Invest Overseas with ADRs
Individual investors have more resources than ever to manage their own portfolios. However, buying foreign stocks is still primarily left to institutional investors, such as mutual funds.
Challenges such as converting currencies and higher transaction costs are among the barriers to buying international equities.
So, how can you buy individual stocks of overseas companies with relative ease?
The best answer may be American Depositary Receipts (ADRs).
What is an ADR?
An ADR is a certificate that represents ownership in shares of foreign stock. The underlying security is held overseas by an American financial institution. ADRs are denominated in dollars and trade on U.S. stock exchanges like securities.
There are no currency conversion hassles or duty costs when buying ADRs. Investment managers such as Elliott Broidy and smaller investors may buy ADRs to cut transaction expenses.
While ADRs are purchased in dollar terms, returns and dividend payments reflect the foreign currency. Depending on the relative strength of that currency, your dollar adjusted returns can be positively or negatively affected.
How to Buy ADRs:
You can buy ADRs through most discount brokers. The commission paid buying through an online broker will likely be much lower than foreign transaction costs.
ADR Investing Strategies:
The current American economy features low interest rates and a weak dollar. This can make it challenging to find attractive yields for income investors.
Meanwhile, a weak currency has broad effects on purchasing power, wage growth and corporate profits. Each of these can put a damper on stock performance.
Buying ADRs with high dividend yields can provide added income when converting payments to dollars. Conversely, a strong American dollar would have the opposite effect.
Stocks with high dividend yields also cushion against volatility. If you choose to reinvest dividends, equity returns in dollar terms are also increased.
Given a weak dollar, overseas equities can have high currency adjusted returns. While a strong dollar would reduce this, adding some foreign exchange risk to your portfolio may be appropriate.
Unlike mutual funds, an ADR allows you to take concentrated positions in promising stocks. Due to the higher costs of foreign investing, international funds have relatively high expense ratios, which cuts into returns. For those who manage their own investments, you can dollar cost average to build a cost effective ADR portfolio.
ADRs help you gain exposure to foreign companies that benefit from market conditions separate from the U.S. economy. The negative correlation of foreign stocks to U.S. markets can lower overall risk in your portfolio.
Reduce Risks and Increase Returns:
Investing abroad is made easier by ADRs. Beyond current economic conditions, there are overseas companies with solid fundamentals that may have a place in your portfolio.
As a result, your investments may be better positioned for greater returns and lower risk.