American Depositary Receipts (ADRs)

American Depositary Receipts (ADRs) are securities listed on US exchanges and the Over-the-Counter (OTC) market that represent ownership of shares in foreign companies. For companies based outside of the US, listing shares directly on American exchanges like the NYSE or Nasdaq is a complicated and expensive process. However, American investors may want to purchase shares of these companies to diversify their portfolios and gain exposure to new markets. ADRs make it easier for American investors.

To offer ADRs to investors, American banks first purchase shares of foreign companies on foreign exchanges. Then, the banks issue the ADRs, which are certificates denominated in American dollars that represent the foreign shares and can be traded on an American stock exchange or the OTC market.

An ADR may represent a single foreign share, a fraction of a share, or a bundle of shares depending on the price the bank wants to list for the ADR. Many banks will divide or group foreign shares so the ADR price aligns more closely with typical prices on American stock exchanges. Holding an ADR is similar to owning a share in the foreign company, so ADRs still may pay dividends and are subject to capital gains taxation in American dollars.

Sav offers certain ADRs for trading on our platform, but not all. We don’t offer ADRs that are subject to local financial transaction taxes, including ADRs on Spanish, French, and Italian listed companies.

What fees are associated with ADRs?

Some banks require investors who hold ADRs to pay periodic services fees (sometimes called custody fees), which typically run between $0.01 to $0.03 per share. If you purchase a share from a company that’s based outside the US on Sav, you can find information about any ADR fees that may apply on the website of the bank issuing the ADR.

The following key dates are used for ADR fees:

• Record date is when the issuer bank associates owners of the ADR. If you’re holding the ADR on this date, you’ll be charged the ADR fee.

• Process date is when the fee is charged to your account.

Note

Standalone ADR fees are passed through to your account based on record date. If this fee results in a negative balance, you may sell shares or deposit cash to avoid the possibility of a margin call.

What are the potential benefits and risks of ADRs?

Just like all other securities, there are certain benefits and risks associated with ADRs.

Potential benefits:

• Increased diversification: ADRs can help American investors build a more geographically diverse portfolio.

• Lower cost: Investing directly in foreign markets can be expensive, so ADRs generally help to lower that barrier to entry.

Potential risks:

• Exchange rate fluctuations: If the currency in the issuing company’s country drops relative to the US dollar, that can bring down the value of your investment.

• Political upheaval: Regime changes in the issuing company’s country can negatively impact the exchange rate or destabilize the company in some other way, and non-local investors often don’t have as much context on how these factors can affect their investment.

• Inflation risk: If the issuing company’s country is experiencing rising inflation, that can lower the value of their currency.

• Access to different information: Not all non-US companies provide shareholders with the same type of information that American companies do, and language barriers can make it difficult to access the information that’s available.

• Some ADRs are listed on the OTC market that may carry additional risk compared to public exchanges. Refer to the relevant stock detail pages for more information on listings.

Why is my ADR no longer trading?

Occasionally, the American bank responsible for custody of the shares will terminate the ADR while the underlying foreign stock is still active. This is generally handled in one of the following ways:

• Shareholders automatically receive cash for their ADR shares.

• Shareholders have a 6-month window where they can voluntarily convert their ADR shares into the underlying foreign shares. After that 6-month window, the foreign shares are automatically sold and holders receive cash.

• The ADR shares are automatically converted into the underlying foreign shares. Because Sav can’t support the underlying foreign shares, customers will need to work with the company’s transfer agent to receive physical stock certificates.

Note

Sav doesn’t support the trading of foreign shares. Because we can’t support the underlying foreign shares, we’ll cover the cost of an ACAT (automated customer account transfer) to a broker that supports the underlying foreign shares. Note that you’ll be responsible for any fees that the outside broker may charge.

Still have questions?

The decision to terminate an ADR isn’t made by Sav. If you have questions about why an ADR was terminated, we suggest contacting the holding bank’s investor relations team to learn more.

Disclosures

Diversification doesn’t ensure a profit and cannot protect against losses in a declining market. All investments involve risk and loss of principal is possible.