Buying Foreign Stocks: To ADR or Not To ADR

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by Tom Konrad, Ph.D., CFA

ADR

Since my 10 Clean Energy Stocks for 2021 list contains 5 foreign stocks this year, a reader asked about the relative merits of buying a foreign stock compared to a US ADR.  Here is a summary of the relative merits (for US investors) of buying a foreign stock directly compared to buying the American Depository Receipt (ADR).

First, let’s look at the tickers for the five foreign stocks in the list.  There are four types of ticker in the list this year:

  1. The stock on its home exchange in the local currency.  These have the form TICKER.EX, where TICKER is the stock ticker on the foreign exchange, and EX is an abbreviation for the name of the exchange.  European stocks usually trade on several European exchanges. I try to use the ticker on the exchange with the most liquidity, which is usually also in the company’s home country.
  2. The US ticker for the foreign stock – a five letter ticker ending in F.
  3. An unlisted ADR – a five letter ticker ending in Y which trades over the counter.
  4. A listed ADR – this is an ADR that trades on a US stock exchange such as the NASDAQ or NYSE.

For the companies in the list this year, MiX Telematics is the only one with a listed ADR, MIXT.  I don’t usually mention its listing on the Johannesburg stock exchange, MIX.JO because it does not have a corresponding US ticker, but include it here for completeness.

The others all have unlisted ADRs:

Company Foreign Exchange Foreign Ticker US Ticker US ADR ADRs per Foreign share Approx ADR fees in 2020 per ADR
MiX Telematics Johannes-burg MIX.JO MIXT 1/25 $0.012
Red Electrica Madrid REE.MC RDEIF RDEIY 2 $0.056
Valeo, SA Paris FR.PA VLEEF VLEEY 2 $0.027
Veolia Paris VIE.PA VEOEF VEOEY 1 $0.085
Umicore Brussels UMI.BR UMICF UMICY 4 $0.03

 

ADR fees are often withheld from dividend payments to ADR holders, but can also be charged directly to the account holding the ADR.  Both holders of the foreign stock and holders of the ADR will also have foreign taxes withheld from the dividend payment.

I have not found any way to determine how much an ADR fee will be.  Sponsoring banks can change ADR fees over time, and sometimes they are charged as a fixed number of cents, other times they are a percentage of the dividend.  I called and asked my broker to look up the total ADR fees charged on each of the ADRs above in 2020.  The results are in the last column. 

Foreign Stock or ADR?

To determine if you are better off buying the foreign stock (F ticker) or the ADR (Y ticker), you should first determine the commission your broker will likely charge you for either trade.  I usually just enter the trade into my broker’s online platform to see the estimated commission but hit “Cancel” instead of confirming the trade.  If the commissions for the foreign stock and the ADR are the same, then buy the foreign stock.

If the commission to buy the foreign stock is higher, then you have to consider how long you plan to hold the stock and how much you intend to buy.  

Small investors and investors not expecting to hold the stock for long will find the ADR is usually more cost effective. Larger investors and long term holders should generally buy the foreign stock.

Rule of Thumb

I find that I typically pay an extra $50 per trade for a foreign stock compared to an ADR.  I generally hold stocks for one to five years. Since there is also a similar fee to sell the stock, I will generally pay an extra $100 to buy and sell a foreign stock.  Annual ADR fees seem to usually be around 1% of the share price, so if I can make a trade large enough to keep the extra commission paid less than 1% and hold the stock longer than a year, it makes sense to buy the foreign stock rather than the ADR.

As a formula, I buy the foreign stock if 

D x Y > 100 x C 

Where D is the size of the trade in dollars (500 shares at $10 is $5,000), Y is the number of years I expect to hold the stock or ADR, and C is the extra commission I have to pay to buy the foreign stock.  Since my expected holding time is typically stocks is 2 years or more and I usually pay an extra $50 to trade foreign stocks, the foreign stock purchase will usually make sense for trades of $3,000 or more.  

In general, I dislike ADR fees, so I try to buy foreign stocks using large trades. 

DISCLOSURE: Long MIXT, REDIF, VLEEF, VEOEF, UMICF..

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

 

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