Popular Arbitrage Trade Backfires as TSMC Frenzy Grows in US

TSMC's American Depositary Receipts (ADRs) trade at a premium compared to the Taiwan shares primarily due to several factors including accessibility, demand, and fungibility6.

1. Accessibility: TSMC's ADRs are more easily accessible to foreign investors as they are traded on US exchanges and can be bought and sold like any other US stock. On the other hand, not all foreign investors can hold the Taiwan stock, making the ADRs more attractive.

2. Demand: The ADRs are also included in popular indices such as the Philadelphia Stock Exchange Semiconductor Index and in exchange-traded products like the VanEck Semiconductor ETF and iShares Semiconductor ETF. This means that funds tracking these indices must buy the US-listed securities, leading to higher demand and, therefore, a higher price.

3. Fungibility: TSMC's ADRs are fungible, meaning they can be exchanged for the Taiwan shares. However, the Taiwan shares need special regulatory approval to be converted into the US equivalent, making the ADRs more convenient to trade.

4. AI Boom: The current boom in artificial intelligence has led to increased interest in semiconductor companies like TSMC, driving up the price of the ADRs.

In summary, the premium at which TSMC's ADRs trade compared to the Taiwan shares is due to their accessibility, demand from index funds, fungibility, and the current AI boom.

The surge in TSMC's American Depositary Receipts (ADRs) compared to its Taipei shares can be attributed to several factors:

1. Enthusiasm over artificial intelligence in the US: The growing excitement about AI has pushed TSMC's ADRs to their most expensive price compared to the Taiwan stock since 2009. As of Friday, they traded at a premium of around 21%, compared with less than 8% for the five-year average.

2. Accessibility for foreign investors: TSMC's ADRs are more easily accessible to foreign investors, making them more attractive. They are also included in gauges like the Philadelphia Stock Exchange Semiconductor Index and in exchange-traded products such as the VanEck Semiconductor ETF and iShares Semiconductor ETF, meaning that funds tracking them must buy the US-listed securities.

3. Fungibility: TSMC's ADRs have typically traded at a premium because they're fungible, unlike the Taiwan shares, which need special regulatory approval to be converted into the US equivalent.

4. Heavy ownership of Taiwan shares: The Asian security is already heavily owned by fund managers, making it difficult for them to increase their position further. In contrast, the ADRs provide an alternative way for investors to gain exposure to TSMC.

5. AI sector remaining hot: The AI boom is not over, with Nvidia Corp. worth more than $3 trillion in market value and a gauge tracking semiconductor shares at a record high. TSMC's ADRs premium over the local stock has climbed to an average of almost 17% this quarter after reaching 30% in February.