The U.S. currently accounts for about 60% 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.
These days, investments in foreign stocks should be part of any portfolio. It diversifies your holdings and offers opportunities to profit from trends and developments outside your home country.
That's why trading in depositary receipts (DRs) such as ADRs and GDRshas become popular in recent years. They are designed to make it easier for investors to buy foreign stocks.
Below is an overview of the easiest ways to invest in foreign stocks, whether you live in the U.S. or any other country.
Depositary Receipts (DRs)
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 cooperation of the underlying foreign company. The agreement generally gives the foreign owners of sponsored DRs the same rights, such as voting rights, as stockholders in the home country. An unsponsoredDR may not have fewer rights.
When a foreign-listed company wants to create a depositary receipt abroad, it typically hires an advisor/consultant/investment banker to help it navigate local regulations and a domestic bank to act as custodian and brokerin the target country.
American Depositary Receipts (ADRs)
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a number of shares in a foreign 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 the administration and duty costs that would otherwise be levied on each transaction.
It’s important to note that any ADR you choose should be sponsored by the underlying corporation. If it is not, the security is likely to be traded over the counter(OTC), which is considered riskier as there are fewer regulatory requirements.
Here's how to tell the difference: In most cases, a foreign firm trading OTC will have a five-letter ticker symbol. For instance, AirbusSE trades under the U.S. ticker “EADSF.” An ADR may trade with the common three-letter ticker symbol on the NYSE. Swiss-based ABB Ltd. trades with the symbol “ABB” on the NYSE.
The 4 Levels of ADRs
The chart below clarifies 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 less liquidity.
To determine the level a company trades at, an investor can check which forms have been filed with the SEC at its site, sec.gov. Alternately, the website of a depository bank or ADR.com can be used to check a company's filing status.
Type of Program | Description | SEC Filing required | Capital Raising |
Unsponsored | ADRs traded on the US OTC marketusing 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 marketusing 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 and is similar to the 10-K filing that U.S.-based companies file every year.
A 20-F provides detailed and useful information on a firm, including how its financial statements in its home country might differ using the U.S. GAAP accounting. It makes for an apples-to-apples comparison instead of apples-to-oranges.
A foreign firm that trades OTC status will normally not have to file with the SEC, but financials from its home country will be available for analysis. The chart above helps to clarify the reporting requirements.
A depository generally refers to a company, bank, or institution that holds and facilitates the exchange of securities. When it comes to ADRs, large depositories include JPMorgan Chase (JPM) and BNY Mellon (BK).
JPMorganowns and operates the website ADR.com, which contains a wealth of information on ADRs.
You should know that the term American depository share (ADS) is often used in tandem with the term ADR. The ADS is issued by a depository bank in the U.S. under an agreement with the issuing foreign company. The entire issuance is called an American Depositary Receipt (ADR), and the individual share is referred to as anADS.
Global Depositary Receipts (GDRs)
A global depositary receipt (GDR) is a second category of DR. It represents a bank certificate issued in more than one country for shares in a foreign company.
In this case, 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 its bank branches.
The term GDR is used around the world and designates any foreign firm that trades on an exchange outside its home country.
GDR transactions in the international market tend to have lower associated costs than some other mechanisms that can be used to trade in foreign securities.
Other Types of DRs
There are other types ofGDRs that are defined more narrowly. A Chinese Depositary Receipt (CDR), for example, trades on the Chinese stock exchanges.
More generally, an international depository receipt (IDR) is issued by a depository bank and represents ownership in the 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 designed to make it easy for a foreign investor to invest in another country.
The sponsored ADR can give an investor the same economic and voting interests as a domestic investor. Beloware some ways to buy DRs.
- Powershares: These exchange-traded funds offer multiple baskets of listed depositary receipts (BLDRS). One example is BLDRS Asia 50 ADR Index Fund (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. The BLDRS Developed Markets ADR Index Fund (ADRD) and the BLDRS Emerging Markets 50 ADR Index Fund (ADRE) are similar.
- You can invest directly in foreign companies that trade on U.S. exchanges like Sony Corporation (SNE) and Toyota Motor Corporation (TM).
- While over-the-counter (OTC) stocks like Samsung (SSNLF) offer an opportunity to invest across borders, they are not as forthcoming with their earnings reports as ADRs are.
The Bottom Line
The U.S. currently represents the most liquid and robust depositary receipt market in the world. Other countries continue to grow their DR markets. The DR market is poised for increased growth and robustness, with lower costs, faster execution, and equal rights for shareholders regardless of their home country.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
U.S. Securities and Exchange Commission. "Investor Bulletin: American Depositary Receipts," Pages 1-2.
Utah State University. "Possible Benefits of ADR Issuance: Evidence from Developing Countries," Page 1.
OTCMarkets. "EADSF Airbus SE."
NYSE. "ABB Ltd Sponsored ADR."
Deutsche Bank. "Types of ADR."
JPMorgan. "DR Universe."
Deutsche Bank. "SEC Filing Requirements."
JPMorgan. "Depositary Receipts."
Citi. "Global Depositary Receipts (GDRs): A Primer," Page 1.
Invesco. "Invesco BLDRS Emerging Markets 50 ADR Index Fund Prospectus," Page 2.
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As a seasoned financial expert with a deep understanding of global investment markets, particularly in the realm of depositary receipts (DRs), I can offer valuable insights into the intricacies of investing in foreign stocks. My expertise is underscored by a comprehensive knowledge of the concepts and mechanisms involved in this dynamic field.
The statement in the provided article that the U.S. accounts for about 60% of the world's total stock market value aligns with the latest data available up to my last knowledge update in January 2022. This statistic highlights the dominance of the U.S. market on a global scale. However, the assertion that this dominance is likely to decline in the coming years as more investors turn to emerging markets such as China and India is a well-founded observation. Emerging markets have indeed been attracting increased attention due to their growth potential and investment opportunities.
Now, let's delve into the key concepts related to depositary receipts (DRs) discussed in the article:
Depositary Receipts (DRs)
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Definition: A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities.
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Types: Sponsored and unsponsored DRs. Sponsored DRs involve cooperation with the underlying foreign company, offering similar rights to stockholders in the home country. Unspnsored DRs may have fewer rights.
American Depositary Receipts (ADRs)
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Definition: A negotiable certificate issued by a U.S. bank representing shares in a foreign stock traded on a U.S. exchange.
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Denomination: ADRs are denominated in U.S. dollars, reducing administration and duty costs.
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Different Levels: Level I, II, and III ADRs with varying SEC reporting requirements. Level III involves capital raising and requires additional filing forms.
Global Depositary Receipts (GDRs)
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Definition: A second category of DR representing a bank certificate issued in more than one country for shares in a foreign company.
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Transaction Cost: GDR transactions in the international market generally have lower associated costs than some other mechanisms for trading in foreign securities.
Other Types of DRs
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Chinese Depositary Receipt (CDR): Trades on Chinese stock exchanges.
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International Depository Receipt (IDR): Similar to ADR but issued by a depository bank and known as ADR in the United States.
How to Invest in DRs
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Platforms: Utilize platforms like Powershares, offering exchange-traded funds with baskets of listed depositary receipts.
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Direct Investment: Invest directly in foreign companies trading on U.S. exchanges.
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Considerations: Be aware of regulatory requirements and differences in liquidity when choosing between ADRs and OTC stocks.
Reporting and Regulatory Compliance
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SEC Filing Requirements: ADRs, like U.S. stocks, must meet specific SEC filing requirements, with annual reports (20-F filing) providing detailed information.
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Depositories: Major depositories include JPMorgan Chase and BNY Mellon, providing information on ADRs.
In conclusion, investing in foreign stocks through depositary receipts is a strategic way to diversify portfolios, tapping into global growth opportunities. The nuances of sponsored and unsponsored DRs, various ADR levels, and the distinct features of GDRs contribute to a comprehensive understanding of this complex investment landscape.
