For those of you unfamiliar with the term ADRs, it stands for American depositary receipt. An ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued in the U.S. by a bank or brokerage company. For dividend investors looking for diversification, ADRs can offer diversification benefits by allowing us to invest in companies outside of the U.S. and Canada.[ad#tdg-embedded]
Do I invest in dividend-paying ADRs?
In a word, no. The reason I don’t is because I have enough trouble following the stocks that I currently own. I have written time and time again that for an investor to invest in individual stocks then they need to ensure they have enough time to focus on the analysis of potential stocks to buy as well as the current stocks in a portfolio. Adding in ADRs to an investment mix adds additional risk (more on that risk in a moment) to a portfolio that takes additional time and effort to FULLY understand and make sense of. Watching out for the risks associated with our own local stocks is difficult enough
The risks of investing in ADRs
There are some risks that are relatively specific to ADRs that an investor needs to be aware of before they even consider investing in individual ADRs. Here are some of the ones that I have been able to gleam from some quick research on the web:
1. Unstable economic policies: Some countries around the world can quickly change their economic policies which can dramatically alter the valuation of assets. It is very hard (read: impossible) to predict these changes.
2. Political risk: Do you fully understand the policies of your own governments? I know I find myself scratching my head a lot. However, in Canada the political environment is stable compared to many countries around the world. How a country is governed can impact stock prices a great deal.
3. Currency risk: Currency risk impacts Canadians as we very often invest in U.S. dividend stocks. Currency risk also impacts ADRs, but it can be exasperated depending on how stable the country’s monetary policy is. Currency risk is very much beyond our control and it often does things we can in no way anticipate.
How I choose to invest internationally
Rather than invest in ADRs, I choose to invest internationally through the use of index funds. This frees my time up a lot because I do not need to spend the extra time analyzing ADRs and trying to figure out the aforementioned risks. Through index funds, I get diversification across countries and industries. For me it is much simpler, and that can be very powerful when it comes to investment performance.Google+