5 min read

What is an American Depositary Receipt (ADR)?

By understanding what an ADR is and how it works you’ll not only be adding another investing acronym to your arsenal; you’ll have the skills to know if it's worth your bills when sizing it up as an investment.
Published on
May 17, 2023

American Depositary Receipts (ADRs) are a way for companies outside the US to trade through the US share markets, without having to go through the expense and hassle of listing on them.  ADRs open up the door to people investing on the US share markets to access  companies publicly trading in London, Shanghai, Taiwan and all over the globe!

So what’s the difference between an ADR and ordinary shares? ADRs work a little differently to companies listed directly on the US markets; they have different ways of representing shares, and might have additional tax implications. We’ll explain what an ADR is and how it works so you can decide

What is an ADR?

By definition, an ADR is a certificate issued by a US depositary bank. An ADR is created when the bank buys shares in a company listed on a non-US share market and repackages them, making the shares appealing to list on the US market. 

‘Repackaging’ just means setting the ratio of US ADRs per home-country share to a price they think will appeal to investors. Priced too high the shares can be a turn-off, but pricing too low can cheapen the offer and make them look like bargain-bin penny stocks.

Each ADR share represents a specific number of shares in a company. For example; 

  • 1 Alibaba (BABA) ADR represents 1 share in the company
  • 1 British Petroleum (BP) ADR represents 6 shares in the company

This is often called the ‘ADR ratio’ or the ‘conversion ratio’.

How to determine the ADR ratio

Before setting your investing sights on world (market) domination, take a look at an ADR listing website (JPMorgan or BNY Mellon) so you can work out the ADR ratio. By understanding exactly what you own when you buy an ADR, you can calculate things like the P/E ratio correctly.

Paying custodial fees on ADRs

The depositary banks take care of all the registration, compliance and record-keeping services that come with listing foreign shares as ADRs. They charge a ‘custodial fee’ for this, which is invoiced to the US broker and passed-through to you, the investor.

If making sense of all the different fees feels overwhelming, note that the fees generally range from just $0.01 - $0.05 USD per ADR, per year, but it can vary. You can find the exact fees on the SEC’s website by searching for a company and viewing its F-6 registration statement. 

Are ADRs impacted by exchange rates?

Yes! Because of the way that ADRs are structured, the price and dividends are impacted by the foreign currency-to-US dollar exchange rate. For example, if the local price of the foreign share doesn’t change, but the exchange rate versus the US dollar declines by half, the US-listed ADR price would also drop by half. The inverse is also true: any gain in the exchange rate would mean an increase in the US-listed ADR price.

Sponsored and Unsponsored ADRs

There are two types of American Depositary Receipts, sponsored and unsponsored, and these mean different things for how you can buy them, vote on them, and the potential risks.

Sponsored ADRs are fully SEC compliant, and are issued by the bank on behalf of the foreign company. 
Unsponsored ADRs may be SEC compliant but could have no direct involvement from the actual company (only a broker).

For investors one of the main differences between the two is where they are able to be traded; unsponsored ADRs can only trade over the counter (OTC) whereas sponsored ADRs trade on the NYSE and the NASDAQ. If you’re buying an unsponsored ARD, be mindful that you might not be eligible for the usual shareholder benefits and voting rights that come with sponsored ADRs.

You may pay more tax on ADRs than on other types of shares

There’s no ‘one-size-fits-all’ answer to how you’ll be taxed on ADRs in NZ. If you have a professional tax advisor or accountant, they’ll give you all the info you need. At a high level, if you invest in ADRs, you need to:

  1. Pay tax on any dividends you receive
  2. Expect to pay tax when you sell your shares

It may also impact the amount of tax you can claim on your tax return at the end of the tax year.

Tax when you sell your ADR shares 

Yep that’s right, more tax chat. In some cases, you may need to pay tax when you sell your ADR shares. Any tax advisor worth their salt will help you understand exactly how the tax scenario will play out for a particular ADR, and your overall investment strategy. 

Having access to buy shares in world-class companies around the globe is pretty cool. The opportunities ADRs give for more diversification can be balanced with the extra complexities of owning them, as long as you do your homework and understand what you’re buying into.

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We’re not financial advisors and Hatch news is for your information only. However dazzling our writing, none of it is a recommendation to invest in any of the companies or funds mentioned. If you want support before making any investment decisions, consider seeking financial advice from a licensed provider. We’ve done our best to ensure all information is current when we pushed ‘publish’ on this article. And of course, with investing, your money isn’t guaranteed to grow and there’s always a risk you might lose money.

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