Taiwan Semiconductor Manufacturing (TSM.US) American Depositary Receipts (ADRs) have surged to their highest premium over the Taiwan-listed shares in more than 16 years, reigniting concerns about potential overheating in the artificial intelligence investment boom.

Data reveals that Taiwan Semiconductor Manufacturing ADRs traded at an average 24% premium to their Taiwan-listed counterparts in July, up from 17% in April and well above the 10-year average of 7.4%. While Taiwan Semiconductor Manufacturing ADRs have historically maintained a premium over the Taipei-listed shares, July's price differential has reached its highest level since April 2009.

Vincent Fernando, Executive Director at investment research firm Zero One, explained: "On one hand, investors are increasingly focused on Taiwan Semiconductor Manufacturing's pivotal role in the global AI supply chain, which has significantly boosted demand for its ADRs in the US market. However, ADR supply remains relatively fixed, with limited new issuance capacity and increasingly challenging conversion operations. This has led to an expanding trading range for the ADR premium."

The historical premium for Taiwan Semiconductor Manufacturing ADRs stems from two primary factors: First, they are fungible (freely tradable between markets), while Taiwan-listed shares require special regulatory approval to convert to the US version. Second, they are included in indices such as the Philadelphia Semiconductor Index, requiring exchange-traded funds (ETFs) tracking these indices to purchase the ADRs.

Since the launch of ChatGPT in 2022, Taiwan Semiconductor Manufacturing ADRs have surged over 190% through Thursday, while the company's Taipei-listed shares have gained less than 140%. During this period, foreign ownership of the latter has risen to nearly 74%, though still below the historical record of 80% set in 2017.

Market observers, including Owen Lamont, a portfolio manager at Acadian Asset Management, view this widening premium as a cautionary signal. Lamont stated: "When US ADRs of popular technology companies trade at excessive premiums relative to their domestic shares, it often signals a bubble in the US market. I see many signs of overheating in the current market environment."