American Depositary Receipts (ADRs)
ADRs offer U.S. investors a simple, liquid way to add international stocks to their portfolios. Like regular stocks, ADRs are negotiable securities traded on U.S. exchanges and in over-the-counter (OTC) markets during U.S. trading hours and are listed in U.S. dollars. Rather than representing direct ownership in a company, an ADR is a certificate issued by a U.S. bank, generally corresponding to shares of a non-U.S. company. This provides investors access to foreign equities without requiring trades on local exchanges or in local currencies.
ADRs come in two types, depending on the foreign company's involvement:
- Sponsored ADRs: Issued with participation from the foreign company, which retains a controlling relationship. Depending on qualifications, these may be listed on U.S. exchanges or traded in the U.S. OTC market.
- Unsponsored ADRs: Issued without involvement or approval from the foreign company and traded only in the U.S. OTC market.
Foreign Ordinaries Traded Over the Counter (OTC)
Foreign ordinaries represent shares of ownership in a foreign company and trade in the U.S., in addition to their local market. These securities trade on U.S. OTC markets and, like ADRs, are priced and settled in U.S. dollars.
Foreign Ordinaries Traded in International Markets, including Canadian Stocks
Many international companies list their stock on their local exchange, such as in Canada, Japan, the U.K., and Hong Kong. These stocks trade in the local currency and during the exchange's trading hours. Investing directly in foreign markets can offer enhanced liquidity and potentially better execution compared to U.S.-traded alternatives. However, these investments are subject to unique rules and regulations, which may present restrictions and cost considerations for U.S. investors.
Benefits and drawbacks
Benefits and drawbacks
| ADRs and Foreign Ordinaries traded OTC | Local Foreign Markets and Canadian Stocks | |
|---|---|---|
| Benefits | Trade like domestic stocks on U.S.-listed or U.S. OTC exchanges during exchange hours and are priced and settled in U.S. dollars. Listed ADRs must file quarterly with the U.S. Securities and Exchange Commission (SEC), providing potentially more information for researching a stock. Some ADRs are marginable and have listed options trading. |
Local market securities tend to be more liquid with narrower spreads, potentially offering better executions than the U.S. OTC market. Foreign companies not available as ADRs or foreign ordinaries on the U.S. OTC market can often be bought on local foreign markets. |
| Drawbacks | Less liquid and more volatile compared to foreign stock shares traded on local market exchanges. ADRs have custody pass-through fees that are levied on a regular basis (e.g., quarterly or annually.) You can search for individual prospectuses online using the U.S. Securities and Exchange Commission's EDGAR Company Search. OTC markets are subject to fewer regulations and reporting requirements. Not every foreign company has an ADR or Foreign Ordinary traded OTC available for U.S. investors. See all the drawbacks here. |
Subject to the foreign exchange market's hours, and stocks are priced and settled in the local currency. Some countries impose controls on foreign investing that can limit a U.S. investor's equity holdings, require them to place trades in round lots (standard trading amounts) and/or delay their currency conversions. Foreign countries can have different tax treatment than the U.S. and may also impose additional fees or taxation on U.S. investors. Foreign exchanges can limit equity holdings for U.S. investors. Foreign exchange regulations can differ from U.S. laws which can make researching a stock more difficult. |
How do I start investing in foreign companies using ADRs or foreign ordinaries?
ADRs, foreign ordinaries traded OTC, and most Canadian Stocks can all be traded online on Schwab.com using a SchwabOne® Brokerage Account. Additionally, foreign ordinaries traded directly in the 12 local markets offered can be placed for you by our Global Investing Services team, or you can trade them online on your own using a Schwab Global Account™. Call our Global Investing Services team at 800-992-4685 to learn more. They're available from 5:30 p.m. ET Sunday to 5:30 p.m. ET Friday.
Common questions
ADRs are created and issued by both domestic and international banks. These custodian banks or 'ADR agents' will typically charge an ADR 'pass-through fee' to cover administrative or other costs associated with the ongoing management of the particular ADR program. The average fee is one to three cents per share. The actual fee amount charged, and the timing of the pass-through fees vary per ADR issuer. Any fees charged to Schwab, like most brokerage firms, are automatically passed on and borne by the ADR investor.
- When are the fees collected? Pass through fees can be charged in two different manners. If the underlying ordinary share pays a dividend, the custodian banks collect the foreign issuer's funds and convert them to U.S. dollars and then forward the dividend payments to ADR holders'. Generally, at this time, they also choose to charge the ADR pass-through fee. When the foreign issuer does not offer dividends, the pass-through fee is simply deducted from the investor's account according to the predetermined timing as delineated in the ADR's prospectus.
- How are the fees collected? To collect the fees owed by ADR investors, the Depository Trust Company (DTC) collects the custody fees on behalf of ADR agents and then charges companies like Schwab that hold ADRs for their clients. Fees charged to Schwab by the DTC are referred to as 'ADR pass-through fees' and labeled as such on client statements. The dividend and the ADR fee will appear as two separate items making it very clear for investors to understand the difference.
- Where can I find information on the fees? Investors should review each individual ADR's prospectus for specific pass-through fee information. You can search for individual prospectuses online using the U.S. Securities and Exchange Commission's EDGAR Company Search.
The governments of some countries, such as France, Italy, and Spain, have implemented foreign transaction taxes on the purchase of certain securities they deem as being connected to their country, including U.S.-issued ADRs. These taxes are imposed extraterritorially, without regard to where an investor or financial firm is located, and are calculated as a percentage of the purchase amount of a covered security. Schwab collects an Industry Fee to offset these charges along with others. The Industry Fee is in addition to any commissions we may charge and is identified on your trade confirmation and account statements as Industry Fee.
Many ADRs can be converted into ordinary shares in the local home market and foreign ordinary shares can sometimes be converted to ADR shares. Occasionally, the underlying ordinary share is actually a Private Placement or the ADR custodian bank's books are closed in anticipation of a dividend, corporate action, or they have reached a foreign ownership limit. In such instances, converting the ADR and holding the asset at Schwab would not be feasible or possible.
It is also important to note there are often fees, taxes, and costs associated with an ADR conversion.
- Y-shares are five-letter stock symbols ending in "Y" which designate ADRs that trade in the U.S. OTC market. Banks or other depositary institutions hold the local foreign shares and issue receipts for them in a ratio of one ADR to X-amount of the foreign shares. They can be sponsored ADRs (the underlying company is sponsoring the listing) or they can be unsponsored.
- F-shares are five-letter stock symbols ending in "F" that represent an equity traded on a foreign exchange. In some instances, the foreign ordinary shares may be tradable in the U.S. Over-the-Counter market (OTC) through a market maker. In these cases, the market maker purchases and sells the foreign ordinary shares from their own inventory. It's important to note not all F-shares trade in the U.S. OTC market. Some foreign equities, even with F symbols, must be traded in their respective local home markets only.