Broker ADR Fees

Depositary banks that issue or manage American Depositary Receipts (ADRs) may assess periodic custody or pass-through charges to ADR holders. These charges often range from $0.01 to $0.05 per ADR, although the exact amount and collection date depend on the specific ADR program.

The charge is often processed through the Depository Trust Company (DTC). In many cases, it is deducted from the gross dividend paid to ADR investors. If the ADR does not issue a dividend, DTC may collect the charge from broker-dealers and other participants, and the broker may then debit the customer’s account. The charge may appear on monthly account statements and transaction-history pages as an "ADR Custody Fee" or "ADR Pass-Thru Fee."

Broker ADR Commissions

ADR commissions are not the same as ADR fees. As shown in the table below, many brokers do not charge separate commissions for online trades of U.S.-listed ADRs:

How Can I Trade ADRs?

ADRs trade like U.S. securities and are quoted in U.S. dollars. You can enter ADR trades online in 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 U.S. dollars, but they may still be subject to foreign-tax withholding.

What Are the Tax Implications of ADRs?

ADRs may help investors avoid some taxes and procedures connected with buying and selling securities directly on foreign exchanges, but dividends may still face foreign-tax withholding and U.S. tax rules. Consult a tax advisor for additional information.

What Are The Reasons to Invest in ADRs?

Currency Exposure

Many investors are unsure whether ADRs still carry foreign-currency exposure because they trade in U.S. dollars. The answer is “yes.” An ADR represents shares of a foreign company, and those underlying shares are often priced in the company’s home-market currency. For example, Nokia Corporation’s ADR (NYSE:NOK) trades in U.S. dollars, but it represents exposure to Nokia shares whose main market is in Finland. Because of this, both changes in Nokia’s local share price and movements in the euro/U.S. dollar exchange rate can affect the ADR’s price.

FX Conversion Costs

Currency exposure leads directly to the issue of currency conversion. ADR investors usually do not have to trade directly on a foreign exchange or convert U.S. dollars into a foreign currency for every buy or sell order. Instead, the ADR trades in U.S. dollars on a U.S. market. Currency conversion can still happen in the background, especially when dividends are converted into U.S. dollars or when ADRs are created or canceled. This can make ADRs easier to use than buying ordinary shares directly in the local market, although ADR fees, spreads, and currency movements still matter.

Dividends

In the same way, if you owned Nokia’s ordinary shares directly, you might have to handle a EUR dividend whenever the company paid one. With the ADR, the depositary bank generally manages the conversion by changing the dividend proceeds received for the ADR program into U.S. dollars and then distributing them to ADR holders, usually after applicable fees and foreign-tax withholding.

Filing Taxes

Investing directly in foreign markets and receiving income from those investments can add tax and reporting complexity. ADRs can make the process simpler because the securities trade through a U.S. brokerage account and dividends are generally paid in U.S. dollars. However, ADRs do not remove every foreign-tax issue. Foreign taxes may still be withheld from dividends, and investors may need to report those amounts or claim a foreign tax credit or deduction on their U.S. tax return. Consult a tax advisor for guidance.

Regulatory Concerns

Many investors avoid foreign stocks because regulatory systems in other countries can be very different, sometimes confusing, and often less familiar than U.S. rules. Public companies in the U.S. must file audited financial statements each year, which gives investors some comfort that an independent firm is reviewing and signing off on the accuracy of the financials. ADR programs are subject to different regulatory levels. Level II and Level III ADR programs have SEC reporting requirements, including annual reports on Form 20-F, while Level I ADRs have more limited requirements and usually trade over the counter. For this reason, Level I ADRs call for extra caution and due diligence from potential investors.

Are ADRs Right for My Portfolio?

If you want more targeted exposure to specific foreign companies than you can get through diversified mutual funds and ETFs, ADRs may be worth considering. Buying ADRs is often easier than purchasing a company’s ordinary shares directly in its home market. ADRs are quoted and traded in U.S. dollars, and the depositary bank usually handles dividend conversion and other administrative tasks. Still, ADR returns may not match the local shares exactly because fees, foreign taxes, currency changes, liquidity, trading spreads, and the ADR-to-ordinary-share ratio can all affect performance.