6. Don't buy TSM ADRs

We all know that semis are hot right now. TSMC, arguably the most important business in the sector (and one of the most important businesses in the world) reached ATHs overnight in Taiwan trading. That’s not to say that TSMC is overvalued (I think the opposite, but that’s for another discussion).

US/EU-holders of TSMC normally buy TSMC through the US ADRs (American depositary receipts), whereby 1 ordinary Taiwanese share of TSMC (ticker 2330 TT) corresponds to 0.20 ADRs (ticker TSM US). In a frictionless world, adjusting for the 1-for-5 multiplier and the FX rate, the price should be the same. But with ADRs of Taiwanese (and some Indian) companies, usually there’s a premium. Below is the chart of the TSM US premium over 2330 TT.

The premium is 21.5% this morning. It looks a bit drastic to me. Yes, TSM US is more liquid than 2330 TT ($1.6B ADV vs $1.2B ADV). But $1.2B is not illiquid. Access to Taiwanese shares for international investors is gradually improving. E.g. in July 2023 Interactive Brokers (IBKR US) let its client base trade Taiwanese shares. Insitutional holders who run US/EU products with no off-benchmark carve-outs won’t hold 2330 TT shares but if you look at the holder list of TSM US (see table below), there are some global funds who are definitely big enough to have prime broker / custodian relationships to hold Taiwan shares directly. Makes little sense for them to hold the ADR instead of the ordinary shares, besides some possible legacy reasons or inertia.

Historically, the ADR premium fluctuated. Look at Q4 2022. In Q4 2022, the US tech sector (e.g. QQQ) and semi indices were at their local lows. That was also the quarter when the US BIS significantly tightened the export controls of semicaps to China. Semis sentiment was bad - buyside I talked to didn’t want to buy; management teams I talked to were downbeat. Perhaps it is no coincidence that at that time, the ADR premium compressed to 0.

To conclude: if you want to own TSMC, own it directly. Or if you buy the ADR, be aware that you have a 20% headwind working against you (which is sizeable).

DISCLOSURES: Standard stuff i.e. no financial advice (NFA), DYODD, and I might have positions in securities mentioned above.