(Bloomberg) — The long-held arbitrage strategy to buy shares of Taiwan Semiconductor Manufacturing Co. Buying in Taipei and shorting the US listing at the same time is starting to become painful.
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Enthusiasm about artificial intelligence in the US pushed TSMC’s American depositary receipts to their most expensive price against Taiwanese stocks this quarter since 2009, according to data compiled by Bloomberg. As of Friday, they were trading at a premium of about 21%, compared with less than 8% for the five-year average. It peaked at 30% during the Lunar New Year holiday in February, when Taiwan’s stock market was closed.
“A lot of people have set it up and hope it will fall back to longer-term fair value levels,” said Jon Withaar, head of Asia special situations at Pictet Asset Management. But the premium could still go higher, “and then there will be a lot of pain,” he added.
TSMC’s advanced technology and reasonable valuation have made it a favorite play among global AI investors. ADRs are up 66% this year through Friday, compared with a 55% rise in Taipei shares. Yet both are trading well below their 2021 valuation highs.
The ADRs have fared better because they are more easily accessible to foreign investors. They are also included in indicators such as the Philadelphia Stock Exchange Semiconductor Index and in exchange-traded products such as the VanEck Semiconductor ETF and iShares Semiconductor ETF, meaning funds that track them must buy the US-listed securities.
“It’s the dynamics of supply and demand,” says Brian Freitas, founder of research firm Periscope Analytics. “Not all foreign investors can hold the Taiwanese stocks, so they prefer to own the ADRs. In addition, there are some indices that only refer to the ADR, so ETFs essentially buy the US equities.”
In addition, TSMC’s ADRs typically trade at a premium because they are fungible, unlike Taiwanese stocks, which require special regulatory approval to convert into the U.S. equivalent. The Asian stock is also largely in the hands of fund managers, making it difficult for them to further expand their position.
Also read: TSMC’s 42% stock surge leads to weighting limits for some funds
For now, however, the AI sector remains popular, with Nvidia Corp. worth more than $3 trillion in market value and a gauge that tracks semiconductor stocks at an all-time high. TSMC’s ADR premium over local stocks has risen to an average of almost 17% this quarter, after reaching 30% in February.
“The AI boom is not over yet,” Withaar said. “I’m happy to wait for a crescendo to build and maybe even the panic to subside.”
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(An earlier version of this story corrected this year’s move in Taiwan stocks.)
–With help from Betty Hou.
(Updates with additional context in second paragraph)
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