American Depository Receipts (ADRs) allow U.S. investors to access global businesses that have their primary listings and trade on foreign stock exchanges. This includes companies like Adidas, Nestle, Volkswagen, Nintendo, Tesco, Roche, Tencent, and Softbank.
At M1, we’re always working to increase your access to high quality investments that expand your opportunities. That’s why you can now invest in ADRs on M1, including Roche Holding Ltd Sponsored ADR (RHHBY), Tesco PLC Sponsored ADR (TSCDY), Nestle S.A. Sponsored ADR (NSRGY), and more.
In this post, we’ll share how ADRs work, what to consider before buying, and how to add these global securities to your portfolio.
What are American Depository Receipts?
American Depository Receipts are securities that represent one or more shares of a non-U.S. company. They exist to give U.S. investors access to foreign stocks that otherwise wouldn’t be available to them and make it easier for businesses to enter U.S. capital markets.
ADRs trade on U.S. exchanges or over-the-counter (OTC) markets with U.S. dollars. These shares often trade via OTC markets because foreign companies don’t want to, or can’t, meet the requirements to list on a U.S. exchange. For example, the cost to list on Nasdaq is upwards of $50,000, and the New York Stock Exchange charges $25,000 to apply and an additional $259,000 to list.
This barrier to entry can push both small and large foreign companies to OTC markets, which are classified based on risk. These three tiers are OTCQX, OTCQB, and Pink Market.
According to the Securities and Exchange Commission, a U.S. bank created the first ADR in 1927 to give American investors access to shares of a British department store. Today, there are more than 2,000 ADRs representing shares from more than 70 countries.
How do ADRs work?
A depository bank creates American Depository Receipts. To offer an ADR, an American bank purchases foreign shares and make the securities available to U.S. investors.
An ADR may represent shares on a one-to-one ratio, a fraction of a share, or multiple shares. The ratios mimic U.S. stock market prices, so investors can relate the securities to other investments.
Not all American Depository Receipts are the same — they can be sponsored, unsponsored, listed, or unlisted.
- Sponsored ADRs: A bank issues these securities on behalf of a foreign company. The bank and business enter into a legal arrangement where the non-U.S. company pays the costs associated with the ADR but retains full control over it. The bank then handles transactions with investors. If a company wants to trade shares in the U.S.—but doesn’t want to pay the New York Stock Exchange listing fee—it could enter into a sponsored ADR. But sponsored programs only offer one ADR per company.
- Unsponsored ADRs: A bank can also issue an unsponsored ADR, but this receipt doesn’t have permission from the foreign business. This means there could be multiple shares from the same foreign business available through various U.S. banks.
- Listed ADRs: Listed versus unlisted refers to where the ADR trade takes place. If the trade is on a recognized securities exchange, such as the New York Stock Exchange, it will be subject to the listing standards of all other companies on that exchange. Any listed ADR must be sponsored.
- Unlisted ADRs: If the security isn’t listed on an exchange, it may trade through other marketplaces, such as the over-the-counter (OTC) market. This process occurs via a broker-dealer network, as opposed to a centralized exchange. These securities are either sponsored or unsponsored.
Before investing, make note of the specific type of ADR so you understand the risks and benefits.
How do ADRs differ from U.S. stock?
ADRs give investors indirect exposure to foreign stocks they would otherwise have to trade on a local exchange in local currency.
Let’s say you’re interested in investing in Adidas, which is based in Germany. You have a few options. You can open a foreign brokerage account in Germany, wire money to an international bank, and convert your U.S. dollars to euros. Only after this complex and lengthy process could you purchase Adidas stock. Or you can buy an ADR of Adidas made available to you on American exchanges or over-the-counter markets. Since these securities trade and pay dividends in U.S. dollars, rather than foreign currency, you don’t have to pay exchange fees or open foreign accounts.
That said, there are several risks to consider when investing. The sponsor bank may issue depository fees, typically a few pennies per share that can be deducted from paid dividends. Some countries also make investors pay a withholding tax on dividends, which often ranges from 15-35 percent. This can result in double taxation, but many countries have tax treaties with the U.S. that can decrease the withholding rate. You’ll also want to factor in the business and political landscapes of the company and country connected to the ADR.
Prior to investing in ADRs, make sure to fully evaluate the risks and benefits attributed to these securities.
Investing in American Depository Receipts on M1
You can invest in ADRs on M1 just as you would in any other stock from domestic companies, including:
- TCEHY: Tencent Holdings Ltd. Unsponsored ADR
- BHPLF: BHP Group Ltd
- RHHBY: Roche Holding Ltd Sponsored ADR
- TSCDY: Tesco PLC Sponsored ADR
- ADYEY: Adyen N.V. Unsponsored ADR
- PROSY: Prosus N.V. Sponsored ADR
- SFTBY: SoftBank Group Corp. Unsponsored ADR
- NTDOY: Nintendo Co., Ltd. Unsponsored ADR
- LNSTY: London Stock Exchange Group plc Sponsored ADR
- VWAGY: Volkswagen AG Unsponsored ADR
- NSRGY: Nestle S.A. Sponsored ADR
- LVMUY: LVMH Moet Hennessy Louis Vuitton SE Unsponsored ADR
- ADDYY: Adidas AG Sponsored ADR
- CABGY: Carlsberg AS Sponsored ADR Class B
When choosing to invest in ADRs, it’s important to know how we select the shares. All are large market capitalization foreign securities that have their primary listings in developed economies with local listing standards. They have significant liquidity in both the OTC and local markets.
As always, make sure to do your research to understand the political, economic, and social elements at play in the company’s home country. Like U.S. stocks, these factors can impact the share price and the stability of the security.
We’ll continue to make more American Depository Receipts available to you, so keep an eye on our full list of offerings to access diverse, global investments.
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