The biggest benefit of investing in ADRs is the ease with which investors can invest in foreign companies because ADRs are available directly through American brokers. This eliminates the need to go through foreign channels to buy stock in a company in which you may be interested. In addition, some of the biggest names in business are foreign entities, and ADRs allow American investors to look overseas for new and different investment opportunities. Furthermore, investing in ADRs is that they provide investors with a way to diversify their portfolios, and investing in international securities allows investors to open their investment portfolio up to greater rewards.
However, although ADRs are subject to the same US capital gains and dividend taxation rules and regulations, there are taxation laws of a foreign country that might come into play. As a result, ADRs may involve double taxation—locally and abroad. Meanwhile, because the ADRs represent non-US investments, they entail special risks inherent to all foreign investments, such as exchange risks, political risks and inflation risks. In addition, depending on the level of the ADR program, investors also may not have access to the amount of information available on domestic companies, and some ADRs may not comply with SEC regulations.
What should investors do before investing in ADRs?
Like any other investment, you should learn as much as you can about a company before you invest. Research the political, economic, and social conditions in the company’s home country so you will understand better the factors that affect the company’s financial results and stock price. Moreover, investors should ask their broker-dealer what fees are charged to them as ADR investors. Typically, fees are assessed per ADR.