American Depositary Receipts: Pros and Cons of ADR Investing

What Is an American Depositary Receipt (ADR)?

ADRs are U.S. certificates for foreign company shares, tradable on major U.S. stock exchanges. They simplify domestic investors' access to global companies and markets.

How American Depositary Receipts Work?

To create ADRs, a U.S. bank buys foreign company shares abroad and replaces them with ADRs, which are traded in the United States.

Sponsored ADRs and Level

Foreign firms can collaborate with U.S. banks to sponsor ADRs. These fall into three tiers: Level 1 ADRs with minimal reporting traded OTC, and Level 2 and Level 3 ADRs with higher reporting traded on NYSE or Nasdaq.

Unsponsored ADR

Unsponsored ADRs are issued by U.S. banks independently, lacking foreign company involvement, and are OTC-traded. They can have multiple listings for one company, unlike unique sponsored ADRs.

Advantages of American Depositary Receipts

ADRs provide a convenient avenue for American investors to access foreign markets and diversify their portfolios with ease, making foreign stock investment more accessible.

Disadvantages of American Depositary Receipt

-Currency Risk -Limited Investment Choices -Lack of Voting Rights -Custodial Fees -Legal Jurisdiction -Reporting Differences Liquidity Issues

Real-World Example of ADR

Between 1988 and 2018, Volkswagen AG traded in the U.S. as a sponsored ADR under VLKAY. After terminating its ADR program, J.P. Morgan established an unsponsored ADR, VWAGY, the next day.