# What Is ADRs? American Depositary Receipts Explained Published: 2026-04-19 Author: Warren Team URL: https://www.heywarren.com/blog/adrs-definition --- When you buy Alibaba (BABA), Toyota (TM), or Nestle (NSRGY) on a US exchange, you are not actually trading shares listed in Hong Kong, Tokyo, or Zurich. You are buying a wrapper called an American Depositary Receipt. So what is ADRs investing in plain English? An ADR is a US-traded certificate that represents shares of a foreign company held in custody overseas. The certificate trades in US dollars, settles through US clearinghouses, and pays dividends in dollars after currency conversion. For most US investors, this is the cleanest path to international diversification. Buying ordinary shares in Tokyo or Frankfurt requires a foreign brokerage account, currency conversion, foreign tax forms, and unfamiliar settlement rules. ADRs strip away that friction. You can hold Taiwan Semiconductor (TSM), ASML Holding (ASML), and Novo Nordisk (NVO) right next to Apple in the same brokerage account. This guide explains how ADRs are created, the difference between sponsored and unsponsored programs, the three sponsorship levels, how the ADR ratio affects pricing, dividend and tax mechanics, and the specific risks you should weigh before buying. By the end, you will read any ADR prospectus with confidence. ## What Is an ADR? The American Depositary Receipt Defined An American Depositary Receipt (ADR) is a negotiable US security issued by a depositary bank that represents a specified number of shares in a foreign company. The underlying shares sit in a custodian bank in the issuer's home country. ADRs trade on US exchanges or over the counter, priced in dollars, and pay dividends in dollars. JPMorgan invented the structure in 1927 to let American investors buy shares of British retailer Selfridges without dealing with London settlement. The instrument solved a real problem: cross-border share ownership was slow, expensive, and operationally messy. Nearly a century later, the same logic applies. More than 2,000 ADR programs trade in the United States today, covering companies from roughly 70 countries. The depositary bank is the key intermediary. Today the market is dominated by three players: BNY Mellon (the largest, with deep historical roots in the business), Citibank, and JPMorgan. Deutsche Bank is a smaller fourth. The depositary issues the ADRs, maintains the share register, distributes dividends, handles corporate actions like splits and rights offerings, and provides shareholder communications in English. Each ADR represents a defined number of underlying ordinary shares, called the **ADR ratio**. The ratio matters because it sets the dollar price range. If a Japanese company's ordinary shares trade at 800 yen each, that is roughly $5.30, too low for many US institutional buyers. A 1-to-10 ratio bundles ten shares into one ADR priced near $53, landing in a comfortable institutional range. ## How ADRs Work: Creation, Custody, and Cancellation ADRs are created through a two-step process. A US broker buys ordinary shares on the foreign exchange, deposits them with the custodian bank in that country, and the depositary bank then issues a corresponding number of ADRs in the United States. The reverse process, cancellation, works the same way in mirror image. ![A US broker buys foreign shares, deposits them with an overseas custodian, and the US depositary bank issues ADRs in return.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20875%20125%22%20width%3D%22875%22%20height%3D%22125%22%20role%3D%22img%22%3E%3Ctitle%3EFlow%20diagram%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22115%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EUS%20Broker%3C%2Ftext%3E%3Ctext%20x%3D%22115%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3Ebuys%20foreign%20shares%3C%2Ftext%3E%3Cline%20x1%3D%22205%22%20y1%3D%2262.5%22%20x2%3D%22237%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22244%2C62.5%20235%2C57.5%20235%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22245%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22330%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ECustodian%20Bank%3C%2Ftext%3E%3Ctext%20x%3D%22330%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3Eholds%20shares%20abroad%3C%2Ftext%3E%3Cline%20x1%3D%22420%22%20y1%3D%2262.5%22%20x2%3D%22452%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22459%2C62.5%20450%2C57.5%20450%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22460%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22545%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EDepositary%20Bank%3C%2Ftext%3E%3Ctext%20x%3D%22545%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3Eissues%20ADRs%20in%20US%3C%2Ftext%3E%3Cline%20x1%3D%22635%22%20y1%3D%2262.5%22%20x2%3D%22667%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22674%2C62.5%20665%2C57.5%20665%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22675%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22760%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EUS%20Investor%3C%2Ftext%3E%3Ctext%20x%3D%22760%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3Ebuys%20ADRs%20in%20USD%3C%2Ftext%3E%3C%2Fsvg%3E) *A US broker buys foreign shares, deposits them with an overseas custodian, and the US depositary bank issues ADRs in return.* ### The depositary and custodian relationship The depositary bank lives in the United States. The custodian bank lives in the issuer's home country, often a local affiliate or correspondent of the depositary. When new ADRs are needed, the custodian receives ordinary shares and signals the depositary to issue receipts. When ADRs are cancelled, the depositary cancels receipts and instructs the custodian to release ordinary shares back to the foreign market. This linkage keeps ADR prices tied to the underlying ordinary shares. Arbitrageurs continuously create and cancel ADRs to capture price gaps. If an ADR trades at a meaningful premium to its underlying shares (after adjusting for the ADR ratio and exchange rate), arbitrageurs short the ADR, buy the ordinaries, and convert. If the ADR trades at a discount, they do the reverse. ### The ADR ratio in practice The ratio is set by the depositary at program launch. Common ratios include 1-to-1 (one ADR equals one ordinary share), 2-to-1, 1-to-2, or unusual ratios like 1-to-10 or 1-to-20 for low-priced foreign stocks. ASML Holding (ASML) uses a 1-to-1 ratio because the underlying Dutch shares already trade at institutional-friendly prices. Toyota (TM) uses 1-to-2 (one ADR equals two Tokyo-listed shares). Companies sometimes change the ratio through an "ADR split," similar to a stock split, when prices drift outside the target range. ## Sponsored vs Unsponsored ADRs The first major distinction is sponsorship. A **sponsored ADR** is created with the foreign company's cooperation and a deposit agreement with a single depositary bank. An **unsponsored ADR** is created by one or more depositaries without any formal agreement with the issuer, usually in response to investor demand. Sponsored ADRs are the modern standard. The company controls the depositary relationship, signs off on disclosures, and typically files at least some information with the SEC. The company often subsidizes some program costs as part of its investor relations strategy. Almost every ADR you have heard of, Alibaba, Toyota, Novo Nordisk, ASML, Taiwan Semiconductor, BP, Novartis, is sponsored. Unsponsored ADRs exist mainly in legacy programs and trade only on OTC pink sheets. Multiple depositaries can issue competing unsponsored ADRs for the same foreign company, which fragments liquidity and creates confusion. The SEC tightened rules in 2008 to allow unsponsored programs without an SEC registration if the company already meets certain home-country disclosure standards. That change actually expanded the unsponsored universe, but the trading volume in these names is typically thin. For retail investors, the practical takeaway is simple. If the ADR trades on the [NYSE](https://www.nyse.com/) or [Nasdaq](https://www.nasdaq.com/), it is sponsored. If it trades on OTC pink sheets with a five-letter ticker ending in "Y" or "F," it might be unsponsored, read the disclosures carefully before buying. ## The Three Levels of Sponsored ADRs Sponsored ADRs come in three levels with sharply different SEC reporting requirements, listing venues, and capital-raising abilities. The level signals how seriously the foreign company has committed to the US market and how much information you can expect. ![The three levels of sponsored ADRs differ by listing venue, SEC reporting burden, and ability to raise new capital.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20600%20211%22%20width%3D%22600%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3ESponsored%20ADRs%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20120%20105.5%20L%20120%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2240%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22120%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ELevel%20I%3C%2Ftext%3E%3Ctext%20x%3D%22120%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EOTC%20only%2C%20Form%20F-6%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20300%20105.5%20L%20300%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ELevel%20II%3C%2Ftext%3E%3Ctext%20x%3D%22300%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ENYSE%2FNasdaq%2C%20Form%2020-F%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20480%20105.5%20L%20480%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22400%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22480%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ELevel%20III%3C%2Ftext%3E%3Ctext%20x%3D%22480%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EListed%20%2B%20capital%20raise%3C%2Ftext%3E%3C%2Fsvg%3E) *The three levels of sponsored ADRs differ by listing venue, SEC reporting burden, and ability to raise new capital.* ### Level I: OTC pink sheets Level I is the entry point. The company files a basic registration statement (Form F-6) with the SEC but is exempt from full US [GAAP](https://www.fasb.org/) reconciliation and most ongoing reporting. ADRs trade only on OTC pink sheets, never on a major US exchange. Liquidity is usually thin and bid-ask spreads wide. Roche Holding (RHHBY) and Tencent (TCEHY) trade as Level I programs despite being massive companies, they simply choose not to take on the US listing burden. ### Level II: Listed on NYSE or Nasdaq Level II ADRs are listed on a US exchange and require the company to file Form 20-F annually with the SEC, including financial statements reconciled to US GAAP or prepared under [IFRS](https://www.ifrs.org/). The company must comply with Sarbanes-Oxley provisions applicable to foreign private issuers. Level II programs do not raise new capital, they simply list existing shares in ADR form. Toyota (TM) and Honda (HMC) are classic Level II examples. ### Level III: Listed with capital raise Level III is the most demanding. The company lists on a US exchange and uses the ADR program to raise new capital through a public offering, filing a full Form F-1 registration statement. This is what Alibaba did in its 2014 IPO, what Taiwan Semiconductor did decades earlier, and what most non-US companies do when they want a true US public listing. Level III companies face nearly the same disclosure burden as US-domiciled issuers. A separate fourth category exists, **Rule 144A private placement ADRs**, sold only to qualified institutional buyers and exempt from SEC registration, but retail investors rarely encounter these. ## Currency, Dividends, and the Fees Nobody Mentions ADR dividends originate in foreign currency, get converted to US dollars by the depositary, and arrive in your brokerage account net of foreign withholding tax and a small custody fee. The depositary bank collects the foreign-currency dividend from the issuer, converts it at a wholesale FX rate, deducts fees, and distributes the net dollar amount. The currency conversion is generally done at competitive institutional rates, but it is not free, the depositary captures a small spread. More importantly, dividend timing can lag. A foreign company may declare a dividend in March and pay it locally in April, but US ADR holders sometimes receive the dollar equivalent weeks later after FX conversion and processing. ADR custody fees are the most commonly overlooked cost. Depositary banks charge **annual custody fees** typically ranging from $0.01 to $0.05 per ADR. For dividend-paying ADRs, the fee is deducted from the dividend before distribution. For non-dividend-paying ADRs, the fee is charged directly to your brokerage account once or twice a year, and it often shows up as a mysterious line item that surprises holders. Always check the fee schedule in the deposit agreement. ### Foreign withholding and the US foreign tax credit The foreign country withholds tax on dividends before they leave its borders. Standard rates vary: 15% for most treaty countries (UK, Japan, Switzerland under treaty), 25% to 35% in some jurisdictions absent treaty relief. US investors can claim a **foreign tax credit** on Form 1116 to offset US tax on the same income, avoiding double taxation. Hold ADRs in a taxable account to use the credit, in an IRA, the foreign tax is essentially lost because there is no US tax to offset. UK ADRs are a notable exception: the UK does not withhold tax on dividends to US investors, making names like BP, Shell, and HSBC (HSBA's ADR is HSBC) particularly tax-efficient. ## ADRs vs GDRs vs Ordinary Shares ADRs are one species in a broader genus called depositary receipts. **Global Depositary Receipts (GDRs)** are the international cousin, typically issued in London or Luxembourg and sold primarily to European and Asian institutional investors. **Ordinary shares** are the original local-listed shares, what trades in Tokyo, Frankfurt, Hong Kong, or Sao Paulo. The structural mechanics of GDRs mirror ADRs: a depositary bank issues receipts against shares held by a custodian. The differences are mostly about venue and audience. GDRs trade on the London Stock Exchange's International Order Book or Luxembourg, settle through Euroclear or Clearstream, and are typically denominated in dollars but marketed to non-US institutions. Many emerging-market companies issue both ADRs and GDRs simultaneously to reach the broadest investor base. For a US individual investor, the choice between an ADR and the underlying ordinary share usually comes down to access and tax. ADRs are simpler, one US brokerage account, dollar-denominated, English-language reporting, foreign tax credit available. Ordinary shares may offer slightly better liquidity for very large positions and avoid the custody fee, but the operational overhead rarely justifies it for retail-sized holdings. | Feature | ADR | GDR | Ordinary Shares | |---------|-----|-----|-----------------| | Primary venue | NYSE, Nasdaq, US OTC | LSE, Luxembourg | Home country exchange | | Currency | USD | Usually USD | Local currency | | Investor base | US institutions and retail | Global institutions | Local + cross-border | | SEC reporting | Yes (Levels II, III) | Generally no | No | | Custody fee | Yes | Yes | No | ## Risks Specific to ADRs ADRs carry every risk the underlying foreign company carries, plus several layered on top by the structure itself. Understanding these risks separates competent international investors from accidental ones. **Currency risk** is the big one. Even though you pay and receive dollars, the underlying business earns in yen, euros, or yuan. A 10% drop in the local currency against the dollar drags the ADR down 10%, all else equal, because the underlying share value translates back at the new rate. Toyota's ADR can fall on a strong dollar even if the Tokyo-listed shares are flat in yen. **Sponsor delisting risk** is rarely discussed but real. A company can terminate its ADR program with relatively short notice, often 30 to 90 days. Holders are then forced to either sell, accept ordinary shares delivered to a foreign brokerage account, or cash out at the depositary's price. Several Chinese companies wound down ADR programs in 2022–2023 amid US-China audit disputes, with mixed outcomes for retail holders. **Foreign company-specific risks** include weaker disclosure standards (especially for Level I issuers), different accounting treatments, weaker shareholder protections, and political or regulatory risks in the home country. Russian ADRs were effectively zeroed out in 2022 when sanctions blocked depositaries from honoring conversions. Always size positions in any single foreign jurisdiction with that tail risk in mind. A useful mental checklist before buying any ADR: confirm the sponsorship level, find the ADR ratio, check the custody fee, confirm the home-country withholding tax rate, and verify the program is sponsored by a major depositary (BNY Mellon, Citi, JPMorgan, or Deutsche Bank). ## Conclusion So what is ADRs investing in one sentence? It is the practical, dollar-denominated, US-brokerage-friendly way to own foreign companies without leaving your domestic account. The structure is nearly a century old, battle-tested, and used by virtually every major non-US company that wants meaningful access to American capital. Key takeaways to carry forward: - **ADRs are receipts**, not shares, a US depositary bank issues them against ordinary shares held by a custodian abroad. - **Sponsorship and level matter.** Sponsored Level II and Level III ADRs (TSM, ASML, BABA, NVO) offer the best disclosure and liquidity. Unsponsored OTC programs deserve extra scrutiny. - **The ADR ratio determines the dollar price** of one receipt and changes nothing about your economic exposure. - **Watch the custody fee and foreign withholding tax**, both quietly reduce your dividend yield, but the foreign tax credit can recover the withholding in taxable accounts. - **Currency, sponsor termination, and country-specific political risk** are the structural risks layered on top of normal [equity](/blog/equity-meaning-in-business) risk. Used thoughtfully, ADRs are one of the cleanest tools available for building genuine international diversification. As US-listed depositary programs evolve and global [capital markets](/blog/capital-markets-def) keep integrating, expect ADRs to remain the default bridge between American portfolios and the world's best foreign businesses. Ready to put this knowledge to work? Try Warren, your AI financial advisor, get personalized, conflict-free guidance at heywarren.com --- ## Related Reading **More from Warren**: - [What Is Diversification: How It Reduces Portfolio Risk](/blog/what-is-diversification) - [Efficient Frontier: What It Is and How Portfolio Optimisation Works](/blog/efficiency-frontier) - [ETFs vs. Index Funds: Key Differences and Which Is Right for You](/blog/etfs-vs-index-funds) **Authoritative sources**: - [SEC Investor.gov, Investing Basics](https://www.investor.gov/introduction-investing/investing-basics) - [FINRA, Investor Education](https://www.finra.org/investors)