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Motley Fool Global Gains / GGM: Really Basic Questions

URL:  http://boards.fool.com/hi-john-first-i-apologize-for-the-delay-in-26645171.aspx

Subject:  Re: With declining dollar are ADRs really best? Date:  5/13/2008  3:54 PM
Author:  TMFDoraemon Number:  74 of 847

Hi John,

First, I apologize for the delay in responding. There's a bunch going on and I try to get to the questions on existing recs first. Second, excellent screen name! Third, welcome to GG!

Ok, let's see if I can help with what's being discussed.

- The fees on ADRs are low and generally come out of dividends. In the grand scheme of things they're not material, and much cheaper than investing locally.

- As for the currency impact, I agree with what Bears said. ADRs generally provide the same benefits as investing in the local shares, but with less headaches. The costs to setting up global brokerage accounts aren't trivial, the commissions are often higher (stamp fees in the UK, HK, etc), and even where some of these things are simplified (ie. E*trade), the currency conversion costs for getting into and out of an investment can be prohibitive. Longer holding periods and willingness to keep money in the same market/country can help to balance this out, having large sums of money to invest makes the percentage costs of some of these fees easier to handle too. But for most folks going with ADRs is the easiest and most cost effective way to go right now (the future could be different).

Most important to what you asked is that ADRs will generally provide the currency effect you asked about. ADR share prices in the US generally move based on the price move in the home market +/- the minute to minute move of the USD and related currencies to each other. There are a couple of exceptions that I've seen, but each was unique.

In general you can check this for yourself by looking at the local share price, the adr ratio, and the exchange rate and then doing the conversion. You can also go backwards from the US share price to the local share price. If you do it again the next day you'll generally see that the US ADR price will very closely reflect the movement of the local share price and exchange rate movement.

As an example a bunch of Japanese companies that trade in the US are down or flat over the last six months in Tokyo. But if you bought the ADRs of the same companies here the losses are much smaller, or in some cases there are gains. This is because of the yen's rise from 115-120:$1 to 100-105:$1.

Some of the big banks have lots of info on ADRs on their sites with how they work, the advantages, etc. A couple of links are below:

http://www.adr.com/research/about_over.html

http://www.bnyadr.com/dr_edu_basics_and_benefits.jsp

Best,

Nate
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