# Does investing with ADRs ad U.S currency risk?



## peterk (May 16, 2010)

There are several companies I want to buy that have ADRs on the NYSE. (which are more convenient to buy than on their home exchange) But I'm not particularly long on the US dollar. Does a company's ADR adjust to compensate for the dollar fluctuations, or would I lose money if the U.S dollar drops further? I'm not sure how this works...
thanks!

*Add


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## humble_pie (Jun 7, 2009)

there are 2 currency adjustments involved.

the more obvious one is that these are ADRs traded in USD, so the investor does have the USD/CAD exchange rate to consider. An ADR doesn't adjust for a canadian investor. The currency risk is the same as for a US stock.

the less obvious one is USD vs the currency of the country of origin of your ADR, ie where the head office is incorporated. For example, take ING bank or tata motors. The countries are the netherlands and india respectively. These shares trade on their primary markets in euros and rupees respectively. So there's your secondary currency risk - USD over euro, or USD over rupee.

to carry the example further, suppose this scenario. USD & euro plunge against CAD, while rupee soars. Theoretically speaking, the currency effect for a canadian investor upon the US traded ADRs ING and TATA respectively should be fall sharply, and one of fall slightly/remain neutral/rise slightly.

i for one don't belive a retail investor has the capability to hedge the secondary currency.


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## scomac (Aug 22, 2009)

When purchasing ADRs, the currency risk that you are assuming is between the CAD and the currency of the country of origin of the company held in the ADR -- ie. Novartis = Swiss Franc, Canon = Yen, Vodaphone = Pound Sterling.

There is no USD risk even though it is the medium of exchange due to the fact that the underlying assets are priced in a third currency.


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## humble_pie (Jun 7, 2009)

with all due respect scomac i disagree.

there are USD financial engineering charges built into each ADR. Typically one ADR represents several or numerous shares of the underlying. The majority of ADRs are created & managed by the Bank of New York, which charges a fee.

ADRs are formed from large blocks of original shares purchased on original or host-country exchanges by large US financial institutions. Their fees are also priced in US dollars.

fees, priced in USD, are substantial.

an ADR never trades in tandem with its underlying. Is not a zero delta operation. There is always a price premium in USD.


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## kcowan (Jul 1, 2010)

Once the USD overhead is priced in, the underlying moves with the host currency. There is sometimes a delay until arbitrage works it out.


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## dogleg (Feb 5, 2010)

kc: sorry to butt in . Could you take a look at my post about calculating i shares yield and see what you make of it. Thanks. I am waiting on both TSX and Morningstar for their explanation.


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## m3s (Apr 3, 2010)

I buy ADRs. Do brokerages allow you to buy on other exchanges so you can buy these direct? How inconvenient is it to trade on foreign exchanges? Do ETFs trade on the foreign exchanges directly? IE does buying a CAD ETF of foreign markets reduce the link to USD

I am moving to Europe as a Cdn but even then I'm not sure how I would open a Euro trading account


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## humble_pie (Jun 7, 2009)

but the overhead is continuously being priced in, on a daily basis. Financial institutions charge their fees each & every day. And the arbs never stop. Night & day.

why are we arguing.  I said the hidden currency risk with an ADR is to the price of the underlying in its home currency on its home exchange.

almost without exception canadian investors believe the sole currency risk with an ADR is USD/CAD. The OP on this thread started out believing this. People don't realize that the real risk is not only more hidden but also pretty near un-hedgeable for a retail investor.

even that quintessentially dull-witted analyst on BNN - the one who says he's an etf expert - claims the new BMO india & china etfs are hedged to the rupee & the yuan respectively, just because BMO describes those 2 etfs & others as "hedged" but states in the fine print that this means to USD only.

it is truly sobering to consider that naiive clients are paying Mister Dull Wits one and one-half percent of money under management per annum ...


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## slacker (Mar 8, 2010)

@humble_pie: Good information. I didn't know there would be overhead with ADR's. But OP's question was regarding USD currency risk, and sounds like there wouldn't be.

For example, looking at the 1 year return of BP, and GBP<->USD:

- GBP dropped 5.34% compare to USD
- LON:BP dropped 25.32%
- NYSE:BP dropped 29.22%

The difference of about 5% return between LON:BP and NYSE:BP can almost entirely attributed to the GBP<->USD currency fluctuation.

In other words, the currency risk of CAD<->USD<->GBP is the same as CAD<->GBP. USD is just a middle man (with a small cut for the ADR operation)


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## humble_pie (Jun 7, 2009)

great stuff slacker.

bp is extremely liquid in both countries so the arbs are obviously keeping it picked to the bone.

on a related matter, CC was the first to post here that he wondered about td waterhouse global trading initiative when they debuted the program recently. CC felt that, for us in canada, an ADR could be faster, easier, cheaper.

i agreed with this view then & i still do. Now you are proving it. Because for us to go buy BP on london in the tdw program, we'd have to first buy the british pounds from td bank. And for our handful of retail pounds, we'll pay the retail FX conversion fee. A high fee. So we'd wind up paying more for BP on london (high FX fees) than we'd pay for BP ADR on new york assuming - and this is a Big Assuming - that we already owned the US dollars or could get them wholesale by gambitting.

of course, if we had to pay FX fees to convert from CAD to USD in order to buy on new york, we'd only come out slightly ahead with the new york ADR, because the bank through its sister broker would charge slightly more favourable rates for USD than for british pounds - because higher volume of business. We'd also benefit with the ADR because the local commish would be less than the london commish. In addition, most brokerages don't have online overseas trading yet, so the possibility of london is not realistically present for most discount clients.


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## peterk (May 16, 2010)

Excellent info! So dumbed down for someone like me... basically the USD is just an intermediate transaction currency. This means if, for example, the USD drops 10% against the canadian and GBP (which stay equal to present rates) the ADR will rise by 10% and I will be breaking even due to the unchanged CDN and GBP exchange rate.

However, ADRs have stock exchange and transaction fees. Will these fees eat away at the share price of the ADR compared to it's home exchange stock, acting somewhat like a mutual fund? If so how much are we talking here over a (say) 20 year period?


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## Eclectic12 (Oct 20, 2010)

slacker said:


> @humble_pie: Good information. I didn't know there would be overhead with ADR's. But OP's question was regarding USD currency risk, and sounds like there wouldn't be.
> 
> For example, looking at the 1 year return of BP, and GBP<->USD:
> 
> ...



Hmmm I must be missing something.

Your example says that the NYSE dropped *more* due to GBP<->USD *currency fluctuation.* 

Doesn't this match the original question - "Does a company's ADR adjust to compensate for the dollar fluctuations, or would I lose money if the U.S dollar drops further?"

Shouldn't the drop in the GBP be reducing the loss instead of widening it?


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## peterk (May 16, 2010)

Eclectic12 said:


> Hmmm ... how can you say there isn't a USD currency risk?
> 
> Your example says that the NYSE dropped *more* due to GBP<->USD *currency fluctuation.*
> 
> ...


I think in this example the ADR drops more than the brits do, but then you would still lose another 5% conversion from CDN to GBP if you had the London shares - so it's a wash. That's my understanding now anyways...


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## scomac (Aug 22, 2009)

humble_pie said:


> there are USD financial engineering charges built into each ADR. Typically one ADR represents several or numerous shares of the underlying. The majority of ADRs are created & managed by the Bank of New York, which charges a fee.
> 
> ADRs are formed from large blocks of original shares purchased on original or host-country exchanges by large US financial institutions. Their fees are also priced in US dollars.
> 
> fees, priced in USD, are substantial.


You're confusing a cost with currency risk. A cost will reduce investment returns. All investment operations incur costs. Currency risk impacts returns in that the return of the investment will be a blend of the change in value of the security and a change in value of the currency it is priced in at origin.



> There is always a price premium in USD.


Yes, that's the price for convenience that allows the investor to buy the securities on a domestic exchange priced in USD. Additional costs would be incurred to make the purchase on a foreign exchange in another currency. an arbitrage opportunity can occur because of this, but that isn't a currency risk.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> I think in this example the ADR drops more than the brits do, but then you would still lose another 5% conversion from CDN to GBP if you had the London shares - so it's a wash. That's my understanding now anyways...


Hmmm ... wan't the original question comparing "being invested on the London exchange"
versus "being invested in an ADR on an American exchange"?

If so, the CAD to GBP costs - while still in the overall picture, would not apply.


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## m3s (Apr 3, 2010)

slacker said:


> For example, looking at the 1 year return of BP, and GBP<->USD:
> 
> - GBP dropped 5.34% compare to USD
> - LON:BP dropped 25.32%
> ...


So to get this straight in my head (which always seems hard when currencies are involved)

If I'm investing in BP I want to invest in GBP and ideally not have the USD affect my investment. You show how the GBP-USD relation changes the price of the holding to negate it, but what about USD-CAD?

The OP said he wasn't long on USD, and if the USD tanks in relation to CAD in my head the investment is still worth less. So USD is actually more than just a middle man??


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## Lephturn (Aug 31, 2009)

You are buying and selling assets in USD - so yes you are exposed to currency risk.

The short answer is if you want to remove the effect of the USD on the price of the asset, short an equivalent amount of USD. So if you buy 10K worth of USD denominated ADRs either short 10K of USD against CDN or use an ETF that is inverse USD in CDN. (Horizons Beta-Pro has some) You could even hedge it with only $5,000 in the Beta-Pro Plus double inverse - although I'd be careful holding these ETFs long term as they always have "tracking error" or slippage.


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## humble_pie (Jun 7, 2009)

hey OP whatever you do, please don't even think about shorting an equivalent amount of USD.

scomac has the purist view. That there is no USD exposure whatsoever. That the exposure is only to the currency of the host exchange listing the foreign company's stock in its host country.

my own view is there is likely to be a modicum of permanent USD assets in most ADRs. For example, they may contain positive USD cash balances - possibly invested short-term - out of which the ADR's ongoing administrative costs are paid.

lephturn's view - that the entire exposure is to USD - is the opposite end of the spectrum from scomac. Me, i'm something like a 20 or a 25 on the scale, much closer to scomac's end.


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## slacker (Mar 8, 2010)

1. The OP's question was "Does investing with ADRs add U.S currency risk?". The answer is no, it does not. In the case of BP (ADR), the currency risk remains with CDN <-> GBP.

2. Subsequent response noted that the people who created the ADR expects a profit, similar to MER. You can get an idea of how much the overhead is by looking at historical data. But for relatively liquid stocks like BP, looks to be very close to 0%.

3. Further response noted the currency conversion for CDN<->GBP may be much higher than CDN<->USD. That may or may not be true, luckily you can find that out yourself pretty easily.

PS: There's been a lot of contradictory responses to this thread, logic dictates that some of them are wrong.


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## slacker (Mar 8, 2010)

Eclectic12 said:


> Hmmm I must be missing something.
> 
> Your example says that the NYSE dropped *more* due to GBP<->USD *currency fluctuation.*
> 
> ...


The LON:BP drop is with respect to british pounds. The reason why it appears that NYSE:BP had worse performance is because NYSE:BP is traded in US dollars. Since the british pounds dropped more than 5%, the NYSE:BP also factored that in.

This is the result of currency risk exposure to british pounds.


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## slacker (Mar 8, 2010)

Eclectic12 said:


> Hmmm I must be missing something.
> 
> Your example says that the NYSE dropped *more* due to GBP<->USD *currency fluctuation.*
> 
> ...





mode3sour said:


> So to get this straight in my head (which always seems hard when currencies are involved)
> 
> If I'm investing in BP I want to invest in GBP and ideally not have the USD affect my investment. You show how the GBP-USD relation changes the price of the holding to negate it, but what about USD-CAD?
> 
> The OP said he wasn't long on USD, and if the USD tanks in relation to CAD in my head the investment is still worth less. So USD is actually more than just a middle man??


More and less are all relative to Canadian dollars. The math will work out to be the same, once you've changed everything back to Canadian dollars, or US dollars, or even the Chinese Yuan. Whatever your calculations, just make sure to value them in the same currency.

Personally, I would not invest directly in the London stock exchange as a small time retail Canadian investor. The comissions and other cost of investing there is probably pretty high for a small fish like me.

It may be a different story if I was a fund manager with tens of millions of dollars.


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## peterk (May 16, 2010)

Thanks everyone. I think I've got a clearer understanding of the situation. HP, whenever you reply to a question I (pleasantly) always find the answer to be much more complex and interesting than I ever anticipate! Thanks.
So it seems like there is minmal risk to the USD by buying ADRs - and even if there is, there's no reasonable way to buy on the foreign exchanges cheaply unless I'm investing rather large sums of cash.


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## Eclectic12 (Oct 20, 2010)

slacker said:


> The LON:BP drop is with respect to british pounds. The reason why it appears that NYSE:BP had worse performance is because NYSE:BP is traded in US dollars. Since the british pounds dropped more than 5%, the NYSE:BP also factored that in.
> 
> This is the result of currency risk exposure to british pounds.


Ahhh ... now I see what I missed - or rather, what I was attributing to a different currency conversion.

Thanks


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## humble_pie (Jun 7, 2009)

slacker's figures show a discrepancy of 3.90% between the london 1-year return for BP & the US 1-year return for the BP ADR. Meanwhile the pound lost 5.34% vs the dollar.

_" For example, looking at the 1 year return of BP, and GBP<->USD:

- GBP dropped 5.34% compare to USD
- LON:BP dropped 25.32%
- NYSE:BP dropped 29.22%"_

if slacker's figs are correct, BP USA is not tracking BP london accurately. In slacker's table, there would have had to be something priced in US dollars in the ADR price that was shoring up BP's price stateside. For example, surely this ADR includes permanent positive USD cash balances to cover ongoing admin costs. To find out, it would be necessary to look under the hood.

if there is a permanent USD component, conceivably it could be hedged by a large-scale institutional investor.

i'm curious about one thing. The new BMO india & china etfs consist of nothing but ADRs. Yet BMO promotes these collections of ADRs as "hedged" while specifying that the hedge is to the US dollar, not the rupee or the yuan. Why, i wonder, would BMO "hedge" to USD if USD is only a medium & there is nothing to hedge. In each case, the hedge is the major component of the MER.


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## Lephturn (Aug 31, 2009)

I see your point about the ADRs - makes sense now that I think about it more that it would be based more on where the main revenue comes from of those companies than anything else.

My suggestion about hedging USD is accurate for normal US companies - but I agree that a 100% hedge in USD is not likely going to do what you want.

That makes it more complicated as you may want to hedge the other currency risk.


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> i'm curious about one thing. The new BMO india & china etfs consist of nothing but ADRs. Yet BMO promotes these collections of ADRs as "hedged" while specifying that the hedge is to the US dollar, not the rupee or the yuan. Why, i wonder, would BMO "hedge" to USD if USD is only a medium & there is nothing to hedge. In each case, the hedge is the major component of the MER.


The claim is that a CAD-USD hedge is a proxy for CAD-Emerging market currencies hedge. It's true that in recent years, the C-dollar has been appreciating against the rupee (I don't know about other emerging market currencies) but I'm not sure how true this will be of the future. It is a bit of an open secret that many emerging market currencies are deliberately kept undervalued to aid their exports.


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