{"id":21957,"date":"2011-06-27T01:00:00","date_gmt":"2011-06-27T05:00:00","guid":{"rendered":"http:\/\/www.investmentu.com\/?p=21757"},"modified":"2011-06-27T01:00:00","modified_gmt":"2011-06-27T05:00:00","slug":"adrs-an-easy-way-to-invest-in-international-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/06\/27\/adrs-an-easy-way-to-invest-in-international-stocks\/","title":{"rendered":"ADRs: An Easy Way to Invest in International Stocks"},"content":{"rendered":"

An Easy Way to Invest in International Stocks<\/a><\/p>\n

by Carl Delfeld<\/a>, Investment U<\/em> Senior Analyst
\nMonday, June 27, 2011<\/p>\n

As interest in investing in overseas markets has grown, so has interest in foreign stocks listed on US exchanges. These are known as American Depository Receipts or ADRs for short. Let’s learn a bit about how they work, the benefits to you as an investor.<\/p>\n

ADRs which are certificates issued by a U.S. bank representing shares in a foreign stock that is traded on a U.S. exchange. Sounds complicated but ADRs are actually designed to make investing in overseas companies easy.<\/p>\n

They are not some new fangled financial invention. JPMorgan created the first depositary receipt in 1927 for UK retailer Selfridges. There are now almost 2,000 ADRs from over 80 countries listed on NYSE, AMEX or NASDAQ exchanges.<\/p>\n

But, as we shall learn, not all are equal.<\/p>\n

The growth of ADRs during the last 25 years has been impressive. ADRs now account for more than 15 percent of the value of the entire U.S. stock market.<\/p>\n

In America alone, the level of investment in foreign equities exceeds $2 trillion, reflecting 100-fold growth since 1980. One good example is British Petroleum (BP). In many ways, it is more an American than British are. It is the largest producer of oil and gas in the U.S. and over the past five years has invested more than $30 billion in U.S. energy projects. In addition, Americans own around 40 percent of BPs shares.<\/p>\n

Foreign companies like ADRs because they get more U.S. exposure, allowing them to tap into the wealthy North American equities markets to raise capital and broaden share ownership at the same time.<\/p>\n

Here is a quick primer on ADRs.<\/p>\n

What are the benefits of ADRs?<\/strong><\/p>\n

    \n
  1. Denominated in U.S. dollars and depositary bank will convert any dividends or other cash payments into U.S. dollars before sending them to you<\/li>\n<\/ol>\n
      \n
    1. Offer a cost-effective way to buy shares in a foreign company and avoid foreign taxes on each transaction.<\/li>\n<\/ol>\n

      However, keep in mind that ADRs do not eliminate the currency and economic risks that go along with investing in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. This has been a welcome feature for the last few years, as the U.S. dollar has declined<\/a> relative to most major currencies but it could go the other way as well.<\/p>\n

      Are All ADRs equal<\/strong>?<\/p>\n

      It is important that investors realize that there are three different types of ADR issues which have different SEC reporting requirements:<\/p>\n