What’s an ADR?
You may have seen familiar names like Sony (SONY), NIO (NIO), and Alibaba (BABA) on US exchanges, but did you know that these companies aren’t directly listed on the exchange? They’re actually a different type of investment called an American depositary receipt (ADR)! 🤯
In this blog, we’ll look at what ADRs are, how they work, and how they differ from investing in companies that are directly listed on a US exchange.
What’s an ADR?
ADRs are a type of investment that you can find listed on Nasdaq and the New York Stock Exchange (NYSE).
An ADR is a certificate that represents shares in a foreign company that’s listed on an exchange outside of the US, like the Tokyo Stock Exchange (TYO) or London Stock Exchange (LSE). The exchange that the company is originally listed on is called its home exchange.
ADRs give companies based outside of the US a way of accessing another market, without going through the expensive and timely process of directly listing on a second exchange. They also enable investors to diversify their investment portfolios across more countries.
There are three ‘levels’ of ADRs. You can find levels II and III on Sharesies.
Level I—are the least regulated ADRs. For this reason, they’re not available through Sharesies’ platform.
Level II—need to provide regular reports to the US Securities and Exchange Commission (SEC) and comply with US accounting laws.
Level III—have similar regulatory requirements to level II ADRs (they need to provide regular reports to SEC and comply with US accounting laws), but are also able to raise capital (cash) through public offerings on the US exchange they’re listed on.
How do ADRs get listed on a US exchange?
A US depositary bank (a specialist bank that helps companies access overseas markets) will find a foreign, listed company that they think people will want to invest in, and buy some of its shares. These depositary banks are often large, well-known investment banks like JP Morgan, BNY Mellon, Citibank, and Deutsche Bank.
The depositary bank then finds a custodian bank (which can hold investments on behalf of a person or business) in the country the company is based in, to hold the shares on the depositary bank’s behalf.
The depositary bank issues a receipt (or ‘certificate’) to represent shares in the foreign company. These receipts are listed on a US exchange for investors to trade.
Once listed, investors buy and sell ADRs like a regular US company. Trades are made in US dollars (USD), and orders take a similar time to settle.
How does investing in an ADR differ from buying shares?
Sometimes, one ADR will represent one share in the foreign company. But the depositary bank can also bundle shares, meaning one ADR might represent several shares in the company. This is called the ADR ratio, and it determines how many shares you actually hold in the company. For example, the car manufacturer NIO has an ADR ratio of 1:1. While Alibaba, an e-commerce company, has an ADR ratio of 8:1. So, if you buy one Alibaba ADR, it’s actually worth eight Alibaba shares!
You can find an ADR’s ratio by checking the ADR prospectus. This is a document provided by the depositary bank which includes relevant information about the ADR and foreign company. Prospectuses can be found on the SEC website by searching the name of the ADR under ‘Search for Company Filings’.
The depositary bank plays a role in managing the ADR, so they charge a fee for their service to investors. On the Sharesies platform, this fee is called a depositary fee, but you might see it being called a depositary service fee, pass-through fee, custodial fee, or ADR fee.
The amount you have to pay differs between ADRs and might change year to year. Usually, the amount is between $0.01–$0.10 USD per receipt. You can find the price range for a specific ADR by checking its prospectus.
The way the depositary bank collects this fee also differs between ADRs. If the company pays dividends, the bank will usually subtract the fee amount before they pass on your dividend payment. If the company doesn’t pay dividends, the bank will ask Sharesies for the fee to be paid at some point during the year, and we’ll deduct the fee amount from your Wallet. There are also instances where the bank will do a mix of both—they’ll take a small amount from your dividend, and ask for the rest during the year. In any case, we’ll let you know when we deduct the fee from your Sharesies Wallet.
Along with the depositary fee, you’re also charged the platform’s usual transaction and currency exchange fees. Check out our help centre for more info.
Tax on ADR dividends works similarly to other US investments. But the difference is that the depositary bank may subtract foreign withholding tax (WHT) from your dividend to pay the government of the company’s home exchange, instead of this being paid to the US government.
For more info about tax on ADRs through Sharesies, check out our help centre article.
Foreign exchange risk
ADRs are affected by three currencies. The currency of the country you’re in (AUD), the currency of the US exchange (USD), and the local currency of the company’s home exchange. Your investment can be positively and negatively impacted by currency fluctuations. For more info on foreign exchange, check out our blog.
While uncommon, the depositary bank and the foreign company have the ability to cancel (or ‘terminate’) an ADR. If this happens, the ADR will be delisted (removed) from the US exchange. The result of the cancellation will vary between ADRs but in most cases, you’ll receive some sort of compensation for your investment.
Wrapping up 🌯
ADRs offer a way to invest in foreign companies through a US exchange, giving you the opportunity to diversify your portfolio across more countries. In many ways they’re similar to investing directly in US companies: you complete your order in USD, some give access to company dividends, and the ADRs (that are available through the Sharesies platform) are regulated by the SEC. However, it’s important to understand the key differences (like fees, tax, and foreign exchange risks) so you’re fully aware of the ins and outs of the investment before you dive in.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.