Recent news of chip price hikes has driven Taiwan Semiconductor's stock price soaring, making Wall Street's &#34;arbitrage trading&#34; increasingly painful.
For a long time, the favored arbitrage strategy by investors has been to buy Taiwan Semiconductor's Taiwan-listed shares while shorting Taiwan Semiconductor's American Depositary Receipts (ADRs). However, this strategy is starting to become outdated.
According to media reports on Monday, the premium between Taiwan Semiconductor's ADR and Taiwan-listed shares has climbed to the highest level since 2009, with the premium reaching about 22% as of last Friday, far exceeding the 5-year average of around 8%. During the Lunar New Year period in February, when the Taiwan stock market was closed, the premium for Taiwan Semiconductor's ADR reached as high as 30%.
Jon Withaar, head of Pictet Asset Management's Asia division, warned:
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Many are betting on this, hoping that the premium will eventually fall back to a more reasonable long-term average level, but the premium may further expand, bringing significant impact when that happens.
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Cutting-edge technology and reasonable valuation have made Taiwan Semiconductor a hot target for global investors to position themselves in AI. As of last Friday, Taiwan Semiconductor's ADR has surged by 66% year-to-date, while Taiwan-listed shares have risen by 55%. However, both stock prices are still well below their valuation peaks in 2021.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7c826e15-94da-4155-b9b6-38f35a401717.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7c826e15-94da-4155-b9b6-38f35a401717.png"/>
The outperformance of Taiwan Semiconductor's ADR is due to foreign investors finding it easier to invest in ADRs, which are included in multiple important indices and ETFs, such as the Philadelphia Semiconductor Index, VanEck Semiconductor ETF, and iShares Semiconductor ETF. This means that investors tracking these indices must buy Taiwan Semiconductor's American ADRs.
Brian Freitas, founder of research firm Periscope Analytics, explained:
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This is driven by supply and demand dynamics, not all foreign investors can hold Taiwan-listed shares, so they prefer to hold ADRs. In addition, there are some indices that only reference ADRs, so ETFs also have to buy U.S. stocks.
Furthermore, Taiwan Semiconductor's ADRs have always had a trading premium because they are interchangeable, unlike Taiwan-listed shares that require special regulatory approval to convert to U.S. stocks. Additionally, Taiwan Semiconductor's shares in the Asian market are heavily held by fund managers, making it difficult to further increase holdings in the stock
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Investors have always favored the arbitrage strategy of buying Taiwan Semiconductor's Taiwan-listed shares while shorting Taiwan Semiconductor's American Depositary Receipts (ADRs). Now, Taiwan Semiconductor's ADR premium over Taiwan-listed shares has climbed to its highest level since 2009

1. Core descriptive facts:
- TSMC's stock price surged due to recent news of chip price hikes.
- The premium of TSMC's ADR over Taiwan-listed shares reached a record high since 2009, with a premium of around 22% last Friday.
- TSMC's ADR premium peaked at 30% during the Lunar New Year holiday when the Taiwan stock market was closed.
- TSMC's ADR has outperformed Taiwan-listed shares due to easier accessibility for foreign investors and inclusion in various indices and ETFs.
2. Points and supporting logic:
- Arbitrage strategy of buying TSMC Taiwan shares and shorting TSMC ADR is becoming less effective due to the widening premium, reaching levels significantly above the historical average.
- Pictet Asset Management's Jon Withaar warns that the premium may continue to expand, posing significant risks to those betting on its normalization.
- TSMC's advanced technology and reasonable valuation attract global investors, leading to a surge in both TSMC's ADR and Taiwan-listed shares.
- Foreign investors prefer TSMC ADR due to easier access and inclusion in key indices and ETFs, forcing index-tracking investors to buy TSMC ADR.
- Periscope Analytics' Brian Freitas explains that the supply-demand dynamics, foreign investors' limited access to Taiwan-listed shares, and index requirements contribute to the persistent premium of TSMC ADR.
- TSMC ADR's interchangeability and the substantial holdings of TSMC shares by Asian fund managers make it challenging to further increase holdings, contributing to the trading premium.

Taiwan Semiconductor ADR rose too sharply, Wall Street can't handle "arbitrage trading" anymore