Advantages of American Depository Receipts

  • 5 min read

Many investors question the notion of branching out to foreign markets. Why bother, they might think, when there are so many domestic markets to be active in? It’s just so much extra work! There are billions of dollars currently invested in American Depository Receipts (ADR) . That statistic alone implies that there are some significant advantages in this particular strategy. 

Here are six good reasons why it could make sense to investing ADRs.

1) You can get access to growth markets – many international markets, especially emerging markets, have higher GDP growth rates than Canada and the United States or Europe. After all, one of the most basic lessons of investing is to ensure that you are adequately diversified; there is no question that ADRs are a great avenue to diversify your portfolio.

2) You can benefit from currency swings – holding ADRs can result in favorable currency conversions for dividends and other cash distributions. For example, if you own shares of a European ADR and the euro strengthens against the dollar, any dividend increase will be boosted because the dividend payment has to be converted to dollars before you receive it.  (Of course, this could swing the other way.)

3) Stocks may be cheaper to acquire – perhaps the most tantalizing and exciting reason to invest is that you may uncover a hidden bargain that will provide stellar returns either over the short-term or the long-term.  Typically speaking, many US analysts are over-focused on domestic companies and may miss certain businesses that are delivering, or have the potential to deliver, results that far exceed anything that their US peers are delivering.  Of course, there are no guarantees and doing your research before you buy is more critical than ever.

4) It is a convenient way to invest – many individual investors have problems selecting foreign companies to invest in and then trying to figure out how to invest in them in a convenient and relatively cost effective fashion. With an ADR, you’re investing in a domestic financial institution that has purchased a certain amount of stock in a foreign company. You won’t have to open a separate brokerage account to invest overseas. In fact, most of the process will be identical to investing in a “regular” stock – for example ADRs trade during U.S. market hours and are subject to similar clearing and settlement procedures as American stocks.

The other thing to bear in mind is that many ADRs (Level II ADRs at least), must supply the same level of information as any other US security. Trading information is readily available, financials are reconciled to US Generally Accepted Accounting Principles (GAAP), and the SEC regulates the Company’s disclosure to investors.

5) It offers tax simplification – perhaps one of the hidden benefits of ADRs is that it simplifies the tax aspects of the transaction.  For example, selling shares in an Australian company, that you owned directly, would trigger tax in the Australian jurisdiction – however, selling from an ADR would trigger US tax.  It is generally simpler and more manageable to manage your tax affairs in one jurisdiction.

Trading foreign stocks with ADRs – can be an easier way to leverage foreign economic situations:

All of this is accomplished without actually trading on a foreign stock exchange, thanks to ADRs.

Of course, this line of thinking has some merit. It is different, and if you choose to trade ADRs, you’ll be stepping into a new territory. It can seem daunting to a novice. (If you’re an experienced and practiced investor, however, I can’t imagine that you’d take the “it’s too hard” stance and defend it!) There are upsides to taking your capital overseas, and it’s not just a function of taking extra steps to trade stocks.

The point, of course, is putting your money where the profit is. By reaching out beyond the bounds of domestic markets, you’re able to potentially leverage a broader variety of high-ROI opportunities. Massive growth in China or India? An ADR can put you there.

The American Depository Receipt simplifies matters considerably, although you’re still going to need to analyze the market before stepping into it. Continue to execute technical analyses of individual stocks, as well as monitoring broad-sweeping trends, and you could very well make a few lucrative additions to your portfolio.

6) ADRs make it easier to follow the data.

One common complaint about trading in foreign markets is the lack of quality information that’s available. Without solid data, it’s hard to make informed decisions after all – and this can put an investor in a very unwelcome position.

This is another reason why ADRs are so well-liked among savvy investors. Level II and Level III ADRs are regulated by the SEC, which means that they’re required to provide the same level of transparency as any domestic publicly-traded company. When you’re holding an ADR, you can rely on accurate periodic reports of financial standing and plans, just as you would with a domestic stock.

Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.