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Computerized Investing > July 2, 2011

adr.com

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by CI Staff

It should come as no surprise that international investing is beneficial to the portfolios of individual investors. Modern portfolio theory tells us that there is an efficient frontier, which plots the highest return investors should be able to achieve at each level of risk. Theoretically, international investments expand the efficient frontier further than domestic-only holdings do. This means investors are effectively able to generate higher returns at each level of risk or bear less risk for a given return.

While it is often difficult for individuals to invest directly overseas, there are other methods of gaining international exposure. Of course, you can always put money in a mutual fund or ETF, but you can also maintain more control over the selection of individual holdings by using American depositary receipts (ADRs). An ADR is a security that represents securities of a foreign company and trades on the U.S. financial markets. These shares are traded in the same way as U.S. shares, but firms offering ADRs are subject to additional rules and regulations pertaining to being listed on a U.S. stock exchange, a benefit for investors seeking exposure to countries with looser standards. Likewise, there are global depositary receipts, which serve the same purpose as ADRs but trade on non-U.S. exchanges. The combined universe (American depositary receipts and global depositary receipts) is known simply as depositary receipts (DRs).

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