American Depositary Receipts are a type of equity security.
An American Depositary Receipt, which is commonly called an ADR, is a certificate issued by a US depository bank. ADRs enable foreign equities to be traded on US stock exchanges. The term is sometimes used interchangeably with American Depositary Shares, but an ADS is the US dollar-denominated equity share of a foreign-based company, which can be purchased on an American stock exchange. So, the whole bundle is an American Depositary Receipt and the individual shares are called American Depositary Shares.
An ADR certificate represents an investment in the stock of a foreign company. A certificate can represent just one share of the stock or many shares.
American Depositary Receipts are kept safe in the vaults of US banks that issue the ADR. However, the stock shares the ADRs represent remain where the company is based and are held in that country by a US depository bank’s representative. Owning an ADR gives you the ability to obtain the non-US equity it represents.
ADRs look and trade almost the same way as US stocks. The major difference is while they trade on US exchanges, they represent shares in foreign stocks.
There are a few ways to tell an ADR from a US stock. For example, when you look up a stock online, you may see some letters after the company name.
For instance, when you look up Interactive Brokers, or our ticker, which is IBKR, you will see Interactive Brokers Group, Inc. When you look up JP Morgan, or JPM, you will see JPMorgan Chase & Co.
When you search for a non-US company, you will often see suffixes other than Inc., Corp. or Co. For instance, try looking up the German bank Commerzbank and you will see Commerzbank “A G” – with the ticker CRZBY. Or Heineken, whose official corporate name is Heineken “N V” – which trades under the ticker HEINY.
However not all foreign company names are followed by a foreign suffix. Take Honda Motor Company for example, which trades Over the Counter under the ticker HNDAF.
A more fool proof way to determine whether a stock is an American Depositary Receipt is to go to websites operated by BNY Mellon or JPMorgan which display information about ADRs. Go to one of these websites and simply type in the company’s name or its ticker symbol into the search field. If information on the company appears, the stock is an ADR. If not, it’s not. Try this out for Alibaba, a Chinese company that trades under the ticker BABA.
Here are links to those websites:
You can also find the links for these two ADR sites in the additional information for this lesson.
Investing in ADRs vs foreign stocks
ADRs were created to make it simple for US investors to invest in foreign companies. While Interactive Brokers enables its clients to invest in over 125 markets in more than 30 countries from a single account, many brokerage firms don’t provide such broad access. ADRs provide easy accessibility and avoid the necessity to set up brokerage accounts to buy stocks in a foreign market.
ADRs also are denominated in US dollars. That makes it easy to report gains and losses to the Internal Revenue Service. Dividends are also paid in US dollars, so investors don’t have the hassle of converting dividends from a foreign currency to US dollars.
Potential benefits of ADRs
Available to US investors
ADRs open the world up to US investors who might otherwise not be able to invest in foreign companies easily, or at all.
For example, say you are a US citizen and you want to invest in the Japanese technology company Canon. You could purchase ADRs of Canon right here in the States on the New York Stock Exchange, under the ticker CAJ. Or if you wanted exposure to the Belgium pharma and biotech firm Galapagos, you could purchase that ADR under the ticker GLPG on the Nasdaq.
Available from US brokers
ADRs are traded on the Nasdaq, New York Stock Exchange or Over the Counter. They are bought and sold the same way regular stocks are. You can buy ADRs through US broker-dealers, including Interactive Brokers. This makes them easy-to-trade.
Pricing and dividends in dollars
As mentioned above, ADR prices are quoted in US dollars and dividends are paid in dollars. Because investors are purchasing them in US dollars, they eliminate the necessity of exchanging currency to invest in a non-US company.
Investing in ADRs provides diversification outside of the US.
Like all investments, there are risks related to investing in American Depositary Receipts. For example, ADRs have certain risks associated with investing in foreign companies. These risks include, but are not limited to, political, exchange rate* and inflation risk.
One of the drawbacks of investing in ADRs is the potential for double taxation. Capital gains can be taxed both by the Internal Revenue Service and by the equivalent organization in the foreign country where the company is headquartered. Investors may need to file paperwork to avoid paying capital gains taxes twice.
It’s important to consider the withholding tax rates for the country where the company you are investing in is based. Those rates are available on the S&P website. A link to the rates is included in the extra information section.
Because of the tax implications of investing in ADRs, you may want to consult a tax specialist before you invest.
An ADR depository bank may charge a fee, referred to as the custody fee. This fee can be used to cover the expenses the depository bank incurs for creating and servicing the ADR.
These costs may include:
- Holding the non-US shares underlying the ADR
- Registering the ADR with the SEC
- Communicating with shareholders
- Providing record-keeping services
- Paying dividends
- Covering compliance costs associated with the ADR
Not all ADRs have service fees. For those that do, the fees usually range from a penny to three cents per share. The fee is either deducted from dividends, if the company pays them, or passed through by the brokerage firm.
Where and when do ADRs trade?
American Depositary Receipts are similar to US stocks. As noted earlier, they trade on markets in the United States, such as the Nasdaq and the New York Stock Exchange, and are traded in the same way that other stocks trade in the US. In addition to the NYSE and Nasdaq, ADRs are also sold “over- the-counter” which means trading is done directly between two parties and not through an exchange.
ADRs trade during US trading hours.
When were ADRs created?
ADRs were created in 1927 by J.P. Morgan. They created the first one for Selfridges, a British retail company.
The first ADR was listed on the New York Curb Exchange, which became the American Stock Exchange.
According to the Securities and Exchange Commission, as of 2019 there are now over 2,000 ADRs which represent shares of companies based in more than 70 countries!
Today, US depository banks can create ADRs. And more ADRs are being added regularly. Examples of the most recently created ADRs can be found on the “Depositary Receipts” section of the BNY Mellon website. A link to the website is also included in the additional information for this course.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.