ADRs: American Depositary Receipts

American Depositary Receipts (ADRs) allow US investors to buy shares of foreign companies on US exchanges, in US dollars, without dealing with foreign brokers, currency conversion, or international settlement. They are the most popular way for Americans to invest in non-US stocks.

How ADRs Work

A US depositary bank (typically BNY Mellon, JP Morgan, Citibank, or Deutsche Bank) purchases a block of foreign shares and issues US-traded certificates representing those shares. One ADR may represent one foreign share, a fraction of a share (for high-priced stocks), or multiple shares (for low-priced stocks) — this is the ADR ratio.

ADRs trade on the NYSE, Nasdaq, or OTC markets. They clear through DTC (Depository Trust Company) just like US stocks.

Types of ADRs

Sponsored vs Unsponsored

Sponsored ADRs: The foreign company enters a formal agreement with a depositary bank. The company bears the administrative cost. Higher reporting standards. Most major ADRs are sponsored.

Unsponsored ADRs: Created by a depositary bank without the foreign company's involvement. Multiple banks may issue ADRs for the same company. Lower liquidity. Less regulatory oversight. Trade OTC.

ADR Levels

• Level I: Trade OTC. Minimal SEC reporting (doesn't require GAAP reconciliation). Lower liquidity. Most unsponsored ADRs are Level I.
• Level II: Listed on NYSE/Nasdaq. Full SEC reporting required (Form 20-F annually). Higher visibility and liquidity.
• Level III: Listed on NYSE/Nasdaq. Full SEC reporting + ability to raise capital in US markets (public offering). Highest standards. Example: BABA (Alibaba).
• Rule 144A (RADR): Private placement to qualified institutional buyers (QIBs). Not available to retail investors.

Fees and Costs

ADRs have depositary fees (typically $0.01-0.05 per ADR per year). These are deducted from dividends. Some ADRs also have cancellation fees ($0.05-0.15/ADR) if you convert back to local shares. Always check the depositary bank's fee schedule in the ADR's prospectus.

Tax Treatment

Dividends on ADRs are subject to the withholding tax rate of the foreign company's home country. The US tax treaty with that country determines the rate. For example:

• UK ADRs: 0% withholding (US-UK treaty)
• Swiss ADRs: 15% withholding (US-Switzerland treaty, 35% refundable portion)
• Chinese ADRs: 10% withholding (US-China treaty)
• Chilean ADRs: 15% withholding

The foreign tax paid is generally creditable against US tax via the Foreign Tax Credit (Form 1116).

Advantages

• Convenience: Trade on US exchanges during US market hours.
• USD Settlement: No forex costs for buying/selling.
• Standard Settlement: T+1 settlement (like US stocks).
• Dividends: Paid in USD (after foreign withholding).
• Transparency: Level II/III ADRs file with the SEC.

Risks

• Delisting Risk: Foreign companies may delist from US exchanges (e.g., Chinese ADRs under HFCAA). Many have secondary listings in Hong Kong.
• Currency Risk: ADR prices still reflect the underlying foreign currency. Even if the foreign stock stays flat in local currency, the ADR moves with FX.
• Lower Liquidity: Some ADRs (especially Level I and unsponsored) have wide bid-ask spreads.
• Corporate Action Delays: Voting rights are exercised through the depositary bank, which can delay processing.
• Investor Protection: Foreign companies are subject to their home country's laws and regulations — not US securities law (unless Level II/III).

Notable ADRs by Country

• China: Alibaba (BABA), JD.com (JD), Baidu (BIDU), NetEase (NTES), Nio (NIO), Pinduoduo (PDD)
• UK: AstraZeneca (AZN), BP (BP), Unilever (UL), Diageo (DEO)
• Switzerland: Nestlé (NSRGY — OTC), Novartis (NVS), Roche (RHHBY — OTC)
• Japan: Toyota (TM), Sony (SONY), Mitsubishi UFJ (MUFG)
• Germany: SAP (SAP), Siemens (SIEGY — OTC), Mercedes-Benz (MBGYY — OTC)
• India: Infosys (INFY), ICICI Bank (IBN), HDFC Bank (HDB)
• Brazil: Petrobras (PBR), Vale (VALE), Itaú (ITUB)
• Australia: BHP Group (BHP), CSL (CSLLY — OTC)

Alternatives to ADRs

• US-listed International ETFs: VXUS, VEA, VWO — broader diversification, lower single-stock risk.
• LSE-listed UCITS ETFs: For non-US investors. Avoid US estate tax issues.
• Direct Foreign Broker Account: For frequent international investors. Lower fees for some markets.
• F-Shares: Foreign shares listed on the Hong Kong Stock Exchange (e.g., foreign companies listing in Hong Kong).