Advantages of American Depository Receipts

There are billions of dollars currently invested in American Depository Receipts (ADR) – that statistic alone implies that there are some significant advantages in this particular strategy.  Here are six good reasons why it could make sense to follow suit.

1) You can get access to growth markets – many international markets, especially emerging markets, have higher GDP growth rates than the United States or Europe. While the American stocks in your portfolio may be providing disappointing returns, holding some ADRs could, potentially, provide you with better prospects. After all, one of the most basic lessons of investing is to ensure that you are adequately diversified; there is no question that ADRs are a great avenue to diversify your portfolio.

2) You can benefit from currency swings – holding ADR’s can result in favorable currency conversions for dividends and other cash distributions. For example, if you own shares of a European ADR and the euro strengthens against the dollar, any dividend increase will be boosted because the dividend payment has to be converted to dollars before you receive it.  (Of course, this could swing the other way.)

3) Stocks may be cheaper to acquire – perhaps the most tantalizing and exciting reasons to invest is that you may uncover a hidden bargain that will provide stellar returns either over the short-term or the long-term.  Typically speaking, many US analysts are over-focused on domestic companies and may miss certain organization that are delivering, or have the potential to deliver, results that far exceed anything that the US peers are delivering.  Of course, there are no guarantees and doing your research before you buy is more critical than ever.

4) It is a convenient way to invest – many individual investors have problems selecting foreign companies to invest in and then trying to figure out how to invest in them in a convenient and relatively cost effective fashion.

Because, with an ADR, you’re investing in a domestic financial institution that has purchased a certain amount of stock in a foreign company, you won’t have to open a separate brokerage account to invest overseas.

In fact, most of the process will be identical to investing in a “regular” stock – for example ADRs trade during U.S. market hours and are subject to similar clearing and settlement procedures as American stocks.

The other thing to bear in mind is that many ADR’s (Level II ADR’s at least), must supply the same level of information as any other US security. Trading information is readily available, financials are reconciled to US Generally Accepted Accounting Principles (GAAP), and the SEC regulates the Company’s disclosure to investors.

5) It offers tax simplification – perhaps one of the hidden benefits of ADR’s is that it simplifies the tax aspects of the transaction.  For example, selling shares in an Australian company, that you owned directly, would trigger tax in the Australian jurisdiction – however, selling from an ADR would trigger US tax.  It is generally simpler and more manageable to manage your tax affairs in one jurisdiction.

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