What is an ADR?
Introduction
An ADR is one way, but not the only way, that a foreign corporation can have its stock trade on a U.S. stock exchange. An ADR is a certificate that evidences an ownership interest in American Depositary Shares ("ADS") which, in turn, represent an interest in the shares of a non-U.S. company that have been deposited with a U.S. bank. The terms ADR and ADS are often used interchangeably by market participants. ADRs are also sometimes referred to by the shortened name of "DR" or depository receipts.
ADRs have been around since 1927. ADRs are issued or sponsored by a U.S. bank. There are four major banks that dominate the market:
Mechanically, the depository bank simply purchases and holds a bulk lot of shares from the foreign corporation, bundles then into groups, and then reissues them on a U.S. stock exchange. An ADR represents a specific number of shares in a foreign corporation. The depository bank sets the ratio of ADRs per home country shares. To avoid having the ADR trade at a low market price, many depository banks will set a ratio greater than one, where one share of the ADR represents more than one share of the foreign security.The ADR represents ownership in the stock of a foreign corporation. The stock of the foreign corporation may or may not also trade on a stock exchange in the company's home country. Often, the ADR traded on a U.S. stock exchange is the company's only publicly traded security. In particular, many Chinese companies have an ADR traded on a U.S. stock exchange and they do not have their shares anywhere else.
Bank of New York Mellon is one of the four major U.S. banks that issues ADRs.
The depository banks charge a fee for their custodian services. The depository bank is in charge of holding the ADR, maintaining records, and collecting the dividends paid out the foreign issuer, converting them into US dollars and depositing them into the U.S. investor's account. If dividends are paid out by the ADR then the depository bank deducts the fees from the dividends or they may decide to charge it separately to an ADR holder as a fee. If the ADR does not pay a dividend then the depository bank will charge that fee directly to the brokerage who in turn will charge it to a client’s account. ADR custodian fees vary, so you need to read the ADR's prospectus to understand the exact fees charged.
Country mix
There are ADRs from companies located around the world. Here is a summary of the ADRs in our database based on the country:
| Country | Stock count | Total market cap |
|---|---|---|
| China | 89 | $566B |
| United Kingdom | 35 | $2.35T |
| Brazil | 21 | $307B |
| Mexico | 12 | $22B |
| Argentina | 12 | $38B |
| Japan | 11 | $1.02T |
| France | 11 | $256B |
| South Korea | 10 | $359B |
| Israel | 10 | $33B |
| Netherlands | 8 | $458B |
| Hong Kong | 7 | $657M |
| Germany | 7 | $379B |
| Australia | 7 | $155B |
| United States | 6 | $2.53B |
| Chile | 6 | $25B |
| Taiwan | 6 | $928B |
| South Africa | 5 | $31B |
| India | 5 | $334B |
| Spain | 5 | $236B |
| Denmark | 4 | $306B |
| Sweden | 4 | $28B |
| Ireland | 4 | $48B |
| Singapore | 3 | $91B |
| Luxembourg | 3 | $43B |
| Colombia | 3 | $3.68B |
| Switzerland | 3 | $201B |
| Belgium | 3 | $132B |
| Turkey | 2 | $6.36B |
| Norway | 2 | $64B |
| Peru | 2 | $3.78B |
| Italy | 2 | $23B |
| Kazakhstan | 1 | $17B |
| Cayman Islands | 1 | $145M |
| Indonesia | 1 | $15B |
| Philippines | 1 | $5.04B |
| Finland | 1 | $27B |
| United Arab Emirates | 1 | $1.23B |
| Macau | 1 | $2M |
Note the large number of ADRs from companies located in China. As explained in our article about China's stock market, China's unique political and economic environment has encouraged Chinese companies to have their stocks traded outside of China, either in Hong Kong or in the U.S.
As explained in our article about global stock markets, countries around the world are classified into one of three buckets based on the sophistication of their financial system and economy. Here is a summary of the ADRs in our database based on the country classification:
| Country | Stock count | Total market cap |
|---|---|---|
| Emerging markets | 169 | $2.31T |
| Developed markets | 146 | $6.22T |
How do ADRs compare to U.S. common stocks?
Let's look at some analysis of how the ADRs compare to U.S. common stocks. First, let's look at a breakout by sector. On our website, we use the GICS sector classification system to classify stocks into sectors. Let's look at the breakout of ADRs by GISC sector:
| Sector | Stock count | Total market cap | % |
|---|---|---|---|
| Technology | 75 | $2.50T | 0.00% |
| Healthcare | 58 | $1.79T | 0.00% |
| Financials | 40 | $1.53T | 0.00% |
| Consumer Cyclicals | 30 | $672B | 0.00% |
| Basic Materials | 25 | $428B | 0.00% |
| Consumer Non-Cyclicals | 22 | $541B | 0.00% |
| Industrials | 17 | $170B | 0.00% |
| Energy | 17 | $646B | 0.00% |
| Telecommunications Services | 13 | $166B | 0.00% |
| Utilities | 11 | $77B | 0.00% |
| Real Estate | 4 | $5.14B | 0.00% |
| Undefined | 3 | $205M | 0.00% |
| Total | 315 | $8.53T | 100.00% |
When we say "U.S. common stocks" in this article, we are talking about all common stocks, REITs and mortgage REITs of U.S. companies that trade on the U.S. stock market. So that excludes MLPs, preferred stocks, ADRs, and investment funds, and the common stocks of non-US companies that trade on the U.S. stock market.
Let's also look at the ADRs based on the size categories we use on our website:
| Category | Stock count | Total market cap | % |
|---|---|---|---|
| Emerging markets | 169 | $2.31T | 0.00% |
| Developed markets | 146 | $6.22T | 0.00% |
| Total | 315 | $8.53T | 100.00% |
As explained in our article size categories, there is no standard definition of what makes up a "large cap" stock. On our website, we use a cutoff of $10 billion to determine a large cap stock. This is a just a widely used rule of thumb that we have also chosen to use. Similarly, a "mid cap" stock under our definition is a stock with a market capitalization between $2 billion and $10 billion.
Notice that there are a lot of "large cap" ADRs.
ADRs that trade OTC
There are two types of ADRs: sponsored and unsponsored. ADRs that are traded on U.S. stock exchanges are "sponsored" by the foreign corporation - the foreign corporation controls the ADR and is subject to SEC reporting requirements.
An unsponsored ADR is an ADR issued by a depositary bank without the involvement or participation - or even the consent - of the foreign issuer whose stock underlies the ADR. Unsponsored ADRs are usually established by depositary banks in response to investor demand. Shareholder benefits and voting rights may not be extended to the holders of these particular securities. Unsponsored ADRs trade over the counter, or "OTC", rather than on an exchange.
There are so many ADRs that are traded OTC, for two reasons:
- It is easier for a foreign company to have an ADR traded OTC rather than on an exchange, so some foreign corporations initially launch an OTC traded ADR as a way to test investor demand
- As explained above, depository banks can create an "unsponsored" ADR that is traded OTC
See our list of OTC ADRs
Global Depository Receipts, or GDRs
The concept of a depository receipt exists all over the world. The term "global depository receipt" is generally used to refer to depository receipts that are trading on stock exchanges around the world, exclusive of ADRs traded on U.S. stock exchanges.
GDRs are traded on exchanges all over the world, but they are particularly popular on the London Stock Exchange. So many people tend to equate a GDR with a security traded on the London Stock Exchange, but they can be traded anywhere.
Other non-US companies that trade on US exchanges
The ADR system is not the only way that a non-US company can trade on a U.S. stock exchange. See list of non-US companies on US exchanges.
Besides ADRs, there are two other ways that a non-US company can trade on a U.S. stock exchange:
- Some companies "cross-list" their shares on a U.S. stock exchange, which means that the company's shares simultaneously trade on a stock exchange in the company's home country and on a U.S. stock exchange.
- Some companies choose to have their primary listing (i.e. their only listing) on a U.S. stock exchange
Preferred stocks
The ADR mechanism is also used by U.S. corporations who want to issue preferred stock. See our article what is a preferred stock?