Posted by Davy Bui on February 13th, 2009 in Reader Questions
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Gerry asks:

“I read your article on investing in ADRs in the US. I am interested in diversifying my portfolio into foreign companies but the spreads on the ADRs seem to be a huge drawback to investing through an ADR. Is there a way to avoid the ADRs and invest in those foreign exchanges directly? Or is my concern unwarranted?”

Thanks for reading, Gerry. It’s not my place to say whether your concern is warranted or not; that’s specific to each individual’s situation. I know Peter Schiff likes to harp on that point but he’s handling a lot of stocks that only trade over-the-counter (OTC) here in the US. I purposely limited the screen to ADRs traded on the NYSE or NASDAQ for that reason. There may still be some spread issues with the less liquid stocks but I’m more comfortable with those than with OTC-traded securities.

I did share your concerns but decided to limit myself to stocks easily accessible to most US-based brokerages for various reasons:

• I think limiting the universe of stocks is beneficial for me. When I pick stocks, I make my decisions based,  to no small extent, on my knowledge base of life in the US. For example, I have some feel for the brand power of American Eagle Outfitters (AEO) because I live here. I don’t think I have that same feel for Marks & Spencer in the UK.
• As a corollary to the above point, if you are looking to flee the US dollar, it may be best to use the currency to do so. I try to focus my primary reasons for investing capital. If you’re fleeing the US$, then buying a foreign stock may not help because you need both the currency and the stock to move favorably. Nothing sucks harder than making the right call but getting the execution wrong and losing money anyway. For example, if you bought a Japanese stock or the market ETF in 2008 to get away from the US$, you probably would have been (much) better off just buying the yen.

That said, I did do some research back then on ways to get to foreign exchanges:

1. Interactive Brokers has the best platform by far for global investing.  Their commissions are ridiculously low, even for domestic stocks and options but it’s pretty much geared toward advanced traders.  There may be some disadvantages for small money, retail investors in using IB.
2. E-Trade was in the process of buidling a global trading platform, last I checked.  It may be up by now but the choices were limited to a handful of exchanges and the commissions were fairly high.

If I missed other options, please feel free to add other suggestions in the comments section.