Hello. Is it better to buy the stock directly from the foreign stock exchange, or is it pretty much the same if you buy an ADR? I really want to diversify my portfolio internationally, but I do not want to go through the hassle of converting money, opening a foreign brokerage account and worrying about currency fluctuation. What I am basically asking is whether or not there is much arbitrage going on between the ADR and the actual stock at its home exchange. If the US dolloar plunges, will the ADR pop up as a result?
I've been looking into the same question, and my takeaway so far is that ADR's are a "buyer beware" situation. Some ADR's are highly liquid, with tight bid/ask spreads and prices that are virtually identical to the underlying foreign stock, so they definitely are an easier and cheaper way to own the foreign stock than using a foreign brokerage account. But there are plenty of anomalies in ADR pricing too: if you Google "ADR mispricing" you will get tons of hits. Here's one academic paper that does a pretty good job of explaining the issue:http://fisher.osu.edu/fin/dice/papers/2003/2003-33.pdfThe author found cases where the ADR traded for anywhere from a 66% premium to an 87% discount vs. the underlying shares. I stumbled into this a couple of weeks ago; was thinking about buying Groupe Danone ADR (DA), but then I discovered that it was trading at about a 9% premium to the underlying shares. (see http://boards.fool.com/Message.asp?mid=25049550). That adds a big uncertainty to the investment, so I decided to stay away. But I have purchased several other ADR's that seemed to be trading in close proximity to their intrinsic value.
thanks bunkerbob, that paper answered many of my questions - I'm leaning toward ADR's as a matter of convenience
The following link from seekingalpha.com shows that changes in foreign exchange rates can cause the ADR to underperform the local shares in times where the U.S. dollar is strengthening:http://seekingalpha.com/article/8573 John Bethel's blog post from Aug. 24, 2006 on his controlledgreed.com website talks about the fact that some ADRs are very illiquid and the extra cost of buying foreign shares is worth getting more liquidity:<<I've been eying an Australian stock lately. It has an ADR trading VERY illiquid on the OTC. Most days it doesn't trade at all. Even when it does, it just trades a couple of hundred ADRs or thereabouts. To establish a full position for my portfolio, I'd need purchase thousands of ADRs. It would be a pain getting the order filled – and might take multiple orders at that. This company trades daily in Australia and New Zealand. It's very liquid on those exchanges.So if I pull the trigger, I'll gladly call Schwab's Global Investing Service and pay a higher commission. I think doing otherwise is a case of being penny wise and pound foolish.” But that's just me.Furthermore, I do own the ADRs of Nikko Cordial that were purchased on the OTC. If I had it to do over again, I would buy the ordinary (“common”) shares in Japan. And for the same reasons I just mentioned. Nikko Cordial ADRs trade thinly but the ordinary shares are very liquid in their native country.>>http://www.controlledgreed.com/2006/08/index.html The following two papers talk about the substantial -- and prolonged -- premiums that ADRs of Indian companies trade at versus the price of the local foreign shares:http://w4.stern.nyu.edu/glucksman/docs/Saxena.pdf http://www.prism.gatech.edu/~rc166/Revised%20ADR%20paper.pdf
TMFHamp writes:The following link from seekingalpha.com shows that changes in foreign exchange rates can cause the ADR to underperform the local shares in times where the U.S. dollar is strengthening:http://seekingalpha.com/article/8573Well, of course if you track the ADR in dollars and track the local shares in the foreign currency, the ADR will "underperform" when the dollar rises. That's kind of by definition of "foreign currency". But the exchange rate has no effect on the dollar return of the local shares versus the ADR. That's because you use the exchange rate when you ultimately convert back to dollars. Tracking the ADR vs. the local shares just incorporates the cost of that conversion continuously.In short, exchange rates are irrelevant to the ADR vs. local shares decision. (Of course, exchange rates are very relevant to the actual dollar return of a foreign investment, however you buy it. I hope this is all the SeekingAlpha author was trying to say; if not, he is simply wrong.)John Bethel's blog post from Aug. 24, 2006 on his controlledgreed.com website talks about the fact that some ADRs are very illiquid and the extra cost of buying foreign shares is worth getting more liquidityYes, this argument makes more sense. On the other hand, you have to consider the two transaction costs for converting to and from the foreign currency.The right answer, as usual, is to add up the total cost -- including commissions, currency exchanges, spread, and slippage -- and take whatever route is cheapest. The shares themselves are identical, whether local or ADR. - Pat
John Bethel's blog post from Aug. 24, 2006 on his controlledgreed.com website talks about the fact that some ADRs are very illiquid and the extra cost of buying foreign shares is worth getting more liquidityADR parity also assumes the free flow of currency and assets across borders. In many countries, this isn't the case, causing huge disparities between the local price and the ADR price. Case in point: India.Bill Mann
I posted a related question over on the GT:book group board and was hoping to get a little more discussion on the subject:http://boards.fool.com/Message.asp?mid=25275240Jim Rogers in his book Investment Biker makes the point that, in times of crisis, hyperinflation, and state controls, it becomes extremely difficult to get out of a currency. For this reason he recommends having investments directly in other markets.Granted, the book was written in 1990 and the global economy is much more intertwined, but doesn't this make a strong case towards investing in the markets of origin over the ADRs?
I'm amazed about how well the BoNY manages to hide from the consumer the huge ripoff behind the ADR system; about the intricate means (Reg. S, Reg. 144A, PFIC, and what do I know else) that the U.S. government uses to keep their citizens caught in the inflationary US$ system, which seems to be designed to expropriate the hard-working, saving people from their money, benefiting only those smart enough to buy real assets (and leverage them); and finally I'm amazed how hard it is to buy (real, not ADR ripoff) foreign stocks from within the U.S. "We don't do that"; "too dangerous"; "but not if there is an ADR of that stock trading in the OTC" etc. etc. In other, free, countries that I know, brokerages usually allow to trade on any major exchange in the world, including U.S., for a pretty small fee, with the currency automatically converted using daily interbank rates. Only not U.S. banks/brokerages. I personally don't see any freaking advantage in the ADR system (originating from some 100 year old antiquated regulations), as almost every foreign company that I looked at so far has their shareholder information in plain, clear English on the internet. BoNY's frivolous arguments don't make sense to me except in view of the huge, mass-stupidifying marketing machinery that they are running. When you ask them by mail or telephone why your US$-dividends paid by them from your ADR is less than the dividend of the ordinary, you get all kinds of excuses and stories from dumb call center agents. When you ask to send you the form to convert to ordinaries, they never arrive at your address (and are not downloadable, as opposed to their marketing crap). They never tell you the real reason of the "mysterious" disappearing of parts of your dividends. Fact is if you build a long-term (e.g. retirement) portfolio with ADRs, and BoNY's fee is between 10 and 25% of the yearly dividend of typically, say, 3%, you can possibly forego about 1/3 or more of your retirement assets to BoNY fees (do your math with compounded yield)! For nothing! Outrageous! (Only the few NYSE-traded ADRs are legally exempt from fees.) Question: Has anybody verified their ADR dividends? Or do most people not care about dividends?? For the buy-and-hold investor, the effect of the possibly higher commission for ordinaries seems to be negligible compared to this.
buyforeign said"They never tell you the real reason of the "mysterious" disappearing of parts of your dividends. Fact is if you build a long-term (e.g. retirement) portfolio with ADRs, and BoNY's fee is between 10 and 25% of the yearly dividend of typically, say, 3%, you can possibly forego about 1/3 or more of your retirement assets to BoNY fees (do your math with compounded yield)! For nothing! Outrageous!"Can someone confirm this is true ? Any links ?
I did my calculations, my research on the internet, and bugged BoNY, various brokers, etc. Information on this subject is very sparse, and most parties are ignorant (intentionally or not). I think this has an extremely high impact on my retirement portfolio (similar to mutual fund fees). I have some links, but have not assembled the information and have no time right now, I will post more details later if I'm still a member; my post was intended as starting point to clear up things: I would like to hear other investors' opinion, or maybe Motley Fool's (I'm paying $300 yearly for this service unless I cancel!) Thanks,
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