What Is an ADR Fee and How Does It Affect Your Investments?
Understand the nature of ADR fees and their impact on your investment returns. Gain insight into this common financial charge.
An American Depositary Receipt (ADR) fee is a charge associated with investing in shares of foreign companies that trade on U.S. exchanges. These fees are a consideration for investors seeking to diversify their portfolios internationally without directly engaging in foreign markets. Understanding these fees is important for anyone holding or considering ADRs.
What is an ADR Fee
An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank that represents a specified number of shares in a foreign company’s stock. ADRs allow U.S. investors to trade shares of non-U.S. companies on U.S. exchanges. This simplifies foreign investing by enabling transactions in U.S. dollars through U.S. broker-dealers and settlement systems.
The depositary bank issues these receipts when underlying shares are deposited in a foreign depositary bank. An ADR can represent a fraction of one share, exactly one share, or multiple shares of the foreign company’s stock. This structure allows investors to own foreign stocks without the complexities of dealing with foreign stock markets, currency conversions, or differing regulations.
An ADR fee is a charge levied by depositary banks for the services involved in creating and maintaining the ADR program. These fees, sometimes called custody or pass-through fees, compensate the depositary bank for various administrative services.
These services include:
Custody of the underlying foreign shares
Currency conversion for dividends
Processing dividend payments
Providing corporate communications
Maintaining record-keeping
These fees cover the operational costs incurred by the depositary bank in facilitating the trading and ownership of foreign securities in the U.S. market. They ensure that foreign companies can access U.S. capital markets and that U.S. investors can conveniently invest in those companies.
How ADR Fees are Assessed and Collected
ADR fees are primarily charged by the depositary bank that issues and manages the American Depositary Receipt program. These fees are not imposed by the foreign company whose shares are represented or directly by the investor’s brokerage firm. The depositary bank then passes these fees through to the investors, often via the Depository Trust Company (DTC) and brokerage firms.
These fees are typically assessed periodically, often annually, but can also be semi-annually or quarterly. The timing and frequency of the fees depend on the specific ADR and are usually outlined in the ADR’s prospectus. The fees are generally calculated on a per-share basis, rather than being tied to the market value of the ADR. Common ranges for ADR fees are usually between $0.01 and $0.05 per share annually. For example, an investor holding 1,000 shares of an ADR with a $0.02 per share fee would incur a $20 annual charge.
Collection of ADR fees often occurs in one of two primary ways. If the underlying foreign share pays a dividend, the depositary bank typically deducts the ADR fee directly from the cash dividend payment before it is distributed to the investor. In cases where no dividend is paid, or the dividend is insufficient to cover the fee, the fee is generally debited directly from the investor’s brokerage account. The Depository Trust Company (DTC) collects these fees from brokerage firms, which then pass them on to the investor.
Impact on Investors and Transparency
ADR fees directly reduce the overall return on an investment in an American Depositary Receipt. Even though the fees per share may seem small, they can accumulate and diminish investment gains, particularly for large holdings or over extended periods. These fees represent an additional cost beyond typical brokerage commissions. Investors need to account for these charges as part of the total expense of owning foreign shares through ADRs.
Information about specific ADR fees can be found in several official documents and statements. The ADR’s prospectus is a primary source, detailing the fee structure and any other charges associated with the program. Annual reports, specifically Form 20-F filings with the U.S. Securities and Exchange Commission (SEC), also require disclosure of fees and payments related to ADR programs.
Brokerage firms are required to disclose these fees to investors. These charges typically appear on brokerage statements, sometimes labeled as “ADR Pass-Thru Charges” or similar terms. Investors can also check the websites of the issuing depositary banks, such as BNY Mellon or J.P. Morgan, for information on their specific ADR programs and associated fees. The SEC’s EDGAR database is another resource where investors can search for prospectuses and other regulatory filings that contain fee details.