American depositary receipts (ADRs) are shares of foreign companies that are traded on US stock exchanges. They were specifically created to give US investors access to foreign stocks without the added step of dealing in foreign stock markets. They also give foreign companies exposure and sometimes a chance to raise capital in the US.
When a foreign company wants to list on a US stock exchange but avoid the hassle and fees of listing, they can enter into an agreement with a US bank or an institution known as the depository. This bank works with the foreign company and its custodian bank abroad to issue ADR shares in the US stock markets.
However, the US bank doesn’t always have to have an agreement with the foreign company. The bank — or another institution — can issue ADRs without the foreign company’s approval.
Depending on whether the foreign company and the ADR-issuing bank have agreements, there are two types of ADRs:
Note: Unsponsored ADRs are often traded over-the-counter (OTC) and cannot be offered to individual investors unless they file financial reports with the SEC or unless the company is 12g3-2(b)-qualified.
Depositary is the US institution — either a bank or a broker-dealer — that works with the foreign company and their custodian bank to register and issue the ADRs on the US stock exchange. The depositary also registers the trades and distributes dividends to US shareholders.
Based on the ADR’s access to the US stock exchanges, there are three categories:
Buy ADRs on US stock exchanges the same as any other traditional stock. But here are some differences between the two.
| ADRs | Traditional US stocks |
|---|---|
One ADR share can represent:
| One share is always one share |
| You may have to pay dividend taxes from the foreign country, as well as US dividend taxes | You get the full dividend payment minus US taxes on the dividend |
| The ADR price may be influenced by currency fluctuations between the US dollar and the foreign country’s currency | No direct currency risks |
| Investors may not have full access to the company’s financial information if the ADR is Level I | Full company financial information available |
ADRs follow the same taxation rules as traditional stocks. This means you’ll pay taxes on any dividend payment you receive. However, the foreign home country may withhold some percentage of the dividend as tax. This can be anywhere from 15% to 35%.
Luckily, the IRS offers tax credits, so your dividend doesn’t get double-taxed. To get the tax credit, you’ll need to fill out Form 1116. This will help you offset the amount you already paid to the foreign country. However, if the foreign country tax is higher than the one in the US, you can only get a tax credit for the amount taxed by the IRS. For example, you pay 15% tax in the US but 35% in the foreign country. The IRS can only give you credit for the 15%, thus the foreign country keeps the remaining 20%
Important: You can’t get tax credits for ADRs held in tax-deferred accounts, such as IRAs.
American depositary receipts are a hassle-free way to invest in foreign stocks. But there are some drawbacks to keep in mind.
| Benefits | Drawbacks |
|---|---|
| Directly invest in foreign stocks | Not all ADRs are listed on the major US exchanges |
| You don’t need to open a new brokerage account | Unsponsored ADRs don’t give you voting rights |
| Get dividend payments if the company pays dividends | Dividends from ADRs may be double-taxed |
Buy ADRs like you would buy any other stock.
Note: Some ADRs trade over-the-counter (OTC). Unless your broker allows buying OTC stocks, you won’t be able to buy the ADR you want.
We selected the 10 most popular ADRs trading on various US stock exchanges.
| Name | Ticker symbol | Exchange | Country | Sector | Depositary |
|---|---|---|---|---|---|
| Volkswagen | VWAGY | OTC | Germany | Consumer Discretionary | JP Morgan |
| Nokia | NOK | NYSE | Finland | Communication services | Citibank |
| Royal Dutch Shell | RDS.A | NYSE | Netherland | Energy | JP Morgan |
| Unilever | UL | NYSE | UK | Consumer staples | Deutsche Bank |
| Airbus | EADSY | OTC | France | Industrials | JP Morgan, BNY, Citibank, Deutsche Bank |
| Alibaba Group | BABA | NYSE | China | Consumer staples | Citibank |
| Nio Inc | NIO | NYSE | China | Consumer discretionary | Deutsche Bank |
| Sony Corp | SONY | NYSE | Japan | Information technology | Citibank |
| BioNTech SE | BNTX | NASDAQ | Germany | Healthcare | BNY |
| Nintendo Co Ltd | NTDOY | OTC | Japan | Information technology | JP Morgan, BNY, Citibank, Deutsche Bank |
The only alternative to buying an ADR is to open an account with a broker that offers access to foreign stocks, such as Interactive Brokers. However, this often comes with additional fees and conversion rate fluctuations.
If the stock you want to buy has an ADR, it’s often cheaper to buy it in that form. Otherwise, brokers that offer access to foreign markets can offer a higher variety of foreign stocks that may not have an ADR.
ADRs are an excellent option for investors looking to buy foreign stocks without the complexity of accessing foreign markets. Buy ADRs like you would buy any other stock on the US market. Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money. Finder is not an adviser or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
But be aware of the pros and cons before you invest. And compare your options to find the right broker when looking to invest in ADRs.
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