Investing in Foreign Stocks: ADRs and GDRs

Investing in foreign stocks should be part of any investor's portfolio. Not only does it diversify your holdings, it offers plenty of opportunities to profit from trends and developments outside your home country.

The U.S. currently accounts for nearly half of the world's total stock market value, but that's likely to decline in the years ahead as more investors look to emerging markets such as China and India.

Below is an overview of the easiest ways to invest in foreign stocks, whether you live in the U.S. or any other country.

DRs (Depositary Receipts)

A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange, such as the New York Stock Exchange (NYSE) in the U.S., but represents an interest in a company that is headquartered outside of the United States. A depositary receipt traded in Germany would represent a non-German company.

A DR can be sponsored or unsponsored. The sponsored variety is issued with the knowledge and cooperation of the underlying foreign company. With this cooperation, a sponsored DR usually lets the owners have the same rights normally given to the stockholders in the home country, such as voting rights. An unsponsored DR may not have the same voting rights.

ADRs (American Depositary Receipt)

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign (i.e. non-U.S.) stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

It’s important to note that an ADR must be sponsored by the underlying corporation. If not, the security is likely to be traded over the counter, which is considered more risky because there are fewer regulatory requirements.

In most cases, a foreign firm trading OTC will have a five letter ticker. For instance, European Aeronautic Defence and Space Company N.V. trades under the U.S. ticker “EADSF.” In contrast, an ADR may trade with the common three ticker symbol on the NYSE. Swiss-based ABB Ltd. trades with the symbol “ABB” on the NYSE.

Overall, there are four levels of ADRs. The chart below explains the difference between sponsored and unsponsored ADRs, as well as different levels of sponsored ADRs and U.S. Securities and Exchange Commission (SEC) reporting requirements.

You can see that the unsponsored variety trades over the counter, which leaves more work to the investor to determine if the voting rights are the same. These shares may also have much less liquidity. To determine which level a company trades at, an investor should check the SEC site (sec.gov) to see which forms have been filed. Checking on the website of a depository bank or ADR.com can also provide insight into a company's filing status.

Type of Program

Description

SEC Filing required

Capital Raising

Unsponsored

ADRs traded on the US OTC market, using existing shares. No contractual relationship with company.

Form F-6 (filed by depositary bank), 12g3-2(b) exemption

No

Sponsored Level I

ADRs traded on the US OTC market, using existing shares. Company forms contractual relationship with single depositary bank.

Form F-6 (filed by depositary bank and company),
12g3-2(b) exemption

No

Sponsored Level II

ADRs listed on a recognized US exchange (NYSE or NASDAQ), using existing shares

Form F-6, Form 20-F

No

Sponsored Level III

ADRs initially placed with US investors and listed on a recognized US exchange (NYSE or NASDAQ)

Form F-6, Form 20-F, Form F-1

Yes

Source: Deutsche Bank Depositary Receipt Services

ADRs, like domestic U.S. stocks, have to meet certain SEC filing requirements. An ADRs' annual report is known as a 20-F filing, which is similar to the 10-K filing that U.S.-based companies file annually.

A 20-F provides detailed and useful information on a firm, including how its financial statements in its home country might differ using U.S. GAAP accounting. It helps an investor make a more apples-to-apples comparison, instead of apples-to-oranges. A foreign firm that trades OTC status will likely not have to file with the SEC, but will have financials from its home country for analysis. The chart above helps clarify what the reporting requirements are.

A depository generally refers to a company, bank or an institution that holds and facilitates the exchange of securities. When it comes to ADRs, large depositories include JP Morgan Chase (NYSE:JPM) and BNY Mellon (NYSE:BK). JPMorgan owns and operates the website ADR.com, that contains a wealth of information on ADRs, both from an educational perspective and to learn which ADRs trade in the U.S.

As a final aside, the term American Depository Share (ADS) is often used in tandem with the term ADR. The ADS is issued by depository banks in the U.S. under agreement with the issuing foreign company. The entire issuance is called an American Depositary Receipt (ADR) and the individual share is referred to as an ADS.

GDRs (Global Depositary Receipt)

Beyond the ADR, there is a second category of DR. A Global Depositary Receipt (GDR) represents a bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. The term GDR is used throughout the globe and designates any foreign firm that trades on an exchange outside its home country.

Other Types of DRs

There are other types of GDRs that represent more specific names in a specific country. A Chinese Depositary Receipt (CDR), which trades on Chinese stock exchanges, is one example. More generally, an International Depository Receipt (IDR) is issued by a depository bank representing ownership of stock of a foreign company held by the bank in trust. An IDR is called an ADR in the United States.

How to Invest in DRs

A DR is meant to make it as easy for a foreign investor to invest in another country. For an ADR, the sponsored variety gives the investor the best chance of having the same economic and voting interests as a domestic investor would.

Here are some ways to buy DRs.

Powershares: These exchange-traded funds offer multiple baskets of listed depositary receipts (BLDRS). One example is BLDR Asia 50 ADR Index Fund (Nasdaq:ADRA), a capitalization-weighted ETF designed to track the performance of 50 Asian market- based DRs. It provides broad diversification to a part of the world that is expected to grow robustly and increase its weight of global market capitalization.

Similar to ADRA are BLDRS Developed Markets ADR Index Fund (Nasdaq:ADRD) and the BLDRS Emerging Markets 50 ADR Index Fund (Nasdaq:ADRE).

You can also invest directly in foreign companies that trade on U.S. exchanges like Sony Corporation (NYSE:SNE) and Toyota Motor Corporation (NYSE:TM). While over-the-counter (OTC) stocks like Samsung (SSNLF) offer an opportunity to invest across the borders, they are not as forthcoming with their earnings reports as ADRs are.

The Bottom Line

The U.S. represents the most liquid and robust depositary receipt market in the world. But other countries continue to grow their DR markets and offer more liquidity for their local citizens. With DRs, the market is poised for increased growth and robustness, with lower costs, faster execution, and equal shareholder rights for investors, regardless of their home country.



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