Do you want to diversify your portfolio internationally but are concerned about the inefficiency and risk of buying foreign securities?

There are often significant road blocks associated with individuals purchasing international securities on a local exchange. If an internationally diversified portfolio is your aim — as it is ours — then take a moment to learn about depositary receipts and why using them to obtain international exposure may help avoid some of the common challenges of foreign investing.

The demand by investors for depositary receipts has been growing between 30 to 40% annually, driven in large part by the increasing desire of retail and institutional investors to diversify their portfolios globally. — Bank of New York Mellon ,The World’s Largest Depositary for ADRs and GDRs

What are ADRs / GDRs ?

American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) are negotiable securities that represent publicly-traded equities or debts of a foreign company. ADRs are typically denominated in US dollars and may be listed on a stock exchange or traded over the counter (OTC) in the US market, while GDRs can be denominated in either US dollars or Euros and trade on the London Stock Exchange or OTC.

How do they work ?

When a non-US company wants to list its publicly-traded stock in the US (or another foreign exchange), shares are deposited into a custodian bank in that respective country, such as Bank of New York Mellon in the US. This process gives investors from other countries the opportunity to won and trade the company’s stock.

The depositary bank issues depositary receipts (DRs) representing the publicly-traded shares on deposit at the custodian bank. The DRs, which entitles the shareholders to all dividends and capital gains, may be used to raise capital in a public offering or may be listed on an exchange, allowing for trading in the secondary market. The process for canceling DRs is the reverse — the receipts are canceled by the local custodian bank and the underlying securities are released back into the local market for trading.

Obstacles of investing in foreign markets

Many investors understand the importance of diversifying their portfolios internationally, but find the obstacles involved in owing the securities from non-US companies trading in their local markets to be daunting. Some of the hurdles include:

• Inefficient trade settlements
• Limits placed on foreign ownership
• Fees and surcharges placed on foreign owners of local market securities
• High foreign taxes and costly currency conversion
• Information flow on trading activity in the local market

• Unfamiliar market practices

Benefits and advantages of ADRs and GDRs

• Access. Investors have increased access to foreign markets through ADRs, trading in the US, and GDRs, trading primarily in London.
• Cost Effectiveness. Investors may potentially save 0.10%-0.40% (10 to 40 basis points) annually, compared to the costs associated with trading and holding ordinary shares outside the US because of the elimination or reduction of custody safekeeping charges.

The comforts of home

Investing in ADRs brings some additional comforts since ADRs are treated in the same manner as other US-listed securities. For exchange-listed ADRs, the companies underlying the ADR must file with the Securities and Exchange Commission (SEC). The SEC seeks to offer investors transparency and protection through US securities regulations, which strive to maintain fair dealings, protect against fraud and ensure that investors receive regular, audited financial statements. ADRs that are not exchange-listedd may not have the same financial reporting standards as in the US and may not be under obligation to distribute shareholder communications or pass through to investors any voting rights.

Ease of trade is also increased with ADRs due to familiar US trade, clearance, settlement and ownership procedures, eliminating the common problems of settlement delays and high transaction costs of international investing. Additionally, shareholders pay the standard US taxes, which often provides greater tax efficiency.

Gaining international exposure

Through the geographical variety of companies with sponsored DRs, investors may diversify their portfolios through exposure to international markets and avoid some of the common inefficiencies and limitations that accompany international investing. Of course, DRs will not make investors immune to risks of foreign markets and may have greater market volatility risk than US securities. Even though DRs are US dollar or euro denominated, currency risk remains. Political, economic and social conditions in the home market may also impact stock prices.

We at Green Valley Wealth Advisors are fully committed to global investing. Let us help you decide how much international exposure is right for you, and the most appropriate way to gain exposure to international markets — depositary receipts or exchange traded funds (ETFs).

Disclaimer: All articles are for informational purposes only and do not constitute offers/solicitations to sell or purchase any security or investment product or service; this information is provided solely for your personal use and is not intended to be investment advice; all investments are subject to risks, including possible loss of the principal amount invested; diversification does not protect against a loss in a declining market or ensure a profit; stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries; foreign investing involves additional risks including currency fluctuations and political uncertainty; prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks; investments in bonds are subject to interest rate, credit, and inflation risk; past performance is no guarantee of future results; nothing constitutes tax or legal advice; investment products described herein are not bank deposits; are not insured by the FDIC or any other governmental entity; are neither obligations of, nor guaranteed by Avant-Garde Advisors, LLC. We are not responsible for the accuracy or content on third party websites; any and all links are offered only for use at your own discretion; and our privacy policies do not apply to linked websites.