ADR Screen

Market volatility reinforces the importance of portfolio diversification among different kinds of assets, industries, and securities. One tactic to ensure that you are investing in different kinds of securities is to add some degree of exposure abroad-investing internationally.

Individual investors can easily access the foreign markets via international mutual funds. Direct investment in foreign-traded stocks is difficult and costly for the individual investor. However, if you want to invest in individual stocks, an excellent route overseas is to purchase shares of international companies in the form of American depositary receipts (ADRs). A depositary receipt is a negotiable certificate that is issued by a U.S. commercial bank and represents shares of a non-U.S. publicly traded company. They are priced in U.S. dollars and owners avoid many costs associated with direct foreign investment—such as international settlement, global custody, foreign brokerage, currency conversions and multi-currency accounting. Dividends are also paid out in U.S. dollars.

This screen explores the characteristics of ADR stocks and how a growth-at-a-reasonable-price screen could be applied.

Some Background

While the world markets are moving more in concert, ADRs are usually highly correlated with their home stock market. Performance of the ADR will mirror very closely that of the underlying stock traded on a foreign exchange. For U.S. dollar-based investors, ADRs are also subject to the same currency risk as the underlying stock in the foreign market when the value of the dollar changes relative to the native currency. For example, if the U.S. dollar appreciates against the Japanese yen, the real return to a U.S. dollar-based investor will be less than the return to a yen-based investor because of the stronger dollar. The investment priced in yens will purchase fewer dollars. This currency risk makes the returns on ADRs more volatile.

…To read more, please become an AAII member or login.