TAIPEI, Taiwan – Investors who have long relied on the arbitrage strategy of buying shares in Taiwan Semiconductor Manufacturing Co.’s Taipei stock while shorting its U.S. listing are facing challenges as the premium on the American depositary receipts (ADRs) has surged in comparison to the Taiwan shares.
Data indicates that the enthusiasm for artificial intelligence in the U.S. has driven up the price of TSMC’s ADRs, reaching a 21% premium against the Taiwan stock, the highest since 2009. This quarter has seen the ADRs consistently trading at a premium, with a peak of 30% during the Lunar New Year in February, when the Taipei stock market was closed.
Despite hopes for a return to fair value levels, Jon Withaar, Head of Asia Special Situations at Pictet Asset Management, warns that the premium on TSMC’s ADRs may continue to rise, causing potential distress for investors.
TSMC’s ADRs have seen significant upticks this year, outperforming the Taipei shares due to their accessibility to foreign investors and inclusion in key indexes like the Philadelphia Stock Exchange Semiconductor Index. The ADRs also benefit from being included in popular exchange-traded products, leading to increased demand for the U.S.-listed securities.
Additionally, TSMC’s ADRs are preferred due to their fungibility compared to the Taiwan shares that require special regulatory approval for conversion. Foreign investors often gravitate toward ADRs, with some indices solely referencing them, prompting ETFs to purchase the U.S. shares to mirror the index.
As the AI sector continues to thrive, TSMC’s ADRs maintain a premium over the local stock, averaging nearly 17% this quarter. With the semiconductor industry soaring to new heights, investors are anticipating further growth in the AI sector.
Looking ahead, the AI sector’s momentum remains robust, with opportunities for widening premiums and potential market corrections. As technological advancements continue to shape the investment landscape, the allure of AI stocks like TSMC remains prevalent among global investors.
