Comparing American Depositary Receipts and GDRs
American Depositary Receipts, more commonly known as ADRs, and Global Depositary Receipts, also known as GDRs, are both investment vehicles used to invest in foreign companies from the comfort of your own domestic market. Although similar in nature and purpose, there are differences between the two investments.
What is an ADR?
An American Depositary Receipt is a type of security that is convertible into the underlying foreign security. It is issued in the US market but represents claims on foreign company’s shares that are held in trust by a bank or other designated custodian in the foreign country. ADRs are denominated in US dollars and trade just like any other US security.
What is a GDR?
A Global Depositary Receipt is very similar to an ADR, except that it is listed and traded in a foreign country. GDRs represent the shares of a foreign company that the depositary holds in trust in its home country. The difference between ADRs and GDRs is that GDRs are denominated in the currency of the home country and are usually more liquid and actively traded in their home markets than in the US.
It’s important to understand the key features of both ADRs and GDRs before making an investment. So, here’s a quick list of their key characteristics.
ADR vs GDR – Comparison Table
Features ADR GDR
Regulatory Framework Issued and regulated by the US Securities and Exchange Commission Issued and regulated by the home country of the foreign company
Underlying Shares Shares held in trust by a custodian in the US Shares held in trust by a custodian in the home country
Currency US dollars Currency of the home country
Liquidity Fairly liquid in US markets Highly liquid in its home markets
Benefits Provides investors with an easier way to invest in foreign companies Provides investors with access to higher liquidity markets
Now that we’ve explored their key features, let’s take a closer look at the advantages and disadvantages of each type of security.
The Advantages of ADRs
The most attractive benefit of ADRs is that they provide investors with an easier way to invest in foreign companies. Since they are denominated in US dollars and listed and traded in US markets, they can be accessed by US investors without the need to open accounts in foreign markets. They also provide investors with an additional layer of legal protection as they are regulated by the SEC.
The Advantages of GDRs
GDRs are attractive to investors because they provide access to higher liquidity markets. Since they are listed and traded in the home country of the underlying foreign company, they have the potential to be more liquid and regularly traded in the home market, which could provide investors with greater trading opportunities and potential price appreciation.
The Disadvantages of ADRs
One of the biggest drawbacks of ADRs is that they are not as liquid as foreign company shares. This is because US investors often have difficulty accessing foreign markets, making trading in ADRs somewhat difficult. In addition, since ADRs are listed and traded in US markets, their prices may fluctuate based on the actions of US investors and domestic forces, rather than the forces of the underlying foreign company.
The Disadvantages of GDRs
The main disadvantage of GDRs is that they are more volatile than ADRs due to their listing and trading in foreign markets. Since they are denominated in the currency of the home country, they are subject to exchange rate fluctuations, which could make them more volatile in overseas markets. In addition, GDRs are not as widely available to US investors, making access and trading more complicated.
Overall, ADRs and GDRs have some differences, but they both provide investors with an opportunity to access foreign markets. Ultimately, investors should understand the key features and differences of each type of security before making an investment decision.
