American Depositary Receipts, or ADRs, give you benefits. One is diversification. In fact, it’s tempting to rename ADRs American Diversification Receipts.
ADRs followed by The Investment Reporter include companies based in Belgium, China, Denmark, Finland, France, Holland, Israel, India, Japan, Mexico, South Korea, Spain, Sweden, Switzerland, Taiwan and the United Kingdom.
Some of the above are so-called ‘emerging markets’. Such markets hold the potential for faster economic growth. China, for instance, comes to mind. Other emerging markets, such as India, have younger populations than most countries. This drives its demand for goods and services now. And in the future, India should add to the demand for financial assets. This will assist older populations in other countries to finance their retirements.
Emerging markets have low correlations
Investing in emerging markets raises your risk. On the positive side, some emerging markets have low correlations with US stocks and with each other. In other words, the ups and downs of some of these nations’ stocks have relatively little to do with the direction of US stocks and a lot more to do with domestic matters. But, correlations rise when global stock markets fall. That is, geographical diversification offers less just when you need it most.
ADRs let you buy into industries that you can’t buy in Canada. For instance, France’s AstraZeneca produces vaccines that protect people against COVID-19. Similarly, many of the other ADRs operate in industries with few or no Canadian counterparts. This can let you earn more while reducing your risk.
Even when you buy ADRs in the same industries as American companies, investigate to see where you’ll get the best deal. Compare AstraZeneca against US stock Pfizer Inc. Compare British consumer products company Unilever PLC against US Key stock Procter & Gamble, and so on. We think that ADRs and American stocks should play a significant role in the portfolios of most Canadian investors.
Choose manufacturing and consumer sectors
Our ADRs deliberately exclude most natural resources stocks, financial stocks and utilities. After all, the Canadian market offers lots of these companies. In addition, Canadian financial institutions and utilities typically pay generous and growing dividends. Even better, these dividends face no withholding taxes but instead benefit from the Canadian dividend tax credit. That’s why these ADRs include more of the manufacturing stocks and consumer stocks that are scarcer in Canada.
It’s important to consider all of your portfolios (including your spouse’s) as one and strike a suitable balance that you’re comfortable with. Use ADRs to add to the manufacturing and consumer sectors of your portfolio. Our usual advice is that you hold at least 10 per cent, but no more than 30 per cent of your stock money in each of the five economic sectors: manufacturing; consumer products and services; natural resources; financial and utilities. ADRs make it more feasible to meet these guidelines.
This is an edited version of an article that was originally published for subscribers in the April 23, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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