American depositary receipts (ADRs) have some fees, their own risks and a few other downsides. Is there any upside in owning ADRs (e.g., AXAHY) instead of owning the underlying stock directly (e.g., AXA), if that's possible (i.e., assuming that one is able to open a brokerage account in the country where the underlying stock is trading and doesn't have issue with currency exchange)?
Is there any upside in owning American depositary receipts (ADR) instead of owning the underlying stock directly, if that's possible?
Here are some reasons why people may choose to buy ADRs even when they have access to the underlying's stock market:
More granularity — Sometimes, each ADR share represents less than 1 underlying share. Each ADR share would then trade at a lower dollar price than than the underlying share. This provides granularity in allocating money to the stock. For example, if 5 ADR shares (each selling at $30) represent 1 underlying share (selling at $150), the investor can allocate money to the stock in multiples of $30 instead of $150. This is extremely useful for small investors.
Lower minimum investment requirement — In the US stock market, one can buy 1 share of a stock (or even less if your brokerage supports fractional shares). This may not be possible in some foreign markets where shares must be transacted in multiples of 10, 100, or 1000 shares. The use of ADRs may reduce the minimum investment requirement and provide granularity in allocating money. This makes investing accessible to small investors.
Lower transaction costs
- The major US stock brokerage firms are now zero-commission brokers. In some countries, domestic brokerage commissions may be very high. Buying an ADR through a zero-commission US broker helps to reduce transaction fees.
- In some cases, the ADR may be more liquid than the underlying stock. There could be many reasons why this could happen. For example, after Brazil implemented a financial transaction tax ("CPMF") in the 1990s, the trading volume of some Brazilian ADRs exceeded that of their underlying stock on the Bovespa.