The price differential between SK Hercules ADR and local Korean shares continues to grow and is pushing more funds towards Korea ETF. Due to the temporary closure of the conversion route between ADR and local stocks, the arbitrage mechanism that had been used to reduce price differentials failed, and investors turned to ETF to acquire South Korea’s technology stock.
The premium rose to 51%.
As of Thursday afternoon New York time, SK Hercules ADR had a premium of approximately 27 per cent against local Korean stock, which had risen to 51 per cent the previous day. At the core of market concerns is the lack of rapid rehabilitation in the short term.
Typically, where there is a significant deviation between ADR and local equity, the investor can reduce the price difference by issuing or writing off ADRs. However, the related books are still closed and are not expected to reopen until later this month. There is no clear information at this time on the level of subsequent convertibility, if any, and whether additional approval is required.
According to Bloomberg data, the average premium over the past year was about 20 per cent because local shares were only partially transferable. In contrast, SK Hercules ' price differentials were even higher this time, indicating that the impact of cross-market supply constraints on pricing was more pronounced.
EWY Layout
Given the high cost of buying ADR directly, some investors began to borrow iShares MSCI South Korea ETF (EWY) to participate in the trade. About a quarter of the Fund ' s warehouse space is equipped with SK Hercules, listed in Korea, and is therefore considered an easy alternative.
For overseas funds, ETF can also reduce the non-tradable time-frames, settlement arrangements and exchange rate conversions involved in direct trading of Korean local stocks. Marketers believe that such tools can more easily absorb short-term concentrated demand in cross-market thematic transactions.
EWI has attracted over $6.3 billion in inflows since the beginning of the year, and the size of the Fund has increased from less than $8 billion at the beginning of the year to about $23 billion, an increase of more than 180 per cent. This is also a reflection of the continuing increase in global funding for Korean science and technology assets.
AI chip heat continuity
The larger context is that Korea's storage chip plate has become one of the hot directions of this year's AI deal. Following the completion of the United States listing by SK Hercules, there was no significant cooling of market demand, although the stock price phase increased.
In the Korean local market, single ETF trading around SK Hercules and Samsung electronics also continued to be active. Due to the high level of participation of the diaspora, the regulatory authorities temporarily suspended the listing of such new products.
Some institutional sources believe that there may be an empty replenishment in recent inflows, but overall demand remains strong. For the market, as long as the ADR premium remains high and the conversion mechanism is not fully restored, South Korea ETF may still continue to assume an alternative role in acquiring the relevant exposure.