ADRs vs Foreign Shares: How to Buy International Stocks

Compare American Depositary Receipts (ADRs) with direct foreign share purchases. Understand the pros, cons, fees, and tax implications of each approach.

What is an ADR?

An American Depositary Receipt is a certificate issued by a US bank that represents shares of a foreign company. ADRs trade on US exchanges in US dollars during US market hours, making it easy for American investors to buy foreign stocks without opening an international brokerage account or dealing with foreign currency settlement.

ADRs vs direct foreign shares

  • Convenience: ADRs trade like US stocks with standard settlement. Foreign shares require a broker with international access and may settle in foreign currency on a different schedule.
  • Fees: ADRs charge custodian fees (typically $0.01-$0.05 per share per year, deducted from dividends). Direct foreign shares may involve higher transaction commissions and FX conversion costs.
  • Tax: Both are subject to foreign dividend withholding tax. ADR holders receive a 1099-DIV showing the withholding, which can be claimed as a US tax credit. Direct holders may need to handle foreign tax documentation.
  • Selection: Only a fraction of foreign companies have ADRs. Direct access opens the full universe of international stocks.
  • Liquidity: Major ADRs (sponsored, exchange-listed) are highly liquid. Unsponsored or OTC ADRs can have thin volume.
Sponsored vs unsponsored ADRs

Sponsored ADRs are created with the cooperation of the foreign company and typically carry better disclosure and liquidity. Unsponsored ADRs are set up by a bank without the company's involvement and often trade over the counter with lower volume.

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FAQs

Do ADRs pay dividends in US dollars?▼

Yes. The depositary bank converts foreign currency dividends into US dollars before distributing them to ADR holders, though a small FX conversion fee is typically applied.

Can I convert ADRs into the underlying foreign shares?▼

In most cases, yes. The depositary bank can cancel the ADR and deliver the underlying shares to a foreign brokerage account. This process involves fees and is mainly used by institutional investors.

Are ADR custodian fees significant?▼

For most investors, ADR fees are minor -- typically a few cents per share per year. However, for large positions in low-dividend stocks, the fees can be noticeable relative to income received.

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International stock investingCurrency risk in investingDividend payout ratio

Intrinsic Investor is for education and research only. Not financial advice.