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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, time and hassle to list them. ADRs open a world of investing opportunities to investors by giving people who invest on the US share markets access to some of the world’s largest companies publicly trading in London, Tokyo, Taiwan, and all over the globe.
So what’s the difference between an ADR and ordinary US shares? ADRs work a little differently to companies listed directly on the US markets. This means they have different ways of representing shares, and may have additional tax obligations. We’ll explain what an American Depositary Receipts is and how it works so you can decide whether ADRs are right for you.
What is an ADR?
An ADR is a certificate issued by a US depositary bank, aka, an American ‘depositary receipt’. An ADR is created when a US bank buys shares in a company that’s not listed on US share markets, which they then repackage, making shares available to list on a US share market.
‘Repackaging’ just means setting the ratio of US ADRs per home-country share to a price they think will resonate with investors. Priced too high and the shares may be less appealing; priced too low can cheapen the offer and make them look like bargain-bin penny stocks.
How does a company list as an ADR?
Companies outside the US are attracted to the US share markets because of the exposure they get to investors, as well as access to money — and because the two main US share markets are the largest in the world. To get an idea of the US market scale, the Nasdaq and the NYSE have a combined market cap (total dollar market value) of around US$70 trillion — at the time of writing, more than the next 10 largest global exchanges combined!
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To list as an ADR on the American markets, a company must meet several requirements set by the Securities and Exchange Commission (SEC) in the US. These include:
- Entering into an agreement with a US depositary bank
- Registering with the SEC
- Complying with exchange and listing terms, such as meeting minimum share price and market cap requirements — see an example in the terms of listing on the NYSE here
- Financial reporting that meet the US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)
Dual-listed companies
Some ADR-listed companies are dual-listed on other world exchanges as well as the US markets. But being publicly listed is not a requirement to list as an ADR in the US.
For example
- XPeng (XPEV) listed by IPO on the NYSE in August 2020 before later listing on the Stock Exchange of Hong Kong (SEHK) in July 2021
- NIO (NIO) listed on the NYSE in September 2018, and later on the HKSE in March 2022
Some companies have also delisted their ADRs from the US markets. An example is India’s Tata Motors delisting from the NYSE in 2022. This was because 18 years after first trading on the exchange, Tata Motors’ number of ADR shares as a percentage of total ordinary shares had dropped significantly. This combined with an increase in liquidity left little reason for Tata Motors to remain on the US markets. Today, they trade only on the Bombay Stock Exchange (BSE India) and the National Stock Exchange of India (NSE India).
ADR stock examples
There are more than 2,000 ADRs listed in the US across the New York Stock Exchange (NYSE), the Nasdaq, and the OTC markets. Investors on Hatch can access more than 500 ADRs, choosing from European biotech companies, Japanese tech companies, and China’s e-commerce giants.
Here are some companies listed as ADRs on the US share markets that may be familiar with investors:
How to determine the ADR ratio
Each ADR share represents a specific number of shares in a company. This is often called the ‘ADR ratio’ or the ‘conversion ratio’.
For example
- 1 Alibaba (BABA) ADR represents 1 share in the company
- 1 British Petroleum (BP) ADR represents 6 shares in the company
ADR listing websites JPMorgan and BNY Mellon have information on ADR ratios, as well as other details on sponsored and unsponsored ADRS, and home country. By understanding exactly what you own when you buy an ADR, you can calculate investing metrics like the P/E ratio.
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, and charge a custodial fee for the service. This is invoiced to the US broker and passed-through to you, the investor. 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 them is where they’re 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 ADR, be mindful that you may not be eligible for 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:
- Pay tax on any dividends you receive
- 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
In some cases, you may need to pay tax when you sell your ADR shares. Your tax advisor will help you understand exactly how the tax scenario will play out for a particular ADR, and your overall investment strategy.
Hatch gives investors access to more than 500 American Depositary Receipts, allowing you to buy shares in world-class companies around the globe. The opportunities ADRs give for more diversification can be balanced with the extra complexities of owning them, as long as you do your research and understand what you’re buying into.
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.
