ADRs & Currency Exposure — Q&A

ADRs let U.S. investors buy foreign companies without trading on foreign exchanges, converting currency, or using foreign broker-dealers. Created by domestic financial firms with foreign branches (e.g., JP Morgan, first ADR 1927).

Voting: most ADRs do not provide voting rights (underlying shares owned by the creating firm). Pre-emptive rights: ADR investors do not receive them but are compensated — rights are liquidated abroad and proceeds paid as dividends to ADR holders.

Currency exchange risk (yen-to-dollar conversion on dividends) and foreign tax withholding on dividends (IRS provides a tax credit). ADRs simplify trading but don’t eliminate foreign-investment risks.

When the currency exchanged out of weakens or the currency exchanged into strengthens before conversion — a stronger dollar means fewer dollars from the same yen dividend.

November 2019 — $136/share vs. $120 in June 2015. A weak domestic currency is unfavorable when buying foreign investments (buys less foreign currency).

Unfavorable — they receive fewer dollars ($136 vs. $200 for ¥15,000). Strong domestic currency is favorable buying foreign, unfavorable selling/converting out.

Diversification across regions/industries — losses in one sector or domestic market can be offset by gains elsewhere. Foreign exposure may balance losses when the U.S. economy is in recession.

Large stable economies = generally safer. Emerging markets = smaller growing economies with substantial risk (government issues, weak infrastructure) but significant profit potential. Example: nationalization (e.g., Venezuela) can wipe out ownership.