SK Hynix is a memory-chip maker. The company recently started trading in the United States through American depositary receipts, or ADRs - basically a U.S.-traded version of its Korean stock. And demand has been wild.
So wild that those ADRs are selling for a lot more than the same shares in Seoul. The price difference between these two securities, both representing the same company, is enormous.
Normally, that gap would close fast. Traders could buy the cheaper shares in Korea, cancel the ADRs, or create new ones - a process called arbitrage that keeps prices in line. But that process is on hold. ADR issuance and cancellation are halted until later this month, and nobody knows how much conversion capacity will be available after that.
So investors who want SK Hynix but do not want to pay a 27% markup are finding a workaround. They are buying the iShares MSCI South Korea ETF (EWY), which holds roughly a quarter of its portfolio in SK Hynix shares traded in South Korea. That gives them exposure to the cheaper stock without needing to trade in Korean market hours or handle currency exchange.
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The numbers tell the story. The ETF's total assets have ballooned over 180% to $23 billion this year.
This is not a new trick. ETFs are often used as stand-ins for hard-to-reach assets.
"ETFs, in general, are proxy plays," "said Todd Sohn, chief ETF strategist at Strategas Securities". "They are extremely efficient for exposure to either emerging or well-developed market themes."
Dave Lutz, an equity sales trader at Jonestrading Institutional Services LLC, put it even more directly: "Investors are using EWY as a way to get exposure to the Korean-listed issuance."
It is not just SK Hynix either. Bloomberg data shows that over the last twelve months, TSMC's ADRs have typically sold at about a 20% markup.
Tom Graff, chief investment officer at the Baltimore money manager Facet, pointed out that "some of that flow might have been short covering." In other words, traders who bet against the ADR got squeezed and had to buy back quickly.
The bottom line: The demand is real, but part of it could be temporary. Graff said, "Demand remains extremely hot. How sustainable that is remains an open question, but it makes sense that most short bets would have a quick trigger."
Officials in South Korea recently paused the launch of new single-stock ETFs after retail investors rushed into funds focused on the chipmaker and Samsung Electronics Co.
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