ADRs offer benefits both for investors and for the company itself. Through ADRs, foreign companies can enter the largest investment market in the world. This is particularly useful for large companies in foreign countries whose capital markets are smaller or less developed.
- Having an ADR is a Status Symbol — Even if a company doesn’t want to raise capital through American markets, the mere act of having an ADR creates a status symbol. It raises awareness for the company and can help gauge investment sentiment and demand. The presence of ADRs can possibly lead to further expansion into the American market.
- Exposure to Foreign Markets — Investors, on the other hand, gain exposure to foreign markets. There have been periods of time where emerging markets have outperformed American ones. Many investors would not have been able to participate in those opportunities if not for ADRs.
- Diversification — Adding foreign companies is a great way to diversify an investor’s portfolio while still maintaining the upside of equities, unlike allocating a portion to bonds or gold. While the correlation is certainly higher, there are markets that have much cheaper valuation with high-quality businesses.
- Avoid Currency Risk — Another benefit of ADRs is the ability for investors to invest in foreign companies without worrying about currency risk. In order to purchase a foreign company’s shares, an investor must convert their U.S. dollars into that company’s currency. When the investor wants to sell out of their position, they would have to then re-convert into U.S. dollars. This opens the investor to changes in the currency’s value, and thus a currency risk.
This doesn’t just apply to emerging markets, which frequently have volatile currencies, but also developed markets facing geopolitical events. A current example would be the recent volatility of the British Pound following uncertainty about Brexit. Either way, ADRs remove one extra headache for investors.