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, some individual stocks have seen their ADRs outperform the underlying shares. For example, LG Display's ADR jumped 44.63% year-to-date as of the previous day, surpassing the 38.88% gain of its underlying share. Similarly, Korea Electric Power Corporation's ADR rose by 151.45%, outpacing the 148.38% return of its underlying share.

Financial stocks also saw relatively better performance from their ADRs. Year-to-date returns for Woori Financial Group and KB Financial Group ADRs were 83.97% and 52.02%, respectively, exceeding the underlying shares' returns of 79.25% and 50.18%. In addition, POSCO Holdings, KT, and Shinhan Financial Group also saw slightly higher returns on their ADRs. However, despite a decline in the 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 American investors to conveniently trade foreign companies' shares on the U.S. market. When a foreign company deposits its shares with a domestic custodian bank, a U.S. custodian bank issues a dollar-denominated certificate backed by those shares, which is then listed and traded like a regular U.S. stock. Recently, SK Hynix has reportedly been considering listing its treasury shares as ADRs, leading to a surge in its stock price.

An official at a securities firm commented, "The U.S. stock market has shown more modest gains compared to the KOSPI this year, and it is noteworthy that ADRs have outperformed their underlying shares despite generally having lower trading volumes than stocks directly listed in the U.S." However, he warned, "If investors chase excess returns by investing in ADRs during this period of high exchange rates, they may suffer 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 average daily trading volumes of less than 1 million shares.

Nevertheless, with a large number of dividend stocks, including financial and holding companies, included among Korean ADRs, there is growing anticipation for increased demand toward the end of the year. For example, Korea Electric Power Corporation, which has the highest year-to-date return among Korean ADRs, posted a cumulative standalone net profit of 4.9 trillion won in the first three quarters of 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, "As earnings estimates have been revised upward throughout the year, we have entered a phase of heightened expectations for increased dividends." Assuming a dividend payout ratio of 20%, the estimated dividend per share (DPS) is 1,980 won.

SK Telecom, the only ADR to post a negative return this year due to the impact 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, explained, "Dividends decreased this year due to the absence of a third-quarter dividend, but in 2026, dividends are expected to increase as profits normalize and non-core assets are disposed of." He added, "The foreign ownership ratio has also dropped to 36%, which is favorable compared to competitors in terms of supply and demand." Next year, SK Telecom's DPS is estimated at 3,000 won, with a dividend yield of 5.5%.