For a U.S. investor, buying stock in non-U.S. companies can often be accomplished by purchasing an ADR. American Depository Receipt (ADR) is usually issued by a U.S. bank, and it represents one or more shares (or a fraction of a share) in a foreign company. The ADR is issued in the U.S. by a U.S. bank in U.S. dollars and is traded on a U.S. exchange. The bank holds the original shares, while the investor buys the ADRs. This makes is easier for the U.S. investor to buy and sell. The Securities and Exchange Commission (SEC) has a description here.
Benefits of ADRs
The first benefit of an ADR is that it gives investors easy access to foreign companies they normally would not have access to. If there is no ADR, the U.S. investor would need to purchase the company’s shares on a stock exchange in a foreign country in foreign currency. Currency, tax, and legal problems can easily arise in such a case.
With ADRs, the investor diversifies internationally. Foreign exposure can be beneficial, as foreign stock movements do not always follow U.S. stock movements.
How ADRs Exist
Banks issuing ADRs must register their plans with the SEC. When they register their ADR plan, detailed financial information of the company issuing the stock must be filed with the SEC.
Downsides of ADRs
The first potential downside is that the company is located in a foreign country, and as such is subject to different laws than in the U.S. There is always political or currency risk.
The U.S. bank sponsoring the ADR plan can terminate it. Namely, could decide to end the ADR plan. Sometimes this is due to the underlying company being merged, or entering a reorganization.
There is a fee for holding an ADR, often called the Depository Service Fee (DSF). Usually this is not high, but is often based on the number of ADRs the investor holds; sometimes this fee is assessed quarterly. Usually this fee is found on your broker’s statement, and is deducted from your account or deducted from the dividends paid by the underlying company. To avoid surprises, the investor is best to understand any ADRs fees before purchasing.
Foreign taxes
One should also be aware of taxes when you buy ADRs. The dividend may be subject to withholding tax by the country in which the company is located, and this can reduce or potentially eliminate the dividend. In some cases the foreign tax can listed on your tax return, reducing your tax. This is usually the case when you hold the ADR in a cash-type account; however it is not usually available when you hold the ADR is a tax-deferred account.
Therefore, when a foreign government assess taxes on your ADR holdings, it is often best to hold the ADR is a non-tax-deferred account so the tax can be listed on the 1099 you receive from your broker, and reduce your U.S. tax due.
How the ADR fee is paid
Your broker will likely list the ADR fee and deduct it from your account. If the underlying security pays dividends, the ADR fee is usually deducted from your account when you receive the dividend, and both are listed in the quarterly statement. If the underlying security does not pay a dividend, the broker will assess the ADR fee and deduct it quarterly or annually.
How to Determine the ADR Fee in Advance
Finding out the ADR fee in advance of purchasing the ADR may or may not be challenging. Some brokers will be able to tell you in advance, others may say that they won’t know until you purchase it.
It is possible to look up the ADR fee using the SEC’s Electronic Data Gathering Analysis and Retrieval (EDGAR) system. To do this, head over to the EDGAR search page. Enter the name or stock symbol of the company. You may need to try a few variations on the name. I have found that on occasion, the stock symbol will not yield the expected results.
The first search results may list dozens of documents. This is normal, companies must file many types of documents with the SEC. In the “Filing Type” field enter “F-6” without the quotes. (F-6 is the document normally filed regarding ADRs.) Click Search.
Any F-6 -related documents will now be listed. The simplest way to proceed at this point is to choose the latest document filing (by date). Click the “Documents” button. One or more files for that filing will be displayed. It simpler to read files of “.htm” type if available. You may need to read one or more files at this point.
You will find that the primary F-6 file shows the name of the “depository”, which is the name of the bank sponsoring the ADR. The item you are looking for may be in another file. The files are legal documents, so their language may be a little stilted. What you are looking for is language regarding fees per American Depositary Share (or portion thereof) for any cash distribution.
Since the language is dense, and the text not totally stimulating, rather than attempt to read entire files, I search for a dollar sign. Eventually I will find the amount specified. In may cases is two to five cents per ADR, but it can vary.
So if the fee is five cents per ADR, that means if you own 100 ADRs, you can expect $5.00 to be deducted from your account annually, or $1.25 per quarter. If the ADR fee is two cents per ADR, then if you own 100 ADRs, the fee is $2.00 per year, or fifty cents per quarter.
As mentioned, these fees are deducted from your account when dividends are paid. If there are no dividends, your account is debited by the amount of the fees by your broker. For U.S. investors, ADR fees paid in non-tax-deferred accounts are considered investment expenses, deductible in the year assessed.
Is It Worth It?
ADR fees reduce income from your ADRs. Some times low fees are simply so minor and can be ignored. At other times they are annoying to the point of frustration. Based on the size of the fee, you can decide if the investment, and the reduction in income, is worth it.
If a person is an index investor, namely they choose index funds or ETFs, then in my view they should steer clear of ADRs. International exposure can be accomplished by choosing international or global mutual funds or ETFs.
If a person is a dividend investor, then in my view ADRs are not a viable investment until the person has some years of experience and understands the benefits and risks of international investing. In my case, I keep ADRs to an extremely low percentage of my investments.
What do you think? Do you hold any ADRs? To send a comment, see the address on the Contact page.
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