American Depositary Receipts and International Investing

How ADRs Can Help You Diversify Internationally

Maintaining a diverse portfolio requires careful consideration of investments that might include assets from foreign countries. Many U.S. investors turn to exchange-traded funds or mutual funds that give them exposure to a diverse group of foreign companies.

But what about investors who want to invest in individual foreign stocks? That can be tricky because those stocks typically can’t be found on U.S. exchanges. 

Beginning in 1927, U.S. banks addressed this need by offering American Depositary Receipts – or ADRs. The banks effectively simplify overseas investment through indirect ownership of stock in foreign companies. ADRs can trade just like regular shares of stock.

“International investments present the same opportunities for individuals that motivate large corporations,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “You can be at the forefront of new technologies and ideas from countries based outside of the U.S., or sheltered from adverse economic trends at home.”

Trade Like Stocks

Because the banks are responsible for the accounting logistics, ADRs offer a straightforward way for traders to diversify holdings around the globe. From a transactional standpoint, ADRs function like stocks and usually cost $7 per trade like other securities offered by Scottrade. Advanced traders can incorporate marginable ADRs into margin and even short-selling plans.

Companies with ADRs listed on U.S. equity exchanges must offer English versions of their annual reports, follow U.S. accounting policies and grant certain shareholder rights. However, since ADRs function as derivatives of foreign securities, they’re subject to currency risk for the country of origin. Currency risk simply means your investment could lose value depending on how the dollar moves compared to other foreign currencies.

“Brexit is a timely example of how political uncertainty can impact market confidence in a particular currency,” said Brian Bachelier, vice president of active trader strategy for Scottrade. “When the local currency for your ADR is weak against the dollar, it becomes that much more difficult to turn a profit with an unfavorable exchange rate.”

Read Next: Learn why diversification matters after Brexit.

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Diversification may help spread risk, but it does not assure a profit, or protect against loss, in a down market.

Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade’s margin agreement is available online or by contacting Scottrade, and contains the Margin Disclosure Statement and information on our lending policies, interest charges, and the risks associated with margin accounts.

All investing involves risk. The value of your investment may fluctuate over time, and you may gain or lose money.

International investing can involve substantial risks and is not suitable for all investors. Risks include changes in currency exchange rates; political, economic and social events; potential for illiquid markets; less information; reliance on foreign legal remedies; and different market structures and operations. Investors should fully research any security or strategy before making an investment decision. 

More Articles & Insights

Covered Calls as a Hedging and Income Strategy

Covered calls provide a potential income opportunity from trading options, but they involve risk and might not be suitable for all investors.

Using Stock Downturns to Your Advantage With Long Puts

Buying puts can be an effective strategy to help protect your financial assets in a market downturn, however there are risks.

Saving for College: How to Get Started

There are a variety of education savings accounts available to help defray the cost of higher education, each with distinct advantages.