American depositary receipts (ADRs) are shares of foreign companies that are traded on US stock exchanges. They were specifically created to give 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 2 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 3 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:
| 1 stock is always 1 stock |
| You may have to pay dividend taxes from the foreign country, as well as US dividend taxes. If you fill out a W-8BEN Form, you can avoid paying US tax and pay tax in Canada instead. If Canada has a tax treaty agreement with the foreign country, you may be able to avoid paying tax to the foreign government and pay tax in Canada instead. | You get the full dividend payment minus US taxes. If you fill out a W-8BEN Form, you can receive the full dividend and pay tax in Canada instead. |
| 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, Canada has tax treaties with a number of countries, including the US, to avoid non-Canadian investments from being double taxed. For US investments, you can fill out a W-8BEN form assuring the US government that you’ll declare US investment income in Canada and pay tax to the CRA accordingly.
If Canada has a tax treaty in place with the country in which the foreign stocks have been issued, then you may be able to follow a similar arrangement to avoid being double taxed. If no such agreement is in place, you may have to pay tax to both the foreign government and the CRA.
The Department of Finance Canada has published a list of foreign countries and related tax agreements that are currently in force.
| Response | Male | Female |
|---|---|---|
| US | 53.04% | 45.36% |
| I would not invest in companies based in any of these countries or regions | 22.47% | 36.09% |
| Europe (EU) | 35.02% | 27.22% |
| UK | 34.21% | 23.67% |
| Japan | 28.14% | 19.72% |
| Australia | 25.51% | 17.75% |
| China/Hong Kong | 19.03% | 15.19% |
| Singapore | 18.02% | 11.05% |
| India | 13.56% | 8.88% |
| Africa & Middle East | 12.15% | 8.68% |
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. Check with your broker to find out whether you can access stocks sold on OTC Markets.
We selected the 10 most popular ADRs trading on various US stock exchanges.
| Name | Ticker symbol | Exchange | Country | Sector | Depositary | Buy Now |
|---|---|---|---|---|---|---|
| Volkswagen | VWAGY | OTC | Germany | Consumer Discretionary | JP Morgan | Buy on Interactive Brokers |
| Nokia | NOK | NYSE | Finland | Communication services | Citibank | Buy on Interactive Brokers |
| Royal Dutch Shell | RDS.A | NYSE | Netherland | Energy | JP Morgan | Buy on Interactive Brokers |
| Unilever | UL | NYSE | UK | Consumer staples | Deutsche Bank | Buy on Interactive Brokers |
| Airbus | EADSY | OTC | France | Industrials | JP Morgan, BNY, Citibank, Deutsche Bank | Buy on Interactive Brokers |
| Alibaba Group | BABA | NYSE | China | Consumer staples | Citibank | Buy on Interactive Brokers |
| Nio Inc | NIO | NYSE | China | Consumer discretionary | Deutsche Bank | Buy on Interactive Brokers |
| Sony Corp | SONY | NYSE | Japan | Information technology | Citibank | Buy on Interactive Brokers |
| BioNTech SE | BNTX | NASDAQ | Germany | Healthcare | BNY | Buy on Interactive Brokers |
| Nintendo Co Ltd | NTDOY | OTC | Japan | Information technology | JP Morgan, BNY, Citibank, Deutsche Bank | Buy on Interactive Brokers |
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 a Canadian or US stock exchange.
But be aware of the pros and cons before you invest. Compare your options to find a stock trading platform that provides access to the US stock exchanges on which you want to trade along with a fee structure that works for you.
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