Investing Abroad: Weighing the Decision Between Foreign Ordinaries and ADRs
Investing outside of one’s home country is a common and effective way to diversify a portfolio. Investors must make an important choice between using foreign ordinary shares or American Depository Receipts (ADRs) to achieve this diversification. Both security types share the same foreign company risk, but there are some key differences between the two. In this paper we clarify the implications of each choice in the context of a Parametric Custom Core® portfolio benchmarked against the MSCI EAFESM Index.
While ADRs are a convenient way to invest in foreign stocks, investors should be aware of imperfect coverage and mismatch of market trading hours, which lead to higher expected tracking error. ADRs help smaller investors gain exposure to international indexes with relative ease, while accounts with over $10 million in assets may benefit from certain cost and tax advantages of ordinaries.