Korean ADRs Outperform Underlying Shares Despite Sluggish U.S. Markets

7 Out of 8 Korean ADRs Outperform Underlying Shares
ADR Investment for Excess Returns Not Recommended
Dividend Stocks Dominate Korean ADRs, Year-End Demand Anticipated

While the New York Stock Exchange has posted lower returns compared to the Korean stock market so far this year, it has been found that most American Depositary Receipts (ADRs) of Korean companies have outperformed the returns of their underlying shares listed in Korea.

According to the Korea Exchange on December 11, the KOSPI closed at 4,135.00, down 0.21% from the previous day, while the KOSDAQ ended at 935.00, up 0.39%. Year-to-date, the KOSPI and KOSDAQ have surged by 72.33% and 37.87%, respectively. During the same period, the three major New York indices-Dow Jones (+11.79%), S&P 500 (+16.30%), and Nasdaq (+22.09%)-have significantly lagged behind.

Despite this outperformance by the Korean stock market, for some stocks, the main shares have trailed their ADR counterparts. The ADRs listed in the United States have surpassed the gains of the underlying shares listed in Korea. For example, LG Display’s ADR jumped 44.63% year-to-date as of the previous day, outpacing the underlying share’s 38.88% increase. Similarly, Korea Electric Power Corporation’s ADR rose 151.45%, exceeding the underlying share’s 148.38% gain.

Financial stocks have also seen relatively better performance from their ADRs. Year-to-date, the ADRs of Woori Financial Group and KB Financial Group returned 83.97% and 52.02%, respectively, surpassing the returns of their underlying shares (79.25% and 50.18%). In addition, POSCO Holdings, KT, and Shinhan Financial Group saw slightly higher returns from their ADRs. However, despite a decline in its share price, SK Telecom’s underlying share (-2.9%) performed better than its ADR (-3.42%).

An ADR is a substitute certificate created to allow U.S. investors to conveniently trade foreign companies’ stocks in the U.S. market. When a foreign company deposits its shares (the underlying shares) with a local custodian bank, a U.S. custodian bank issues a dollar-denominated certificate backed by these shares, which can then be traded like a U.S. stock. Recently, news that SK Hynix is considering listing its treasury shares as ADRs has also fueled a rally.

An official from a securities firm commented, “This year, the U.S. stock market has shown a slower upward trend compared to the KOSPI, and it is noteworthy that ADRs have outperformed the underlying shares, even though ADRs generally have lower trading volumes than stocks directly listed in the U.S.” He warned, however, “In today’s high exchange rate environment, investors chasing only excess returns from ADRs could face losses.” In fact, Coupang, which is directly listed on the Nasdaq, has an average daily trading volume of 10 million shares, but except for KT (1.4 million shares), Korean ADRs have an average daily trading volume of less than 1 million shares.

Nevertheless, as a large number of dividend stocks, including financial holding companies, are included in Korean ADRs, there are growing expectations for increased demand toward the end of the year. For example, Korea Electric Power Corporation, which posted the highest year-to-date return among Korean ADRs, recorded a cumulative standalone net profit of 4.9 trillion won in the third quarter this year, indicating ample resources for dividends.

Song Yurim, a researcher at Hanwha Investment & Securities, raised the target price for Korea Electric Power Corporation from 46,000 won to 64,000 won, stating, “With earnings estimates being revised upward throughout the year, the company has entered a phase where expectations for dividend expansion are rising.” She estimated the dividend per share (DPS), assuming a payout ratio of 20%, at 1,980 won.

SK Telecom, which is the only ADR to have posted a negative return this year due to the aftermath of a hacking incident, is also expected to see its earnings and dividends return to normal in 2026. Choi Minha, a researcher at Samsung Securities, said, “Although dividends decreased this year due to the absence of a third-quarter payout, in 2026, dividend growth is expected as profits normalize and non-core assets are disposed of. The foreign ownership ratio has also fallen to 36%, which is favorable compared to competitors in terms of supply and demand.” She estimated SK Telecom’s DPS for next year at 3,000 won (dividend yield of 5.5%).