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Investing Internationally with
American Depository Receipts (ADRs)
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Published:
October 8, 2007
Imagine going to a supermarket and
shopping in just half of the aisles,
or opening a restaurant menu and
limiting your dinner choices to the
entrees listed on just one of the
pages. This is essentially what
investors with no foreign exposure
are doing with their portfolios.
But buying shares directly in a
foreign company isn't always easy
and typically requires significantly
higher brokerage commissions.
Furthermore, even though the
Securities and Exchange Commission
(SEC) keeps domestic companies in
line, there is no guarantee that
firms trading on overseas exchanges
will be subject to the same
accounting scrutiny and regulatory
requirements. So what's an investor
to do?
Fortunately, there is an easy way
for U.S. investors to gain access to
lucrative foreign stocks -- American
Depositary Receipts (ADRs).
Essentially, ADRs are certificates
issued by domestic financial
institutions that represent an
ownership interest in foreign
shares. ADRs are conveniently
traded on the major U.S. exchanges,
they are priced in U.S. dollars, and
investors are often relived to know
that the companies behind their ADRs
must adhere to
GAAP accounting standards and
meet other stringent reporting
requirements.
ADRs are great diversification tools
because overseas opportunities are
more important today than ever. As
the world's largest economy (with a
gross domestic product in excess of
$13 trillion), the U.S. isn't able
to sustain its robust growth rates
of decades past. And considering the
link between economic expansion and
equity prices, it's therefore not
surprising that U.S. stocks have
struggled to keep pace with the rest
of the world. For instance, the S&P
500 has delivered respectable
average gains of about +12% per year
over the past five years, but this
lags most foreign benchmarks --
stocks have jumped nearly +20% per
year in Europe, +25% in Pacific
Asia, and +40% in Latin America over
the same period. In 2006, the
benchmark failed to even break the
top-ten list of top-performing stock
markets -- the S&P 500's +14% return
wasn't even within shouting distance
of, say, Venezuela's impressive
+156% surge.
In years past, most of the world's
stock market capitalization was
locked up in the United States, and
investors had a difficult time
investing abroad, even if they
wanted to. However, with the help of ADRs, trillions of dollars in market
wealth has been created overseas in
the past decade, and there are now
actually more opportunities outside
our borders than within.
Of course, sifting through hundreds
of ADRs takes some time --
fortunately, StreetAuthority's
Nathan Slaughter has already done
the heavy-lifting. As editor of the
value investing newsletter
Half-Priced Stocks, Nathan
identified a handful of the most
promising ADRs available in a recent
issue. His search focused on ADRs
with attractive fundamentals,
sustainable competitive advantages,
undervalued share prices, as well as
high dividend yields. He uncovered
two favorite securities, including
one that carries an eye-popping 8.6%
yield and a "Price Appreciation
Potential" of +66%. To see
StreetAuthority's exclusive article
on the market's most attractive ADRs
and detailed profiles of Nathan's
favorites,
please follow this link. |
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