Source: Wall Street View, Author: Zhao Ying
The arbitrage strategy that investors have always favored is to buy Taiwan Semiconductor stocks while shorting Taiwan Semiconductor's US ADR. Now, Taiwan Semiconductor's ADR and Taiwan stocks have reached their highest premium since 2009.
Recent news of chip price increases has pushed Taiwan Semiconductor skyrocketing, making Wall Street's arbitrage trading painful.
For a long time, the arbitrage strategy favored by investors was to buy Taiwan Semiconductor's Taiwan shares while shorting Taiwan Semiconductor's US ADR shares, but this strategy is also becoming outdated.
According to media reports on Monday, the premium between Taiwan Semiconductor's ADR and Taiwan stock has risen to the highest level since 2009, with a premium of about 22% as of last Friday, far exceeding the five-year average level of around 8%. During the Lunar New Year period in February, when the Taiwan stock market was closed, the premium rate for Taiwan Semiconductor's US depositary receipts reached as high as 30%.
Jon Withaar, head of Pictet Asset Management's Asian division, warned:
Many people are betting that the premium will eventually fall to a more reasonable long-term average level, but the premium may further expand, which will bring huge impact.
Cutting-edge technology and reasonable valuation make Taiwan Semiconductor a popular target for global investors to layout AI. As of Friday, Taiwan Semiconductor's ADR has soared 66% since the beginning of this year, while Taiwan stock has risen 55%. However, both stock prices are still far below their valuation high points in 2021.
The reason why Taiwan Semiconductor's ADR performs better is that foreign investors are more likely to invest in ADR, and ADRs are included in several important indexes and ETFs, such as the PHLX Semiconductor Index, VanEck Semiconductor ETF, and iShares Semiconductor ETF, which means that investors who track these indexes must buy Taiwan Semiconductor's US ADR shares.
Brian Freitas, founder of research firm Periscope Analytics, explained:
This is the impact of supply and demand dynamics, not all foreign investors are able to hold Taiwan stocks, so they prefer to hold ADR. In addition, some indexes only reference ADR, so ETFs also have to buy US stocks.
In addition, trading premium has always existed for Taiwan Semiconductor's ADRs, because they are interchangeable, unlike Taiwan stocks, which require special regulatory approval to convert to the US stocks. Moreover, Taiwan Semiconductor's stocks in the Asian market have been heavily held by fund managers, making it difficult to increase holdings of the stock further.
Editor/Lambor