Demand for American Depositary Receipts (ADRs) is on the rise. The Merrill Lynch MLADR Index has provided a return 25 percent better than the S&P 500 since September 2001. Moreover that ADR index now offers valuations that are 25 percent lower than the S&P 500, along with a higher dividend yield.
U.S. investors can invest in international companies through ADRs, which do not require opening up a foreign account or dealing with international settlements. ADRs are cost-efficient because they have lower commissions, brokerage fees, transaction costs, and custody fees than their underlying foreign shares. In some cases, ADRs have much better liquidity than their underlying shares, too.
In addition, some people use ADRs to make a currency play on the dollar. An ADR represents the ordinary share of the company in its home market. To price the ADR, the ordinary share is converted and priced in dollars. If, for example, the company is listed in euros and the dollar weakens, investors will gain on the conversion rate. Popular ADRs include Nestle, Roche, Nokia, and Vodafone.
