When a stock is listed on a foreign exchange, sometimes it is also available to US investors through American Depository Receipts (ADRs). I am trying to find out some of the differences between purchasing a stock's ADR shares (in the US market) with purchasing the stock directly on the foreign stock exchange (ie. Singapore, Japan, London stock exchange, etc). Specifically, I am trying to hedge against the falling dollar.

I have heard that having money in foreign securities is a hedge against the falling dollar. As other currencies' value increases compared to the USD, by having your money in foreign securities you can benefit from this. So it sounds like by owning a foreign stock on a foreign stock exchange, one could benefit from the falling USD (a major component is of course the performance of the stock). By owning ADR shares, does one still profit from the falling dollar this way? I think the ADR share price is just set based on current exchange rates, and if this is the case, then you don't have something to gain from the falling USD.

I would prefer to purchase ADR shares, because they can more easily be purchased through my broker and often have cheaper commissions compared with purchasing stocks directly on a foreign exchange.

Any thoughts on this? Thanks.

The ratio of shares to adrs is fixed e.g. 20 native shares per adr. You'll benefit from a falling dollar with both. The main reason you'd buy the native stock instead of the adr is the native stock is usually more liquid.

gandhis said:The adr's typically trade for a premium over the base shares. So depending upon the amount of your investment, it might be cheaper to buy the base shares instead of ADR's.
Now, if the premium remains intact by the time you sell the shares, then you will come out even no matter what you buy.

A good resource is adr.cocm. The site does not have the best UI but it has good information.

you have to go through setting up a bank account or dealing with currency exchange and wire fees, and then you have to worry about local and US taxes. I think it's impractical for most individual investors. either buy the ADRs here, or find a good foreign stock mutual fund.

Your strategy is one advocated in the book “Crash Proof: How to Profit From the Coming Economic Collapse” by Peter D. Schiff and John Downes. Specifically, Peter Schiff primarily recommends that people put their money in foreign dividend paying stocks in foreign currencies, which means buying the stocks on a foreign exchange. Therefore the dividends will be in the foreign currency. He also suggests Perth Mint Certificates. Peter Schiff’s brokerage firm can help implement this strategy as well as other independent-minded brokers. If you are interested in trading Canadian shares online, such as those of mining and energy companies, consider Penn Trade. For large blocks of shares, the trading fee is quite reasonable with little cost to convert currency.

Thanks for the responses.

I don't want to get sidetracked by the increased commissions. Thats probably a topic for a separate thread.

I've noticed that many Funds with an international focus tend to also try to hedge themselves from the falling dollar in other ways. I don't want a hedge against the falling dollar. My concern is some ADRs have VERY low trade volumes.

Don't think I am allowed to list the tickers, but I think this helps illustrate what I'm talking about.

As an example, take Capitaland (large real estate company in Asia) on the Singapore Exchange.

The ADR (CLLDY):
http://www.adrbny.com/dr_profile.jsp?cusip=140547100
last volume: 1,400

vs. the base shares traded on the Singapore Exchange (C31):
http://esite.sgx.com/live/st/ststock.asp?stk=C
last volume: 6.8 million