SK hynix ADR premium nears 40% as index inclusions fuel further demand

The premium on SK hynix's American depositary receipts has approached 40% over the company's domestic shares as the ADR continues to be added to major US semiconductor indexes and ETFs. Analysts say passive fund inflows could push the premium even higher.

According to Investing.com, the premium on SK hynix's ADR over its domestic shares stood at 38.90% as of Monday. The monthly average ADR premium expanded from 30.67% in July to 39.57% this month — far above TSMC's five-year average ADR premium of 12.6%.

The ADR premium measures how much more expensive the ADR price is compared with the domestic share price after adjusting for the exchange rate. A premium approaching 40% means SK hynix's ADR is trading roughly 40% above the won-equivalent value of its domestic shares on the Korean market.

SK hynix's ADR is a US-listed security backed by the company's domestic shares. Ten ADR units carry the same intrinsic value as one domestic share.

The premium is driven by strong investor demand, limited supply in circulation and restrictions on converting between domestic shares and ADRs. With SK hynix's ADR now being added to major US semiconductor indexes in succession, demand is expected to grow further. Analysts say the elevated premium could persist for now as ETFs and funds tracking those indexes continue to buy.

VanEck Semiconductor ETF (ticker: SMH), the largest semiconductor ETF listed in the United States, added SK hynix's ADR through its regular rebalancing on Friday, following a periodic change to its underlying benchmark, the MVIS US Listed Semiconductor 25 index. As of Monday, SK hynix's ADR accounted for 4.60% of SMH, with a valuation of approximately $3.34 billion.

iShares Semiconductor ETF (SOXX) also added SK hynix's ADR in its September rebalancing, after the ADR was included in the NYSE Semiconductor Index. As of Monday, SK hynix's ADR held a 3.18% weighting in SOXX, with holdings valued at $1.53 billion — a larger share than TSMC, which stood at 2.97%.

Direxion Daily Semiconductor Bull 3X Shares (SOXL) also held SK hynix's ADR at a 2.14% weighting as of Monday, with a valuation of approximately $517.51 million.

Markets are now watching the NASDAQ 100's regular December rebalancing. If SK hynix's ADR is added to the index, it could trigger additional inflows from ETFs tracking the NASDAQ 100.

"There is passive fund demand for the ADR, and that demand can translate into outperformance — that is, a premium," said Yoon Jae-hong, a researcher at Mirae Asset Securities. Yoon estimated that potential demand from semiconductor index ETFs and NASDAQ 100 index ETFs could reach $340 million and $450 million, respectively.

The growing inclusion of SK hynix's ADR in US-listed ETFs is also expected to increase indirect exposure for domestic investors. According to the Korea Securities Depository, Korean investors held $5.63 billion worth of SOXL as of Friday. They also held approximately $1.38 billion in SOXX and $866.3 million in SMH.

Domestically listed ETFs are also expanding their SK hynix ADR holdings. Kodex US Semiconductor added SK hynix's ADR at roughly a 4.8% weighting on Monday. In addition, 10 Korea-listed ETFs — including Time Global AI Active and Tiger Global AI Active — already hold SK hynix's ADR.