Stay on top of global markets with American Depositary Receipts (ADRs) and foreign ordinaries

Common questions

How do American Depositary Receipts (ADRs) work?

An American Depositary Receipt is a certificate issued by a U.S. bank that represents shares in foreign stock. These certificates trade on American stock exchanges. ADRs and their dividends are priced in U.S. dollars. ADRs represent a simple, liquid way for U.S. investors to own foreign stocks.
 

What are American Depositary Receipts (ADRs) used for?

ADRs are a form of equity security created specifically to simplify foreign investing for American investors. An ADR is issued by an American bank or broker, known as a custodian or depositary. It represents one or more shares of foreign-company stock held by that bank in the home stock market of the foreign company.

How are ADR dividends paid?

Investors who purchase the ADRs are paid dividends in U.S. dollars. The foreign bank pays dividends in the native currency, and the custodian bank distributes the dividends in U.S. dollars after factoring in currency conversion costs, foreign taxes, and any pass-through fees.
 

What are ADR Pass-Through Fees?

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.

What are ADR Exchange Process Fees?

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.'

Can an ADR be converted into shares of the foreign ordinary international stock and vice versa?

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.

What is the difference between Y-suffixed and F-suffixed five-letter symbols for OTC listings for non-U.S. companies?

• 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.

What are the risks of international stocks?

• Currency fluctuation - While currency fluctuation can work in favor of the U.S. dollar, it's always a variable and investors should be prepared for favorable and unfavorable outcomes.
• Political instability - Investing in international stocks is investing in the people and governments where the foreign shares are located. Political or economic events in a foreign company's home country may harm your investment.
• Regulatory changes - International stock exchanges have their own rules and regulations for participating countries and organizations. Changes in governance and financial policies can create limitations on the access rights of foreign investors.
• Taxation - Taxes on international investments are often taxed at different rates than U.S. holdings. Similar to regulatory changes, some foreign nations may also impose additional taxation on foreign investors.