# American Depositary Receipts (ADRs): Types, Pricing, and Tax Implications

## What Is an American Depositary Receipt (ADR)?

American Depositary Receipts (ADRs) offer U.S. investors an efficient way to invest in foreign companies, simplifying the process of trading these stocks on American exchanges. They connect global markets by allowing foreign firms to reach American capital while helping U.S. investors buy shares without hassle. However, investing in ADRs includes considerations of pricing, fees, and potential tax implications.

### Key Takeaways

*   American Depositary Receipts (ADRs) allow U.S. investors to purchase shares in foreign companies that are traded on American stock exchanges.  
    
*   ADRs are available as either sponsored or unsponsored, with different trading regulations and rights.  
    
*   There are three levels of ADRs, with Level III being the most prestigious, allowing foreign companies to raise capital and having stricter reporting requirements.  
    
*   ADR investors may be subject to fees and double taxation, requiring awareness of potential costs and tax credits.  
    
*   ADRs offer portfolio diversification and ease of access to international markets but come with currency exchange risks.

![American Depositary Receipt](https://www.investopedia.com/thmb/ZsukLbyWh5dS7kJ7UGhSPFps_Fs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_adr-corrected-a2a478f27584412994f7fe6f1bca18fc.jpg)

*— Investopedia / Tara Anand*

## Understanding the Functionality of ADRs

ADRs, priced and traded in U.S. dollars, are held by U.S. financial institutions, often through overseas branches.

To begin offering ADRs, a U.S. bank must purchase shares on a foreign exchange. The bank keeps the stock as inventory and issues an ADR for U.S. trading. ADRs can be listed on the New York Stock Exchange (NYSE), the Nasdaq, and [over-the-counter](https://www.investopedia.com/terms/o/otc.asp) (OTC).

U.S. banks need detailed financial information from foreign companies. This requirement makes it easier for American investors to assess a company's financial health.

## Exploring the Different Types of ADRs

There are two main types of ADRs: sponsored and unsponsored.

### Sponsored ADRs

In a [sponsored](https://www.investopedia.com/terms/s/sponsoredadr.asp) ADR, a bank issues the receipt on behalf of a foreign company. The company typically pays the issuance costs and retains control, while the bank manages investor transactions. Sponsored ADRs are categorized based on the foreign company's compliance with [SEC](https://www.investopedia.com/terms/s/sec.asp) regulations and American accounting rules.

### Unsponsored ADRs

A bank also issues an [unsponsored](https://www.investopedia.com/terms/u/unsponsoredadr.asp) ADR. However, this certificate has no direct involvement, participation, or even permission from the foreign company. Theoretically, several unsponsored ADRs for the same foreign company could be issued by different U.S. banks. These different offerings may also offer varying dividends. With sponsored programs, only one ADR is issued by the bank working with the foreign company.

A key difference is trading location: sponsored ADRs often trade on major U.S. exchanges, while unsponsored ADRs trade over the counter. Unsponsored ADRs never include voting rights.

### 2,000+

The number of ADRs available, which represent companies from more than 70 different countries.

### Understanding the Three Levels of ADRs

ADRs are also categorized into three levels based on the foreign company's access to U.S. markets.

### Level I

This is the most basic type of ADR, where foreign companies either don't qualify or don't want their ADR listed on an exchange. This type of ADR can be used to establish a trading presence but not to raise capital.

Level I ADRs, traded over-the-counter, have the least SEC requirements and are often risky. They are an inexpensive option for foreign companies to test U.S. investor interest.

### Level II

As with Level I ADRs, Level II ADRs can be used to establish a trading presence on a stock exchange and can’t be used to raise [capital](https://www.investopedia.com/terms/c/capital.asp). Level II ADRs have slightly more requirements from the SEC than Level I ADRs, but they get higher visibility and trading volume.

### Level III

Level III ADRs are the most prestigious. With these, an issuer floats a [public offering](https://www.investopedia.com/terms/p/publicoffering.asp) of ADRs on a U.S. exchange. They can be used to establish a substantial trading presence in the U.S. financial markets and raise capital for the foreign issuer. Issuers are subject to full reporting with the SEC.

## Pricing and Costs Involved with ADRs

An ADR may represent the underlying shares on a one-for-one basis, a fraction of a share, or multiple shares of the underlying company. The depositary bank will set the ratio of U.S. ADRs per home-country share at a value that they feel will appeal to investors. If an ADR's value is too high, it may deter some investors. Conversely, if it is too low, investors may think the underlying securities resemble riskier [penny stocks](https://www.investopedia.com/terms/p/pennystock.asp).

Due to [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp), ADR prices closely match the company's stock price on its home exchange. Arbitrage involves buying and selling the same asset in different markets to profit from price differences.

### Fees Associated with ADR Investments

Investing in an ADR may incur additional fees that are not charged for domestic stocks. The depositary bank that holds the underlying stock may charge a fee, known as a custody fee, to cover the cost of creating and issuing an ADR.

This fee will be outlined in the ADR prospectus and typically ranges from one to three cents per share. The fee will be either deducted from dividends or passed on to the investor's brokerage firm.

## Tax Implications for ADR Holders

ADR holders receive [dividends](https://www.investopedia.com/terms/d/dividend.asp) and [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) in U.S. dollars, minus currency conversion costs and foreign taxes, which the bank usually withholds automatically.

Since this is the practice, American investors would need to seek a credit from the IRS or a refund from the foreign government's taxing authority to avoid double taxation on any capital gains realized.

> **Tip**
>
> If you're interested in learning more about ADRs, there are many investing courses available that can get you started.

## Pros and Cons of Investing in ADRs

As with any investment, there are distinct advantages and disadvantages to investing in ADRs. Here are some of them.

### Advantages

ADRs are just like stocks. They trade on a stock exchange or over-the-counter, making them easy to access and trade. Investors can also easily track their performance by reviewing market data.

Purchasing ADRs is easy because they're available directly through American [brokers](https://www.investopedia.com/terms/b/broker.asp). This eliminates the need to go through foreign channels to buy stock in a company you may be interested in. Since they're available domestically, shares are [denominated](https://www.investopedia.com/terms/d/denomination.asp) in U.S. dollars. But that doesn't mean you avoid any direct risks associated with fluctuations in currency rates.

> **Warning**
>
> It is a common misconception that since the ADR is traded in U.S. dollars in the United States, there is no exchange rate risk. ADRs have currency risk because of the way they are structured. The global bank that creates the ADRs establishes a conversion rate, meaning that an ADR share is worth a certain number of local shares. To preserve this conversion rate over time, movements in the exchange rate of the home country vs. the ADR price must be reflected in U.S. dollars.

One of the most obvious benefits of investing in ADRs is that they provide investors with a way to diversify their [portfolios](https://www.investopedia.com/terms/p/portfolio.asp). Investing internationally can increase your portfolio's potential rewards and risks.  

### Disadvantages

The main problems associated with ADRs are that they may involve [double taxation](https://www.investopedia.com/terms/d/double_taxation.asp)—locally and abroad—and how many companies are listed. Unlike domestic companies, there are a limited number of foreign entities whose ADRs are listed for the public to trade.  

Unsponsored ADRs may not comply with SEC regulations and don't involve the company directly. In fact, some companies may not even provide permission to list their shares this way.

Although investors can avoid any direct risks that come with currency exchange, they may incur currency conversion [fees](https://www.investopedia.com/terms/f/fee.asp) when investing in ADRs. These fees are established to directly link the foreign security to the one traded on the domestic market.  

Pros

*   Easy to track and trade
    
*   Available through U.S. brokers
    
*   Denominated in dollars
    
*   Offer portfolio diversification
    

Cons

*   Could face double taxation
    
*   Limited selection of companies
    
*   Unsponsored ADRs may not be SEC-compliant
    
*   Investors may incur currency conversion fees
    

## The Evolution of ADRs Over Time

Before American depositary receipts were introduced in the 1920s, American investors who wanted shares of a non-U.S. listed company could only do so on international [exchanges](https://www.investopedia.com/terms/e/exchange.asp)—an unrealistic option for the average person back then.  

ADRs were developed because of the complexities of buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. J.P. Morgan’s ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=jpm)) predecessor, Guaranty Trust, pioneered the ADR concept. In 1927, it launched the first ADR, enabling U.S. investors to buy shares of famous British retailer Selfridges and helping the luxury department store to tap into global markets. The ADR was listed on the New York Curb Exchange.

A few years later, in 1931, the bank introduced the first sponsored ADR for the British music company Electrical & Musical Industries, the eventual home of the Beatles. Today, J.P. Morgan and BNY Mellon, another U.S. bank, continue to be actively involved in the ADR markets.

## Case Study: ADRs in Action

Between 1988 and 2018, German car manufacturer Volkswagen AG traded OTC in the U.S. as a sponsored ADR under the ticker VLKAY. In August 2018, Volkswagen terminated its ADR program. One day after the termination, J.P. Morgan established an unsponsored ADR for Volkswagen, trading under the ticker VWAGY.

Investors who held the old VLKAY ADRs had the option of cashing out, exchanging the ADRs for actual shares of Volkswagen stock—trading on German exchanges—or exchanging them for the new VWAGY ADRs.

## If I Own an ADR, Is It the Same As Owning Shares in the Company?

ADRs are U.S. dollar-denominated certificates that trade on American stock exchanges and track the price of a foreign company's domestic shares. ADRs represent the prices of those shares but do not grant you ownership rights as common stock typically does.

## Why Do Foreign Companies List ADRs?

Foreign companies often seek to have their shares traded on U.S. exchanges through ADRs to obtain greater visibility in the international market, access to a larger pool of investors, and coverage by more equity analysts. Companies that issue ADRs may also find it easier to raise money in international markets when their ADRs are listed in U.S. markets.

## What Is a Sponsored vs. an Unsponsored ADR?

In a sponsored ADR, the depositary bank works with the foreign company and their custodian bank in their home country to register and issue the ADRs. An unsponsored ADR is issued by a depositary bank without the involvement, participation, or even the consent of the foreign company it represents ownership of. Unsponsored ADRs are usually issued by broker-dealers that own common stock in a foreign company and trade over-the-counter. Sponsored ADRs are more commonly found on exchanges.

## What Is the Difference Between an ADR and a GDR?

ADRs provide a listing of foreign shares in one market. U.S. [Global Depositary Receipts](https://www.investopedia.com/terms/g/gdr.asp) (GDRs), on the other hand, give access to two or more markets (most frequently the U.S. and Euro markets) with one fungible security. GDRs are most commonly used when the issuer raises capital in the local market as well as in the international and U.S. markets. This can be done either through private placement or public offerings.

## Is an ADR the Same As an American Depositary Share (ADS)?

[American depositary shares](https://www.investopedia.com/terms/a/ads.asp) (ADSs) are the actual underlying shares that the ADR represents. In other words, the ADS is the actual share available for trading, while the ADR represents the entire bundle of ADSs issued.

## The Bottom Line

American Depositary Receipts (ADRs) provide U.S. investors with an accessible avenue to [invest in foreign companies](https://www.investopedia.com/ask/answers/05/foreignstocks.asp) by trading these certificates on American stock exchanges. ADRs simplify investing in overseas entities by eliminating the need for direct dealings in foreign markets and currencies. They can be traded like any domestic stock, providing liquidity and ease of access. While ADRs offer opportunities for portfolio diversification, investors should be mindful of potential double taxation and currency conversion fees. Foreign companies also gain advantages by tapping into U.S. markets, enhancing their visibility and access to a broader investor base.  

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: American Depositary Receipts](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-88)."
>     
> 2.  Charles Schwab. "[ADRs, Foreign Ordinaries, & Canadian Stocks](https://www.schwab.com/stocks/understand-stocks/adrs-foreign-ordinaries-canadian-stocks)."
>     
> 3.  Internal Revenue Service. "[Memorandum: Depositary Receipts Program](https://www.irs.gov/pub/irs-utl/AM2013-003.pdf)." Pages 2-3.
>     
> 4.  JPMorgan Chase. "[JPMorgan Chase Celebrates 75th Anniversary of the ADR](https://jpmorganchaseco.gcs-web.com/static-files/b79add3a-c141-40c7-ae41-82d809ee1fe4)."
>     
> 5.  JPMorgan Chase. "[History of Our Firm](https://www.jpmorganchase.com/about/our-history)."
>     
> 6.  Citi. "[Depositary Receipt Services: Volkswagen AG](https://depositaryreceipts.citi.com/adr/guides/pgm_d.aspx?typeDisplay=A&pageId=16&subpageID=104&cusip=928662303)."
>     
> 7.  J.P. Morgan. "[Volkswagen (VWAGY)](https://adr.com/drprofile/928662600)."