ADRs, Foreign Ordinaries, & Canadian Stocks
Get a better understanding of American Depositary Receipts (ADRs), Foreign Ordinaries, and Canadian Stocks and explore how you can incorporate these international stock types into your trading or investing strategy.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are negotiable securities issued by a bank that represent shares in a non-U.S. company. These can trade in the U.S. both on national exchanges and in the Over-The-Counter (OTC) market, are listed in U.S. dollars, and generally represent a number of foreign shares to one ADR. This gives U.S. investors exposure to foreign equities without having to trade on a local exchange in the local currency. Investors can trade ADRs during the U.S. market sessions.
ADRs can be issued as unsponsored without any involvement or approval by the foreign company or they can be issued as sponsored, where the underlying foreign company participates in the issuance of the ADR and also retains a controlling relationship. Only sponsored ADRs may be listed on a national exchange and they must meet certain qualifications, otherwise they trade in the U.S. OTC market. Unsponsored ADRs only trade in the U.S. OTC market.
Pros and Cons
The issuing financial institution will collect any dividend payments and convert them into U.S. dollars for you. Also, ADRs listed on an exchange must file quarterly results because they are registered with the U.S. Securities and Exchange Commission and are subject to U.S. accounting rules. This means investors potentially have access to more information than they would if they’d invested directly overseas.
Additionally, depending on country and account type, applicable dividend withholding tax percentages may be lower than those applied to foreign ordinary shares. There are some listed ADRs that are marginable and may have options.
The institutions that issue ADRs may charge quarterly or annual 'ADR Pass-Through Fees' which consist of custody fees and fees for processing dividends and corporate actions. These fees can add to your investment costs.
Liquidity for some ADRs may be low, which may affect bid/ask spreads. Also, not every foreign company has an ADR.
Finally, while a rare occurrence, the bank offering the ADR may decide to terminate the ADR program for any number of reasons, including lack of interest. This could result in a requirement that the position either be liquidated or converted to the underlying foreign ordinary shares.
If an ADR isn't available, you may be able to trade the company's foreign stock in the Over-The-Counter (OTC) market. This is known as trading "foreign ordinaries." Many international companies' stocks trade on the OTC market in the U.S. These companies are listed on a foreign exchange and also trade in the U.S. The foreign ordinaries are priced and settled in U.S. dollars.
Pros and Cons
Foreign companies that do not offer ADRs have shares that can often be bought as foreign ordinaries via the OTC market, providing U.S. investors with access to more international companies.
Additionally, trades are in U.S. dollars, and take place during U.S. trading hours. Commissions, while usually higher than ADRs, are generally lower than buying foreign ordinaries directly through the local market.
Foreign ordinaries in the OTC market may not be as liquid as the ones trading on a local market exchange, which can lead to greater volatility in the OTC foreign ordinary’s price.
Wider spreads can exist because of lower liquidity in the OTC market and the additional costs that may be incurred by market makers. Due to the wider spreads, foreign ordinaries can trade at a premium or a discount compared to the local market shares. These trades may also be subject to a foreign transaction fee.
Finally, OTC markets are subject to fewer regulations and reporting requirements making it more difficult to research them.
Many international companies list their stock on a local exchange in places such as Canada, the U.K., Australia, Hong Kong, and more. These stocks trade in the exchange’s local currency and during the local trading hours. In order to place trades in these markets at Schwab, a U.S. investor will need to phone and speak with one of our Global Investing Services specialists, who will work to place the trade on the local foreign exchange. The trade will settle and the shares held denominated in U.S. dollars. Orders are sent overseas and executed during local market hours, if trades are made after local hours, they are placed in a queue and executed when the market reopens.
Virtually all Canadian stocks can be traded online at Schwab.com or through a broker via phone. Online quotes on most Canadian securities are provided by the Toronto Stock Exchange and are displayed in U.S. dollars. The majority of trades are sent to Canada and are not traded in the U.S. over the counter market, the trades however will use the U.S. 5 letter symbol ending in "F" and will be placed in U.S. dollars. Included in the execution is a dealer fee paid to the Canadian trader.
Pros and Cons
Securities trading in the local market tend to be relatively more liquid and have narrower spreads resulting in possible better executions than the U.S. OTC market.
Additionally, many foreign companies that are not available as ADRs or foreign ordinaries on the U.S. OTC market can be bought on local foreign markets, providing investors with a potentially wider inventory of available international equities.
You can generally place broker-assisted trades overseas in your Schwab One brokerage account in U.S. dollars and many Canadian stocks can be traded in your account online.
Trading overseas may involve a variety of transaction fees and taxes and commission costs can be much higher.
Some countries impose controls that restrict or delay currency conversions for overseas traders, meaning it can take time to access your funds. Reporting, clearing and settlement of trades may add additional time. You also may be required to place trades in round lots (standard trading amounts).
Also, some countries may impose a cap on equity holdings by 'foreign investors' (U.S. persons investing in international equities would be considered a 'foreign investor' in these instances) limiting the number of shares or percentage of outstanding stock the 'foreign investor' is permitted to invest in. Each country operates under its own rules and these varying regulations may differ from U.S. financial laws and requirements.
Research can also be difficult since foreign countries have different rules and regulations for reporting. Research reports may not be available in English.
Start investing in international stocks today.
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International stock exchanges operate under different rules and guidelines than those in domestic markets. Learning about and considering these differences can help you prepare a better investment strategy for your portfolio.
|American Depositary Receipts (ADRs)||Foreign ordinaries traded in the over-the-counter (OTC) market||Foreign ordinaries traded on local exchanges overseas||Canadian Stocks|
|Liquidity*||Varies by ADR||Low||Generally high; depends on the security and market||
U.S. OTC: Generally low, varies by security
Local Canadian: Generally high
|Minimum position size||None||None||Generally none||Generally none|
|Trading hours**||U.S. market hours||U.S. market hours||Foreign market hours||U.S. market hours|
|Settlement date||Trade date plus two days (T+2)||Varies by country, but usually T+2||Varies by country/local holidays||T+2 (may vary depending on Canadian market holidays)|
|Online trading||Yes||Yes||No, broker-assisted by phone only||Yes|
|Ongoing management expenses||ADRs have custody fees that are levied on a regular basis, such as annually or quarterly||None||None||None|
|Commission at Schwab||
Online trades: $01
Automated phone: $5
Online trades: $6.95 Automated phone: $11.95 ($6.95 commission + $5 TeleBroker® fee)
Broker-Assisted: $31.95 ($6.95 commission + $25 broker assistance fee)
Online Trades: $50 foreign transaction fee2
Automated phone: $55 ($5 TeleBroker fee, plus a $50 foreign transaction fee)
Broker-Assisted: $75 ($50 foreign transaction fee and a $25 broker assistance fee)
Online Trades: Not available
Automated phone: Not available
Broker-Assisted: The greater of $100 or 0.75% of principal, with no maximum
Online trades: $6.95
Automated phone: $11.95 ($6.95 commission + $5 TeleBroker fee)
Broker-Assisted: $31.95 ($6.95 commission + $25 broker assistance fee)
Source: Schwab Center for Financial Research.
*Liquidity refers to the ability to quickly buy or sell an asset without affecting the asset’s price in a significant manner, not the ability to receive cash quickly.
**Foreign market hours vary. Broker-assisted order placement hours are different from order execution.
***Most ADRs listed on U.S. stock exchanges are marginable. ADRs that are traded through the U.S. OTC market are not marginable.
1. Standard online $0 commission does not apply to over-the-counter (OTC) equities, transaction-fee mutual funds, futures, fixed-income investments, or trades placed directly on a foreign exchange or in the Canadian market. Options trades will be subject to the standard $0.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, and Stock Borrow fees still apply. See the Charles Schwab Pricing Guide for Individual Investors for full fee and commission schedules.
2. Transactions in foreign ordinary shares incur additional custody, clearing, and settlement expenses. A foreign transaction fee is added to trades placed on the US over-the-counter market through the online or automated phone channels. The commission and foreign transaction fee will be combined and will appear as one line item, labeled "Commission," on the trade confirmation.
How do I start investing globally?
Your approach to investing globally depends on what type of investor you are. In addition to ADRs and foreign equities, investors seeking global diversification should consider exchange-traded funds (ETFs) and mutual funds with concentrations in international holdings as well as other non-traditional investments such as REITs.
You can invest in international stocks on your own with a Schwab One® brokerage account or call our Global Investing Services team at 800-992-4685 to speak with a dedicated broker about foreign trading. Our team is available between 5:30 p.m. ET Sunday and 5:30 p.m. ET Friday.
ADRs are created and issued by both domestic and international banks. These custodian banks or 'ADR agents' will typically charge an ADR 'pass-through fee' to cover administrative or other costs associated with the ongoing management of the particular ADR program. The average fee is one to three cents per share. The actual fee amount charged, and the timing of the pass-through fees vary per ADR issuer. Any fees charged to Schwab, like most brokerage firms, are automatically passed on and borne by the ADR investor.
- When are the fees collected? Pass through fees can be charged in two different manners. If the underlying ordinary share pays a dividend, the custodian banks collect the foreign issuer's funds and convert them to U.S. dollars and then forward the dividend payments to ADR holders'. Generally, at this time, they also choose to charge the ADR pass-through fee. When the foreign issuer does not offer dividends, the pass-through fee is simply deducted from the investor's account according to the predetermined timing as delineated in the ADR's prospectus.
- How are the fees collected? To collect the fees owed by ADR investors, the Depository Trust Company (DTC) collects the custody fees on behalf of ADR agents and then charges companies like Schwab that hold ADRs for their clients. Fees charged to Schwab by the DTC are referred to as 'ADR pass-through fees' and labeled as such on client statements. The dividend and the ADR fee will appear as two separate items making it very clear for investors to understand the difference.
- Where can I find information on the fees? Investors should review each individual ADR's prospectus for specific pass-through fee information. You can search for individual prospectuses online using the U.S. Securities and Exchange Commission's EDGAR Company Search.
The governments of some countries, such as France and Italy, have implemented foreign transaction taxes as a percentage of the purchase amount on certain securities, including ADRs. Executing brokers and market makers pass these foreign transaction taxes on to broker/dealers like Schwab as fees. In turn, Schwab passes these fees on to clients at the time of the purchase and they are reflected on trade confirmations and client statements as an 'Exchange Process Fee.'
Many ADR's can be converted into ordinary shares in the local home market and foreign ordinary shares can sometimes be converted to ADR shares. Occasionally, the underlying ordinary share is actually a Private Placement or the ADR custodian bank’s books are closed in anticipation of a dividend, corporate action, or they have reached a foreign ownership limit. In such instances, converting the ADR and holding the asset at Schwab would not be feasible or possible.
It is also important to note there are often fees, taxes, and costs associated with an ADR conversion.
- Y-shares are five letter stock symbols ending in "Y" which designate ADRs that trade in the U.S. OTC market. Banks or other depositary institutions hold the local foreign shares and issue receipts for them in a ratio of one ADR to X-amount of the foreign shares. They can be sponsored ADRs (the underlying company is sponsoring the listing) or they can be unsponsored.
- F-shares are five letter stock symbols ending in “F” that represent an equity traded on a foreign exchange. In some instances, the foreign ordinary shares may be tradable in the U.S. Over-the-Counter market (OTC) through a market maker. In these cases, the market maker purchases and sells the foreign ordinary shares from their own inventory. It’s important to note not all F-shares trade in the U.S. OTC market. Some foreign equities, even with F symbols, must be traded in their respective local home markets only.
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