Stock Derivatives
ADRs Explained: Trading US-Listed Foreign Stocks
How American Depositary Receipts work, sponsorship levels, ratio, currency exposure, and trading examples for Petrobras, Naspers, Vale, and more.
Contents
American Depositary Receipts let foreign companies access US capital markets and let global investors hold foreign stocks through standard US brokerage infrastructure. For global investors, ADRs offer a convenient way to access companies that may be less easily traded directly on home exchanges, while also providing access to options and other derivatives that may not exist on the underlying. This guide covers the structure, the major examples relevant to international audiences, and the practical considerations for trading ADRs.
What an ADR actually is
An ADR is a US-issued security that represents shares of a foreign company held in custody by a US depositary bank. The ADR trades on US exchanges (NYSE, NASDAQ, OTC Markets) in USD, with US settlement conventions, and US tax-reporting infrastructure.
Behind each ADR sits a fixed number of "ordinary shares" of the underlying foreign company, held by the depositary bank on behalf of ADR holders. The ADR ratio specifies the relationship, for example:
- 1 ADR = 1 ordinary share (common for most listings)
- 1 ADR = 0.5 ordinary share (some half-ratio listings)
- 1 ADR = 2 ordinary shares (some double-ratio listings)
- 1 ADR = 10 ordinary shares (some scaled-up listings for low-priced foreign stocks)
The ratio is set at ADR program inception and rarely changes (though it can be modified through corporate actions).
Sponsored vs unsponsored
ADRs come in two flavours based on the foreign company's involvement:
Sponsored ADRs
The foreign company actively participates in the ADR program. There are three sponsorship levels:
- Level I, OTC Markets only; minimal SEC reporting requirements.
- Level II, listed on NYSE or NASDAQ; full SEC registration and reporting.
- Level III, listed on NYSE or NASDAQ + raises new capital from US investors; most disclosure-intensive.
Most major ADRs (Petrobras, Vale, Naspers/Prosus equivalent, Itaú Unibanco, Anheuser-Busch InBev, Toyota, Sony) are Level II or III sponsored.
Unsponsored ADRs
Issued by US depositary banks without the foreign company's active participation. Typically OTC-traded with limited transparency. Less common for major international companies.
Major examples relevant to international audiences
Petrobras (PBR)
Brazilian state-controlled oil major. ADR ticker PBR (preferred shares as PBR.A). Among the most-traded ADRs by volume globally. Petrobras has both common (PBR) and preferred (PBR.A) ADR listings, the distinction matters because Brazilian dual-class share structure gives different voting and dividend rights.
For Brazilian audience: PBR ADR provides USD-denominated exposure to PETR3/PETR4 (the underlying B3-listed shares). For non-Brazilian audience interested in Brazilian oil exposure: PBR is the natural access point. See ADR Petrobras PBR trading for the practical mechanics.
Vale (VALE)
Brazilian iron ore and mining major. ADR ticker VALE on NYSE. Heavy beta to global iron ore prices and to Chinese steel demand. Active options market in addition to the ADR.
Naspers / Prosus (NPSNY / PROSY)
South African-headquartered global tech holding. Naspers (Johannesburg ticker NPN) is the parent; Prosus (Amsterdam ticker PRX) is the listed Dutch entity. ADR programs exist for both: NPSNY (Naspers ADR, OTC), PROSY (Prosus ADR, OTC). Heavy weight from Tencent stake (Prosus owns ~25% of Tencent historically).
For South African audience: Naspers ADR provides USD-denominated exposure to JSE NPN. For global audience interested in Asian tech exposure via a non-Chinese entity: Prosus ADR is a natural play. See ADR Naspers Prosus South Africa.
Other major EM ADRs
- MTN Group (MTNOY), South African-based African telecom; OTC ADR.
- Itaú Unibanco (ITUB), Brazilian bank; NYSE-listed.
- Banco Santander (SAN), Spanish bank; NYSE-listed.
- América Móvil (AMX), Mexican telecom; NYSE-listed.
- Tata Motors (TTM), Indian automaker (Jaguar Land Rover parent); NYSE-listed.
- Toyota (TM), Japanese automaker; NYSE-listed.
Currency dynamics
ADRs trade in USD but the underlying shares are denominated in local currency. This creates currency exposure that affects ADR pricing:
ADR price ≈ (Underlying local-currency price × Shares per ADR) / FX rate (USD per local currency)
For PBR:
- PBR.A ADR ratio: 1 ADR = 1 PETR4 share
- PETR4 trades in BRL on B3
- USD/BRL FX rate determines USD price of PBR
If PETR4 trades at R$30 and USD/BRL is 5.10, PBR theoretical price is R$30 / 5.10 = $5.88. In practice, intraday divergence happens but arbitrage closes the gap.
For non-USD investors holding ADRs, three currency layers exist:
- The local currency of the underlying (BRL for PBR, ZAR for NPSNY, JPY for TM).
- The USD ADR price.
- The investor's home currency (EUR, GBP, ZAR, wherever the investor is based).
A French investor holding PBR is exposed to BRL/USD and USD/EUR, two FX dimensions on top of the underlying business risk.
ADR fees
Depositary banks charge ADR fees, typically:
- Annual administration fee, $0.01 to $0.05 per ADR per year.
- Dividend processing fee, small charge on each dividend distribution.
- Issuance / cancellation fees, when ADRs are created or cancelled by converting to/from underlying shares.
These fees are small but accumulate. Long-term ADR holders should account for them.
Dividends
ADR dividends are paid in USD, converted from the local-currency underlying dividend at the FX rate on the conversion date. The depositary bank handles the conversion and any local withholding tax.
Withholding tax treatment varies by underlying country. Brazilian ADRs may have specific withholding mechanics; South African ADRs apply SA withholding rules; etc. Tax treaties between the investor's home country and the underlying country may reduce withholding (W-8BEN forms for global holders).
Options on ADRs
Most major ADRs have actively-traded US options chains. AAPL, GOOGL, META, these are not ADRs but illustrate the depth of US single-stock options. For ADRs: PBR, VALE, ITUB, BABA (formerly), TM all have liquid options markets.
For an investor wanting derivatives exposure to a foreign company, the ADR options market often provides better liquidity than the home-market options market (when the home market even has listed options on the underlying).
Trading approaches
Direct ADR trading
Buy or sell the ADR through a US-equity-enabled broker. Standard limit orders, market orders, etc. Trades settle T+1 (US convention as of 2024).
Options on ADRs
Use US-listed options chains for leveraged or non-linear exposure. AAPL strategies apply to PBR strategies, the strategy mechanics are identical, only the underlying differs.
Pair trading ADR vs underlying
When ADR and underlying diverge beyond the FX-adjusted theoretical relationship, arbitrage opportunities exist. Long the relatively-cheap, short the relatively-rich, with hedge against FX movement. Institutional play primarily.
Macro positioning
ADR exposure provides convenient access to country macro themes without needing local-market broker access. Long-Brazilian-economy thesis can be expressed through PBR, VALE, ITUB combination. Long-Asia-tech can be expressed through Prosus (PROSY) for non-Chinese-direct exposure.
Access for international traders
- Interactive Brokers, full ADR access; multi-currency accounts simplify FX accounting.
- Saxo Bank, major ADRs on the multi-asset platform.
- DEGIRO, popular European retail broker; ADR access limited to listed (not OTC) ADRs in many jurisdictions.
- eToro, basic ADR trading available in most markets.
- Local-jurisdiction US-equity brokers, Brazilian brokers (XP, BTG Pactual, Genial), South African brokers (EasyEquities offshore, Standard Bank Online Share Trading) provide ADR access in their respective markets.
Risks specific to ADRs
- Currency risk, multiple FX layers as discussed.
- Withholding tax complexity, varies by underlying country.
- OTC liquidity risk for unsponsored ADRs, wider spreads, slower fills.
- Sponsorship-level risk, Level I OTC ADRs have less disclosure than Level II/III listed ADRs.
- Country-specific event risk, political risk in the underlying country (Brazil political cycle for PBR, South African policy for NPSNY) gets transmitted directly to ADR holders.
- Termination risk, depositary banks can terminate ADR programs, requiring holders to convert to underlying shares.
Related reading
- ADR Petrobras PBR trading, Brazilian oil exposure.
- ADR Naspers Prosus South Africa, SA tech exposure.
- Stock Derivatives pillar, the full landscape.