investors continue to buy the more expensive ADRs, betting that the premium will stay elevated rather than the price gap being arbitraged away, according to Kim Sang-bong, an economics professor at Hansung University.
A currency trader passes by a screen showing the Kospi, the foreign exchange rate between U.S. dollar and Korean won, SK hynix and Samsung Electronics stock prices at the foreign exchange dealing room of the Hana Bank headquarters in central Seoul on Tuesday.AP/YONHAP
Such a practice can also be seen with other ADRs, such as TSMC, whose ADR holders can switch their U.S.-listed shares into local stocks. By contrast, Taiwan-listed shares require special regulatory approval before they can be converted into their U.S.-listed equivalents.
Another catalyst is that expectation that the ADR could be added to major indexes like the Philadelphia Semiconductor Index. “ADRs can benefit from index inclusion, which generates mechanical buying from index and passive funds,” said Park Seok-hyun, an equity strategist at Woori Bank Wealth Management Group. "Given its substantial market capitalization, there is a clear possibility that SK hynix’s ADR will be added to major indexes by next year at the latest.”
TSMC is included in the Philadelphia Semiconductor Index, which is tracked by funds across numerous countries, including Korea, Japan and Taiwan. The ADRs of Dutch chip-equipment maker ASML and British chip designer Arm are also included in the S&P 500, giving their U.S.-listed shares access to demand from funds that track the index.
Beyond those expectations, some retail investors say the ADR is simply easier to trade. Despite risks associated with the currency fluctuation and higher tax for capital gains, investors are attracted to the lower per-share price, which makes it easier for them to “average down” and “trade for short-term gains,” according to investors who commented on an online community operated by a local brokerage.
While the ADR may trade at a premium, the two shares are expected to move in tandem, as the Seoul-listed stock will continue to influence SK hynix’s ADR price, Prof. Kim added.
A logo of semiconductor and memory chip maker SK hynix during the company's debut on the Nasdaq market in New York City, U.S., on July 10.REUTERS/YONHAP
The costly choice
Analysts say the math rarely works out for Korean retail investors, who have to face multiple risks by investing in the U.S. stock.
“For Korean investors, buying the ADR means taking on currency risks while giving up the convenience of trading the shares in Seoul. Given those risks, choosing the ADR could be viewed as somewhat unreasonable,” Park said. “Buying ADRs to avoid volatility in the Korean market, like some investors argue, is also questionable, as investors remain exposed to the same underlying market risks as the ADR is tied to the Korean stock.”
The sentiment echoed on Wall Street. Owen Lamont, senior vice president of Acadian Asset Management, called such behavior “absolutely crazy,” adding that such price discrepancies are “a symptom of the bubble,” reported CNBC on Aug. 17. James Mackintosh, a senior markets columnist at the Wall Street Journal, wrote in a column late last month that “the huge ADR premium is exactly the sort of thing that shouldn’t happen in markets.”
ADRs of major foreign companies listed in the U.S. “typically trade at some premium” because they give a broader pool of investors easier access to the stocks through the more liquid U.S. market, with less currency friction, according to Lee Kyung-min, a market analyst at Daishin Securities.
TSMC’s ADRs averaged a 3.2 percent premium from 2010 to 2020. That gap widened to 7.4 percent between 2020 and 2023 before reaching a two-decade high in October last year, as TSMC became one of the biggest beneficiaries of the AI spending boom.
It’s still too early to determine whether SK hynix’s premium is excessive, given that the ADR has been listed for less than two months. “We’ll need more time to see where the premium settles,” Lee added.
“So long as the premium is broadly stable, it’s fine to buy the ADR, because the premium should still be there when you come to sell,” Mackintosh wrote in his column.
