ADR vs investing in native market

[schin]

I have InteractiveBrokers, so both transactions should be easy (ADR or purchase in foreign market). That said, is there any reason to buy ADRs instead of going directly to the foreign market?

 

Many noted they bought Nintendo directly in Japan instead of the ADRs. I know ADRs have extra, hidden (custodian) fees...

 

Is there any reason to buy the ADRs?

[johnpane]

If transaction costs are the same, a reason not to use ADRs is where the sponsor charges a substantial fee. For example, for GLNCY Citi charges 20% of the gross dividend, max 5c/share.

Edited May 4 by johnpane

[TwoCitiesCapital]

On 5/4/2024 at 1:17 AM, schin said:

I have InteractiveBrokers, so both transactions should be easy (ADR or purchase in foreign market). That said, is there any reason to buy ADRs instead of going directly to the foreign market?

 

Many noted they bought Nintendo directly in Japan instead of the ADRs. I know ADRs have extra, hidden (custodian) fees...

 

Is there any reason to buy the ADRs?

 

The primary reason would be just the simplicity and access. Most domestic brokers don't trade in foreign markets OR they charge exorbitant fees to do so.

 

The only downside of buying local markets on IB was that you had to convert enough currency to make the trade and it was hard to get the right amount without uneconomic residuals sitting in the foreign currency. That being said, I believe they just announced auto-conversion of currency balances which SHOULD mean that this is taken care of and you can buy foreign stocks with USD balances and IB auto-converts the appropriate amount for settlement/commission on your behalf. I only own local holdings @ IB. I use ADRs in my accounts at Schwab. 

 

The other piece is liquidity - there may be a handful of notable instances where foreign companies listed on major exchanges via ADR might actually have more liquidity in the US than their home country, but I don't know how often this might actually matter for us smaller individual investors. 

 

 

[bizaro86]

2 hours ago, TwoCitiesCapital said:

 

The primary reason would be just the simplicity and access. Most domestic brokers don't trade in foreign markets OR they charge exorbitant fees to do so.

 

The only downside of buying local markets on IB was that you had to convert enough currency to make the trade and it was hard to get the right amount without uneconomic residuals sitting in the foreign currency. That being said, I believe they just announced auto-conversion of currency balances which SHOULD mean that this is taken care of and you can buy foreign stocks with USD balances and IB auto-converts the appropriate amount for settlement/commission on your behalf. I only own local holdings @ IB. I use ADRs in my accounts at Schwab. 

 

The other piece is liquidity - there may be a handful of notable instances where foreign companies listed on major exchanges via ADR might actually have more liquidity in the US than their home country, but I don't know how often this might actually matter for us smaller individual investors. 

 

 

 

I generally buy the foreign stock on the local exchange on margin, then convert exactly the amount of currency that I need, that way I don't end up with any extra. 

[schin]

6 hours ago, bizaro86 said:

 

I generally buy the foreign stock on the local exchange on margin, then convert exactly the amount of currency that I need, that way I don't end up with any extra. 

 

@bizaro86 @TwoCitiesCapital @johnpane - Thanks for the reply. 

 

I have one German bank position (Commerzbank) that I believe will be a takeover target in the future.  Do you know how stock mergers work out in ADRs? Do I get converted to cash nonetheless or will I get new ADRs if there is a stock transaction. 

 

For example, if it get bought out by Deutsche Bank, which is NYSE traded, versus Unicredit (Italian and ADR, itself).  How do mergers work out either way? I'm worried about the tax treatment.... if they pay me out, there's going to a huge cap gain... versus rollover into a stock position... of course, that's a rose-colored glasses problem.

[TwoCitiesCapital]

11 hours ago, schin said:

 

@bizaro86 @TwoCitiesCapital @johnpane - Thanks for the reply. 

 

I have one German bank position (Commerzbank) that I believe will be a takeover target in the future.  Do you know how stock mergers work out in ADRs? Do I get converted to cash nonetheless or will I get new ADRs if there is a stock transaction. 

 

For example, if it get bought out by Deutsche Bank, which is NYSE traded, versus Unicredit (Italian and ADR, itself).  How do mergers work out either way? I'm worried about the tax treatment.... if they pay me out, there's going to a huge cap gain... versus rollover into a stock position... of course, that's a rose-colored glasses problem.

 

Probably depends on the merger. If paid in cash, you'll receive cash. If acquired by a US listed company, my guess is you'll receive US listed stock. If acquired by a foreign listed company, my guess the ADR sponsor receives the shares, sells them, and distributes the cash to you. 

 

But I cant say for sure it will likely vary pending the scenario. 

[schin]

6 hours ago, TwoCitiesCapital said:

 

Probably depends on the merger. If paid in cash, you'll receive cash. If acquired by a US listed company, my guess is you'll receive US listed stock. If acquired by a foreign listed company, my guess the ADR sponsor receives the shares, sells them, and distributes the cash to you. 

 

But I cant say for sure it will likely vary pending the scenario. 

Makes sense. Thanks.

[AG]

On 5/5/2024 at 6:00 PM, TwoCitiesCapital said:

The only downside of buying local markets on IB was that you had to convert enough currency to make the trade and it was hard to get the right amount without uneconomic residuals sitting in the foreign currency.

No need for the autofx which is actually more expensive. You make the trade first and then close the negative currency balance. If there is a small residual Interactive Brokers automatically converts that to your base currency the day after I think

[AG]

On 5/4/2024 at 7:17 AM, schin said:

Is there any reason to buy the ADRs?

If the market where the shares trade is not available in the broker. Or if the ADR has more liquidity (not normally the case but it can happen)

Another reason is if the ADR fees are cheaper that additional fees or taxes that you might have trading the shares. One such example is BATS, it is cheaper to buy BTI as you don't pay stamp duty. 

[TwoCitiesCapital]

15 minutes ago, AG said:

No need for the autofx which is actually more expensive. You make the trade first and then close the negative currency balance. If there is a small residual Interactive Brokers automatically converts that to your base currency the day after I think

 

Mayhaps that is how they treat taxable accounts, but this is NOT allowed in my IRAs there. It always refused to take the trade unless if there is sufficient settled currency in the account to cover it.

 

regardless - the new functionality should fix whatever the issue is I covered for both taxable and qualified accounts if you so choose to use it. 

Edited Wednesday at 06:17 PM by TwoCitiesCapital