While immersing myself in various financial publications, I come across at least one article a day touting the benefits of investing in foreign stocks. The storyline is familiar: foreign stocks provide diversification and access to stock sectors unavailable in Canada; returns abroad look more promising than at home, especially in higher-growth emerging markets; it's another way to reduce portfolio risk.
Most Canadians who invest directly using a discount broker are adept at buying and selling foreign stocks, if "foreign" means our neighbour to the south. However, American companies represent less than half of the foreign stock universe, as measured by market capitalization. Fortunately, investing in the stocks of companies based outside North America has never been easier for direct investors.
Care to invest in BHP Billiton Ltd., the Australian mining giant currently pursuing Canada's own Potash Corp. of Saskatchewan Inc. POT? What about tapping into the burgeoning Asian telecom market by owning a piece of China Mobile Ltd? Or how about investing in AmBev, the Brazilian beverage company that profits from the Canadian taste for Labatt's Blue? Through financial products known as American Depositary Receipts (ADRs), buying or selling shares in these businesses and hundreds of other non-North American companies can be as simple as trading Microsoft, Procter & Gamble or other American stocks.
An ADR is a certificate that represents ownership of one or more shares or a fractional share of a non-U.S. company. ADRs are issued by a U.S. depositary bank such as BNY Mellon, Citibank or Deutsche Bank. They trade like stocks on one of the major American stock exchanges: the New York Stock Exchange, NASDAQ or NYSE Amex. (There are also ADRs that trade in the U.S. over-the-counter market.) The shares underlying an exchange-listed ADR are purchased on the company's home stock exchange and held by a custodian bank in the home country.
A foreign company hires a depositary bank to set up an ADR program for various reasons: to access the large pool of American capital, to build corporate visibility within the U.S. and globally, to expand and diversify its shareholder base and improve overall liquidity, or to facilitate merger and acquisition activity.
For direct investors, there are many advantages to investing in foreign companies with ADRs that trade on a major U.S. exchange:
For foreign-stock investors who are not content to limit their holdings in overseas companies to ADRs, two of the main Canadian discount brokers offer customers the facility to trade on stock exchanges beyond Canada and the U.S. HSBC InvestDirect is the long-established player in this space. Its clients can execute online trades for shares listed on the Hong Kong, London, Paris and Frankfurt stock exchanges and can access 30 other stock markets with a phone call. Trades are settled in 11 currencies.
With the recent launch of TD Waterhouse's global-trading platform, HSBC InvestDirect now has some competition. TD Waterhouse customers can execute online trades for shares listed on the London, Sydney, Brussels, Paris, Frankfurt, Hong Kong, Milan, Amsterdam, Singapore and Madrid stock exchanges. Trades settle in seven currencies.
TD Waterhouse's flat-rate commissions are generally much cheaper than HSBC InvestDirect's percentage-of-trade commissions. For instance, a £25,000 trade on the London exchange would cost a flat rate of £29 at TD Waterhouse; at HSBC InvestDirect it's 0.45% of the trade, or £112.50.
In Hong Kong, HSBC commissions begin at HK$300 plus a HK$50 administration fee, whereas TD charges a flat rate of HK$299 for most trades. Additional fees may apply to transactions on foreign stock markets. For example, there's a stamp duty in London and stamp duty, trading fees and transaction levies in Hong Kong.
For the enthusiastic direct investor, trading on foreign exchanges can be exciting. It also has its challenges: navigating the time difference in operating hours between home and the foreign exchange, finding reliable company information in a language you understand, dealing with foreign rules on accounting and disclosure, managing investments in various currencies, and getting reasonable exchange rates.
There are definite benefits to including non-North American stocks in your investment portfolios, but the question is how best to do it. Trading directly on foreign exchanges entails challenges that many investors, myself included, don't wish to tackle. ADRs and/or exchange-traded funds and mutual funds in the International Equity category can accomplish a similar end with less hassle, leaving us all with more time to enjoy the finer things in life.