It's easy to find bears claiming that this stock, that stock or the entire market is wildly overpriced. Usually it's a matter of opinion -- but not with the newly listed New York shares of the South Korean tech darling SK Hynix.

Earlier this month, to much fanfare, the chip maker introduced American depositary receipts to add to its longstanding listing in Korea. Its new ADRs are each backed by one-tenth of a Seoul-listed share and can be converted into a Korean share with little effort.

No one in his or her right mind would choose to convert, though, because the U.S. stocks trade at a fat premium to the price in Korea, after adjusting for the currency.

It's yet another sign of the frothiness of the AI trade.

Since the ADRs listed two weeks ago, the premium has ranged from 16% to 51%. Americans are paying a high price for the convenience of buying the memory-chip maker's stock in New York, rather than finding a broker willing to trade the Korean shares. It's part of a willingness to overpay for chip stocks in general and memory stocks in particular.

The huge ADR premium is exactly the sort of thing that shouldn't happen in markets. Prices for, say, haircuts or hotels can diverge significantly because they can't be shipped to another location. But shares are virtual and can be moved instantaneously, so arbitragers usually step in and profit from any significant gaps between dual-listed stocks.

The problem is that there is no safe arbitrage between the Korean and American shares. While the ADRs can be converted into Korean shares, regulatory restrictions make it hard to convert them back, and impossible without the permission of the company.

For normal ADRs, Friday's premium of 29% would have hedge funds buying stocks in Seoul to convert into ADRs while short selling the ADRs in New York. But the inability to convert means the trade would leave them exposed to big losses if the premium gets even bigger.

Investors who want to buy and hold have a simple choice: Faced with paying 29% more for the same thing, one will find that it's well worth the hassle and cost of buying the local Korean stocks by calling a broker on the phone. (Mainstream U.S. brokers mostly don't offer online trading for Korea.) Professional traders are different and need a theory for why there is a premium.

Some premium is justified: South Korea has a trading tax, and the U.S. doesn't, while U.S. trading costs are lower and custody is cheaper. Also, ADRs are priced in dollars, so Americans don't need to protect against currency swings. Paul Foley, head of EMEA portfolio management at Dimensional Fund Advisors, points out that ADRs are more tax-efficient than Korean stocks in U.S. ETFs, too.

That justifies a premium of a few percentage points. Taiwan Semiconductor Manufacturing's ADRs, which are also hard to arbitrage, have a longer record. For the decade between 2010 and 2020, they had a 3.2% average premium. So long as the premium is broadly stable, it's fine to buy the ADR, because the premium should still be there when you come to sell.

But TSMC's ADR premium soared during the postlockdown bubble, and then again as artificial-intelligence demand drove U.S. buyers to bet on the supplier of chips to Nvidia. Since ChatGPT's 2022 launch, the TSMC premium has averaged 15%, as Americans proved willing to pay a lot more than Taiwanese investors.

The size of the SK Hynix premium shows that there is out-of-control demand to trade chip stocks in the U.S., even more than in Korea, home of gamified FOMO trading. According to UBS's HOLT valuation models, this shows up in normal stocks, too, where like-for-like valuations are far higher for U.S. technology stocks and especially chips than for Asian tech. But valuations are hard to compare; ADRs are literally receipts for the stocks listed elsewhere, offering a direct comparison.

A high ADR premium doesn't necessarily foretell disaster -- in 2008-09, TSMC's fat premium was the result of Taiwanese shares' falling much more than the ADRs.

Markets aren't perfectly efficient, but they are pretty efficient. Eventually enough people will wake up to the fact that with a little extra effort they can buy the same stock far more cheaply in Korea, or the company will issue more ADRs to profit from the premium, or interest will wane.

Buyers of the ADR would be fine if the premium falls because Korean shares catch up. But they will be hurt if the company uses the U.S. shares as a piggy bank, and hurt even more if the premium falls because chip stocks in both Korea and the U.S. plunge.

Meanwhile, of course, the premium might do anything -- including getting far bigger.

Write to James Mackintosh at james.mackintosh@wsj.com

(END) Dow Jones Newswires

July 25, 2026 22:00 ET (02:00 GMT)

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