Nov 01
ADRS: What you need to know about American Depository Receipts
in Investing

This post was originally made on August 16, 2006 on a former blog of mine.

Owning an American Depository Receipt, ADRs as they are called for short, is slightly different than owning a share of a stock in a US company. There are a few things you need to be aware of before deciding to buy one.

First, let’s discuss exactly what an ADR is. The way an ADR typically works is that a foreign corporation wishes to “list” its stock on the American stock exchanges. They do this because it makes it easier for Americans to purchase ownership in their company. Buying an ADR on a US stock exchange is easier for an American investor than opening an account in a foreign country and buying stock through the local exchange. What generally happens is that a large bank or institution with offices in the home country of the issuing company will buy a large block of stock and then hold it in a trust. American Depository Receipts are then created against the shares of stock held in that trust. The ADRs are then listed on the stock exchanges and traded in the market very similar to stocks.

A few things you need to know about ADRs:

  • Voting - Owners of foreign ADRs have NO VOTING RIGHTS. You do not have the same control over the company as you do with a US common share.
  • Regulation - Companies issuing ADRs are not required to register with the SEC.
  • Dividends - dividends paid as a result of ownership of an ADR are “declared” in the foreign currency but “PAID” in US dollars. This means that, as with most foreign investments, you have exchange rate risk associated with the asset. If the USD appreciates vs. the foreign currency then your dividend will buy less USD coming back and you will be out some money. If the USD goes down against the currency then you will make a bit more.
  • Taxation - some foreign countries require taxes to be withheld from dividend payments. You may find that your dividend payment was reduced prior to it even being converted back into dollars.
  • Other Considerations - of course, investing in foreign countries involves many other types of risks you should be aware of including political risk and inflationary risk (does not have to be the same as the risk in the US).

There are those out there who believe that owning an ADR of a foreign company is exactly like owning a share in a US company. Just be aware that the two things are NOT equivalent. There are different risks associated.

Investopedia has a more in depth discussion of ADRs if you are in search of a more detailed explanation.

2008 Update: Another great resource for ADRs is ADR.com.

More on these topics (tags): , ,
Related Posts

2 Responses to “ADRS: What you need to know about American Depository Receipts”
 

While you are technically correct in saying that ADRs (by themselves) have no voting rights, the statement is misleading. Each depository receipt is tied to an underlying share, or underlying shares, of the voting stock of a company. As a result, the bank acting as the depository retains the voting rights to the securities which, in every case that I’ve reviewed, are then extended to the holders of the ADRs. So, while the ADRs don’t, by themselves, have voting rights, holders of ADRs do exercise the voting rights of the underlying stock.

Seymour wrote on March 25th, 2008 at 3:29 pm

 

Thanks for the info Seymour. I was unaware of the pass through shareholder rights. Thanks for clarifying.

Of all the ADRs I have ever held, never once have I received a proxy statement or anything of the nature requesting a vote, either from the ADR company or by way of the depository bank.

Jeff wrote on March 25th, 2008 at 6:55 pm

Leave a Reply

 
The opinions expressed on this site are those solely of Jeff Howard and do not necessarily represent those of Black Swan Financial, Inc. (“BSF”). This website is for educational purposes only. Mr. Howard is the owner of BSF, a Registered Investment Advisor in the state of Georgia. This website is for informational purposes only and does not constitute a complete description of the investment services or performance of BSF. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. A copy of BSF’s Form ADV Part II (disclosure statement) and privacy policy are available upon request. This website is in no way a solicitation or an offer to sell securities or investment advisory services and no investment recommendations should be implied from any of the opinions stated herein. Mr. Howard and BSF disclaim responsibility for updating information. In addition, Mr. Howard and BSF disclaim responsibility for third-party content, including information accessed through hyperlinks. Please do not rely upon the information presented here to make financial decisions without first consulting a financial advisor who knows the specific details of your personal situation.