The premium on SK Hynix's American Depositary Receipts (ADRs) once soared to a historic peak of 51%. With the arbitrage channel closed, the price gap is difficult to narrow in the short term. Keen-scented investors quickly found a way to break the deadlock—BlackRock's iShares MSCI South Korea ETF (EWY) raked in over $1.1 billion in a single day, with its asset scale surging 180% year-to-date to $23 billion. As direct arbitrage paths are blocked, ETFs are becoming the most efficient "side door ticket" to this AI chip feast.
The huge price gap between SK Hynix's ADRs and its local South Korean shares is fueling a proxy trading frenzy around South Korea ETFs.
BlackRock's $23 billion iShares MSCI South Korea ETF (ticker: EWY) attracted over $1.1 billion in a single day on Wednesday, following a record net inflow of $814 million the previous day. Since the fund allocates about a quarter of its portfolio to SK Hynix shares listed in South Korea, investors see it as the most convenient channel to bypass the high-premium ADRs and gain indirect exposure to this chip giant.
As of Thursday afternoon New York time, the premium on SK Hynix's ADRs relative to its local South Korean shares was about 27%, after briefly surging to a historic peak of 51% the previous day. This gap is unlikely to narrow in the short term—the issuance and cancellation channels for ADRs will not reopen until later this month, and the subsequent conversion capacity and regulatory approvals remain uncertain.
Year-to-date, EWY has attracted cumulative inflows of over $6.3 billion, with the fund's asset scale skyrocketing more than 180% compared to the beginning of the year.
High ADR Premium, Arbitrage Mechanism Blocked
The pricing chasm between SK Hynix's ADRs and its local shares stems from the temporary failure of the normal arbitrage mechanism.
Typically, the price gap between ADRs and their corresponding local shares is quickly erased through conversion operations that issue or cancel ADRs. However, the ADR ledger is currently closed to both issuance and cancellation, with reopening expected later this month. Even if the channel opens then, it remains unclear how much conversion capacity will be available and whether additional regulatory approvals will be required.
This structural constraint has allowed the premium to persist. According to Bloomberg data, TSMC's ADRs have maintained an average premium of about 20% over the past year due to the partial convertibility of its local shares. SK Hynix's situation is similar, but the premium magnitude is more extreme.
EWY Becomes the Optimal Proxy Tool
Faced with the high ADR premium, some investors are turning to EWY to gain exposure to SK Hynix. EWY allocates about a quarter of its assets to SK Hynix shares listed in South Korea, while avoiding the complexities involved in directly holding South Korean stocks, such as operations outside trading hours and currency conversion.
"Investors are using EWY as a tool to gain exposure to South Korean-listed stocks," said Dave Lutz, equity sales trader and macro strategist at Jonestrading Institutional Services LLC.
Todd Sohn, chief ETF strategist at Strategas Securities, pointed out, "ETFs are essentially proxy trading tools, extremely efficient in gaining exposure to themes in emerging or developed markets."
AI Chip Boom Drives Sustained Capital Inflows
On a broader backdrop, South Korean memory chip stocks have become one of the hottest AI trading targets this year. After SK Hynix completed its U.S. listing, despite periodic market volatility, capital continues to flow in. In the local South Korean market, retail trading enthusiasm around single-stock ETFs for SK Hynix and Samsung Electronics is high, prompting regulators to temporarily suspend the launch of new such single-stock ETFs.
"Some of the inflows may be coming from short covering," said Tom Graff, chief investment officer at Baltimore-based asset management firm Facet. "Demand remains extremely strong, but whether it can sustain is unknown. However, it's logical that most short positions would quickly cut losses in such a market."
Year-to-date, EWY's asset scale has ballooned from less than $8 billion to $23 billion, a surge of over 180%, reflecting the global capital's strong pursuit of South Korean tech assets.
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