The substantial price gap between the American Depositary Receipts (ADR) of SK hynix and its shares on the Korean domestic market is fueling a significant trading surge centered on Korean exchange-traded funds (ETFs).
BlackRock's $23 billion iShares MSCI 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. With approximately a quarter of the fund's portfolio allocated to SK hynix shares listed in Korea, investors view it as the most convenient channel to gain indirect exposure to the chip giant while bypassing the highly priced ADRs.
As of Thursday afternoon in New York, the premium for SK hynix ADRs over the local shares was around 27%, having surged to a historical peak of 51% the day before. This gap is unlikely to narrow quickly, as the channels for issuing and canceling ADRs are not scheduled to reopen until later this month, and uncertainties remain regarding subsequent conversion capacity and regulatory approvals.
So far this year, EWY has accumulated inflows exceeding $6.3 billion, with the fund's assets under management skyrocketing by over 180% since the start of the year.
High ADR Premiums and Impaired Arbitrage Mechanisms
The pricing disparity between SK hynix ADRs and its local shares is fundamentally due to a temporary breakdown in the normal arbitrage mechanism.
Typically, the price difference between an ADR and its corresponding local share is quickly erased through conversion operations that issue or cancel ADRs. However, the ADR book is currently closed for both issuance and cancellations, with reopening expected later this month. Even if the channel reopens, it remains unclear how much conversion capacity will be available and whether additional regulatory approvals will be required.
This structural constraint is sustaining the premium. According to Bloomberg data, the ADRs for Taiwan Semiconductor Manufacturing Company have maintained an average premium of about 20% over the past year due to the partial convertibility of its local shares. The situation with SK hynix is similar, though the premium magnitude is more extreme.
EWY Emerges as the Preferred Proxy Vehicle
Confronted with the elevated ADR premium, some investors are turning to EWY to gain exposure to SK hynix. EWY allocates roughly a quarter of its assets to SK hynix shares listed in Korea, while also sidestepping complexities associated with directly holding Korean stocks, such as after-hours trading operations and currency conversion.
"Investors are using EWY as a tool to get exposure to Korean-listed shares," said Dave Lutz, a stock sales trader and macro strategist at Jonestrading Institutional Services LLC.
Todd Sohn, chief ETF strategist at Strategas Securities, noted, "ETFs are essentially proxy trading vehicles, extremely efficient for gaining exposure to themes in either emerging or developed markets."
AI Chip Frenzy Drives Sustained Inflows
The broader context is that Korean memory chip stocks have become one of the hottest AI-related trades this year. Following SK hynix's U.S. listing, capital has continued to flow in despite periodic market volatility. In the Korean domestic market, retail trading enthusiasm for single-stock ETFs focused on SK hynix and Samsung Electronics has been intense, prompting regulators to temporarily halt 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 manager Facet. "Demand remains extremely strong, but whether it can persist is unknown. However, it's logical that most short positions would quickly stop losses in this kind of market move."
Year-to-date, EWY's assets have ballooned from under $800 million to $23 billion, a surge of over 180%, reflecting intense global investor appetite for Korean technology assets.
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