What is an ADR?
Provided by RBC Wealth Management
and Dave Dupont
The desire for global diversification and a more efficient manner in which to invest has resulted in the growth of American Depository Receipts (ADRs). Essentially, an ADR is a security that trades like a stock on U.S. exchanges, and represents a specific number of ordinary shares in a non-U.S. company. Instead of buying shares of foreign-based companies in overseas markets, investors can buy shares in the United States in the form of an ADR.
ADRs are structured as follows:
Level I-sponsored ADRs trade on the U.S. over-the-counter (OTC) market but are not required to adhere to Securities and Exchange Commission (SEC) disclosure rules or U.S. generally accepted accounting principles (GAAP). Most ADRs fall under this category.
Level II- and Level III-sponsored ADRs are registered with the SEC and adhere to disclosure rules as well as U.S. GAAP. Since these types of ADRs can be used to raise capital or make acquisitions, they often attract a large number of U.S. investors.
Unsponsored ADRs are those that can be established by any or all of the four ADR depository banks; there is no exclusive agreement. While this is a small percentage of overall ADR value, the number of unsponsored ADRs is increasing as demand from brokers and investors exceeds the capacity to create the exclusive agreements. Like Level I-sponsored ADRs, unsponsored ADRs trade on the OTC market.
ADRs are legal U.S. securities that trade on U.S. exchanges during market hours and adhere to U.S. settlement rules. Individual and international investors are attracted to ADRs, as they provide significant advantages compared to direct investments in ordinary foreign shares, such as providing a higher degree of liquidity and lower trading costs than in non-U.S. markets.
In addition, custodian safekeeping fees and custody transaction fees are generally lower for ADRs. ADRs also may issue physical certificates unlike a large number of ordinary foreign shares. Overall financial disclosures tend to be better in U.S. markets than in non-U.S. markets as well.
Finally, there are no currency expenses or currency transactions related to the purchase and sales of ADRs. However, the value of an ADR will be affected by the currency exchange rates at the time of sale or purchase. For this reason, it is important that investors or their advisors be cognizant of exchange rate movements at the time they are considering such transactions.
The information included in this article is not intended to be used as the primary basis for making investment decisions.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC
Some funds invest in the securities of international countries, which may involve different risks than U.S. investments. Some of these additional risks include political and economic instability, currency fluctuation, foreign taxation and different accounting methods.