ADRs are a form of equity security that was created specifically to simplify foreign investing for American investors.

American Depository Receipts (ADRs) offer US investors a means to gain investment exposure to non-US stocks without the complexities of dealing in foreign stock markets.

ADRs are a form of equity security that was created specifically to simplify foreign investing for American investors. An ADR is issued by an American bank or broker. It represents indirect ownership of one or more shares of foreign-company stock that isn’t directly traded on U.S. exchanges and held by that bank in the home stock market of the foreign company.

The ratio of foreign shares to one ADR will vary from company to company, but each ADR for any one company will represent the same number of shares. ADRs may be listed on a major exchange such as the New York Stock Exchange or may be traded over the counter (OTC). Those that are listed can be traded, settled, and held as if they were ordinary shares of US-based companies.

Because ADRs are issued by non-US companies, they entail special risks and drawbacks inherent to all foreign investments. These include:

• Exchange rate risk—the risk that the currency in the issuing company’s country will drop relative to the US dollar
• Political risk—the risk that politics or regime changes in the issuing company’s country will undermine exchange rates or destabilize the company and its earnings
• Inflation risk—the risk that inflation in the issuing company’s country will erode the value of that currency
• Liquidity: Plenty of companies have ADR programs available, but some may be very thinly traded.
• Higer Fees—ADRs can carry higher fees than traditional stocks.
• Transparency—investors also may not have access to the amount of information available on domestic companies.

ADRs have a number of unique differences relative to foreign stocks or traditional U.S. stocks that are equally important to consider.

For instance, there is a significant difference in the way that taxes are charged on dividends. As with U.S. stocks, dividends are taxable in the U.S. Unlike U.S. stocks, the dividends may also be subject to tax by the company’s home country. However, they’re usually automatically withheld by the sponsor. Investors may choose to apply a credit to their U.S. taxes or apply for a refund abroad to avoid double taxation.

References:

1. https://www.fidelity.com/learning-center/investment-products/stocks/understanding-american-depositary-receipts
2. https://www.thebalance.com/about-adrs-understanding-american-depositary-receipts-1979192