1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

ADRs were first introduced in the United States in 1927.  They represent a specific type of global depositary receipt (GDR) that was first issued in London and Luxembourg.  A GDR represents a security that trades outside a company’s home country.  In the case of an ADR, it represents a claim on a company based outside of the United States.  The ADR represents a specified number of shares in a foreign corporation and represents a way for foreign firms to raise capital from U.S.-based investors. ADRs are bought and sold on U.S. stock markets just like regular stocks and are issued/sponsored in the U.S. by a bank or brokerage firm. (Related: How are American Depository Receipts (ADRs) priced?)

ADRs were introduced in response to the difficulty of buying shares from other countries which trade at different prices and currency values. U.S. banks simply purchase a large lot of shares from a foreign company, bundle the shares into groups and reissue them on a U.S.-based exchange. The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. For example, a ratio of 4:1 means that one ADR share represents four shares in the foreign company.

There are several types of ADRs that foreign-based companies can utilize to gain a presence in U.S. markets.  There is an option for the security to trade on an over-the-counter (OTC) exchange, which has less stringent requirements than on a listed exchange.  This overview provides more detail on these specific types.

 

Objectives and Risks

ADRs offer an opportunity for foreign-based firms to raise capital in the United States.   Filing requirements from stock exchanges and the Securities & Exchange Commission (SEC) can also provide another level of detail and comfort for investors concerned about less stringent reporting requirements in certain foreign jurisdictions. (Related: https://www.investopedia.com/ask/answers/06/adshares.asp)

Even though ADRs trade on domestic U.S. exchanges, they still represent interests in foreign-based companies.  Below are additional considerations that come with international investing:

Political Risk – Though it may not seem it, the U.S. government is the most stable in the world.  Investing in other countries generally carries additional political risk, though most developed markets have similarly stable governments and related institutions.

Currency/Foreign Exchange Rate Risk – Currencies fluctuate against each other.  As such, foreign exchange risk represents a very significant additional factor to consider when investing in ADRs and outside U.S. borders.

Inflationary Risk – Inflation represents a risk of loss in purchasing power.  Foreign-based companies are subject to the monetary systems and central banking policies of the countries they are based in.

 

How to Buy or Sell It

As detailed above, the vast majority of ADRs trade on U.S. exchanges.  As such, they are among the most liquid securities in the world.  Investors can buy or sell and ADR and the trade will settle in “T+2” days, or 3 days including the day the ADR was traded, and two additional days for the cash to settle and the transaction to be completed.

 

Strengths

 

Diversification into international markets but domestic-based stock market exchange exposure and domestic security filing requirements

ADRs can quickly and conveniently be converted into cash

Ability for foreign-based firms to raise capital

 

Weaknesses

 

Higher political, currency, and inflationary risk

Risk that a company eliminates its ADR security, which has occurred since the 2008 financial crisis and Sarbanes Oxley regulation during the dot com bubble.

Filing requirements still aren’t as stringent as U.S-based firm requirements.

 

Key Considerations

 

Liquidity:  High

Historical Returns:  High

Inflation Protection:  Medium


25 Investments: Annuity
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