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One of my favorite on-again-off-again recovery plays is Mittal Steel (NYSE: MT).

I buy the MT ADR there (American Depositary Receipt) because I live in the US.

Am I exposing myself to any extra risk owning the ADR instead of the underlying stock? Has there ever been any sticky issues with ADRs not performing exactly like the underlying stock?

I understand the benefits of ADRs, just wondering if there are downsides.

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Yes, the ADR will trade on a separate exchange from the underlying one, and can (and does) see fluctuations in price that do not match the (exchange corrected) fluctuations that occur in the original market.

You are probably exposing yourself to additional risk that is related to:

  • Financial market volatility
  • Trading patterns in the american market
  • Taxation, trade and other issues that stem from international relations (imagine an ADR where the foreign country's relations with the US quickly deteriorate; it's USD value may fall in lock-step, dropping to below its native currency value)
  • Loss of liquidity (ADRs often tend to be more difficult to sell)
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    Wouldn't those fluctuations actually present an arbitrage opportunity? At some point the price of the ADR has to come in line with the price of the security in the home market. – Eric Petroelje Dec 10 '10 at 13:45
  • The added complexities both increases the opportunity for arbitrage (giving incentive to speculators) and makes value calculations more difficult (making it more likely that essentially correct out of synch pricing is mistaken for an arbitrage opportunity). Yes, there will be points where the ADR will price in correlation to the underlying security, but they are not reliably predictable points. – blueberryfields Dec 10 '10 at 15:13
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    @EricPetroelje You are correct about the potential for ADR arbitrage. I used to do that for a past employer. But the amounts to be earned through ADR arb trades were usually small, and a combination of synchronization issues, taxes and other costs, resulted in lean pickings. But it was a nice straightforward strategy, and easy to monitor for occasional mispricings and profit opportunities. – Ellie Kesselman Oct 8 '11 at 18:15
  • @EllieKesselman, So the question is should you buy the ADR or the non-ADR? Which is better to put money into? Or do you buy 50/50? – Pacerier Dec 31 '16 at 5:26

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