Brokers ADR Fees
Transfer agents and banks that sponsor American Depositary Receipts (ADRs) are permitted to charge
holders an annual custody ADR fee of anywhere from $0.005 to $0.05 per share.
The fee is administered through the Depository Trust Company (DTC) which typically will be subtracted from the
gross dividend amount payable and/or collected from your broker's clearing firm by the DTC and deducted from your account if the ADR
does not pay a dividend. The fee will be posted to your monthly account statement and transaction history pages as "ADR Custody
Fee" or "ADR Pass-Thru Fee."
Brokers ADR Commissions
ADR commissions are different from ADR fees. As you see from the table below, most brokers don't charge
ADR commissions:
How can I trade ADRs?
ADRs trade like U.S. issues and are quoted in American dollars. You can place ADR orders online for your brokerage and brokerage retirement
accounts (e.g., IRA, SEP-IRA, Keogh, etc.). Some ADRs are marginable.
How are ADR dividends paid?
Dividends are paid in American dollars but are still subject to foreign-tax withholding.
What are the tax implications of ADRs?
You may be able to avoid certain taxes involved in buying and selling securities in overseas markets. Consult a tax advisor for additional information.
What Are The Reasons to Invest in ADRs?
Currency Exposure
Many investors get confused about if they still have any foreign currency exposure when investing in an ADR since it is denominated in USD. The answer is “yes”, you do still have the same currency exposure as you would if you invested in that company’s stock directly in its local market. Let’s look at an example, Nokia Corporation, to see why. If I buy Nokia’s ADR (NYSE:NOK) I’m paying USD for shares in their ADR. The ADR’s sponsoring bank takes my USD and converts it to EUR, which it then uses to buy shares in Nokia’s stock on the Finnish stock exchange, where it has its primary listing. So ultimately what your ADR shares own is an asset that is denominated in EUR and will therefore fluctuate in value along with that currency.
FX Conversion Costs
Currency exposure is a good segway into currency conversion considerations. In the example above, investors might forget about the currency exposure in ADRs because the sponsoring bank takes care of the FX conversion from USD to EUR. This is more effective for the ADR investor because if they were to invest in Nokia’s stock in the Finnish market directly they would need to convert their funds to EUR each time they bought stock, and then convert it back to USD whenever they sell it.
Dividends
Similarly, if you invested directly in Nokia stock, every time it paid a dividend you would have to convert the EUR dividend back to USD. If you invested in the ADR, the sponsoring bank would take care of this conversion for you by converting the total proceeds received by all ADR shares to USD and then passing them through to the ADR investors.
Filing Taxes
Investing directly and earning income in most foreign markets would require the investor to fill out and submit the appropriate annual tax forms in that country in addition to their home country. Depending on how many foreign markets you want to invest in, this could be a significant amount of extra paperwork. Investing in ADRs eliminates the need to file taxes in each of these markets as this is handled by the ADR’s sponsoring bank so that any gains you make on the ADR itself would be reported and taxed the same way they U.S. stocks are taxed.
Regulatory Concerns
Many investors shy away from foreign stocks because the regulatory requirements and environments can be very different and sometimes confusing in other countries, and they are often times less stringent than in the U.S. Public companies in the U.S. are required to submit audited financial statements every year that provide investors with a certain level of comfort knowing that an independent firm is reviewing and signing off on the accuracy of the financials. Most ADRs are also subject to these same requirements: there are 3 levels of ADRs that correspond to the degree of regulatory requirements they must adhere to. Level II and III ADRs are required to file annual financials with the SEC in English through their sponsoring bank, however Level I ADRs are not required to do so and therefore would require extra care and due diligence from prospective investors.
Are ADRs Right for My Portfolio?
If you are looking to achieve more concentrated exposure to specific foreign companies that can’t be achieved with diversified mutual funds and ETFs, you should consider investing in ADRs. Investing in ADRs vs. investing in the companies’ stock directly in their local markets should yield the same returns, however ADRs are simply a much easier, less complex vehicle to use. The sponsoring banks take care of the FX conversion and dividend payments for you, and also ensure that the company is meeting regulatory requirements and providing relevant company communications in English so that you can spend more of your time researching investments.
Updated on 1/1/2025.