Do You Actually Own Your Foreign Stocks?

“Oh we already own European stocks. We bought them from Schwab.”

I’ve been hearing versions of that a lot lately. (Just last week I saw Jeff answer a similar reader question asking how to buy foreign stocks.)
Over the last few months, I’ve noticed a distinct uptick in interest in investing in foreign equities from clients of my consultation service here at International Living. 

Today, I want to explain what you’re actually buying when you do.

When investing in a foreign company, you have two options. You can buy its shares directly on a foreign exchange, or you can buy American Depositary Receipts, or ADRs, that trade on a US exchange.

The two look similar. In both cases, you gain exposure to the same company. But the structure, risks, costs—and even what you legally own—differ in important ways. To understand the difference, it helps to start with what an ADR is.

An ADR is a financial instrument created by a US bank that represents shares of a foreign company. A US depositary bank buys the foreign shares and deposits them in a custodian bank in the company’s home country. The US bank then issues ADRs in the US, either on a one-to-one basis, or with some multiple of ADRs equalling one foreign share.

When you buy an ADR from a US broker like Schwab or Fidelity, you are notbuying the foreign shares. Instead, you are buying a receipt issued by the US bank. That receipt gives you a claim on the underlying shares that the bank holds on your behalf. The US bank remains the registered owner of the underlying shares, not you. You own the benefits of the shares, not the shares themselves.

ADRs give you economic exposure to the foreign company. If the company pays a dividend, the US bank collects it in the local currency, converts it into dollars, and distributes it to you, with less fees and taxes. But you rely on the US depositary bank to manage the shares and pass through dividends and other corporate actions.

If the company’s stock price rises or falls, the ADR price will move in line with it, adjusted for exchange rates. Arbitrage by institutional traders usually keeps these prices aligned. However, pricing gaps can occur, especially in volatile markets or when liquidity is low, such as when you buy ADRs of a small foreign company.

ADRs typically carry an annual fee, often a few cents per share, which the US bank deducts from dividends or bills through your brokerage account. That reduces your returns to ADRs compared to owning the stocks directly.

On the other hand, if you purchase foreign shares on a foreign exchange, you become their actual owner. Dividends are paid in the local currency and may be converted into US dollars, depending on your account setup. There are fewer layers between you and your shares.

ADRs aren’t risk free. If your US bank gets into financial trouble, access to your ADRs could be disrupted. In a bankruptcy, ADRs are supposed to be segregated from the bank’s own assets. “Segregated,” however, doesn’t mean “risk-free.”

If the US bank fails, there will be long delays while the bankruptcy process unfolds. Transfers, dividend payments, or corporate actions could be disrupted. It’s even possible that you could be required to take a haircut on your ADRs.

Then there is custodian risk in the foreign country. If the foreign custodian bank fails, or if there are legal disputes in that jurisdiction, ADR holders could be affected. This risk is higher in countries with weaker legal systems or less developed financial infrastructure.

Finally, there is legal and structural risk. Your rights as an ADR holder are defined by the deposit agreement between the foreign company, the depositary bank, and ADR holders. You don’t have the same direct shareholder rights you would have if your name were on the company’s share register. If there is a breakdown in communication or process, you are dependent on the US bank to act on your behalf.

These aren’t theoretical concerns.

After Russia’s invasion of Ukraine in 2022, trading of ADRs for Russian companies like Gazprom was suspended. Settlement links between Russian and US banks were broken. The Russian government required companies to terminate their ADRs. To this day many investors are still locked into Russian ADRs they can’t access.

In 2020, Congress passed the Holding Foreign Companies Accountable Act, which required audit oversight of foreign companies with ADRs on US exchanges. Regulatory uncertainty led to a collapse in the market price of Chinese ADRs like Alibaba and JD.com. Didi Global’s ADRs were delisted, causing liquidity to evaporate, costing investors a fortune.

Things could work in the opposite direction as well. If foreign governments were to implement sanctions against the US, investors could lose access to the underlying economic benefits of foreign ADRs.

ADRs are a useful way to gain exposure to foreign companies that aren’t listed on US exchanges—at least in normal times. But they may not be for everyone… especially if you are concerned about the stability of the US financial system.

Yes, you can buy ADRs through US brokers like Schwab or Fidelity, and it’s convenient. But you also need to factor in the risk. On the other hand, there are brokerages around the world, like Investors Europe and Boom.com, where you can buy foreign stocks directly if you qualify for an account. My consultancy service is one way to figure out which is right for you.