HSBC InvestDirect clients can execute online trades for shares listed on the Hong Kong stock exchange, among others.VINCENT YU/The Associated Press
The stocks of companies based outside Canada are often touted as essential portfolio building blocks because they provide both diversification and access to stock sectors unavailable in this country.
According to some market pundits, stock returns abroad look more promising than at home, especially in higher-growth emerging markets.
Most Canadians are familiar with buying and selling mutual funds that invest in foreign companies. Many have gravitated to exchange-traded funds for the same purpose.
Investors who have opened discount brokerage accounts are usually adept at trading foreign stocks, if "foreign" means our neighbour to the south. However, American companies represent less than half 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 investors.
Care to invest in British pharmaceutical powerhouse GlaxoSmithKline PLC? What about tapping into the burgeoning Asian telecom market by owning a piece of China Mobile Ltd? Or how about gaining some exposure to the global consumer products market by buying some shares in Anheuser-Busch InBev SA, the Belgian brewing giant that owns iconic Canadian brand Labatt Blue?
Courtesy of financial products known as American Depositary Receipts (ADRs), buying or selling shares in hundreds of non-North American companies can be as simple as trading Apple Inc., Procter & Gamble Co. or other American stocks.
An ADR is a certificate that represents shares of a non-U.S company. 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.
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.)
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.
There are many advantages to investing in foreign companies with ADRs that trade on a major U.S. exchange:
•Companies issuing ADRs are typically established, multinational corporations, so they are unlikely to go bankrupt.
•ADRs can be purchased through all Canadian investment brokers, including discounters. Buy and sell procedures are the same as for U.S. domestic stocks.
•Transactions, including dividend payouts, are all in U.S. dollars. This minimizes currency-management headaches.
•Dividends and other cash distributions from overseas companies are converted into U.S. dollars at exchange rates that retail investors can only dream about.
•ADRs must meet U.S. Securities and Exchange Commission listing requirements, so you get the same level of disclosure as any other listed U.S. security.
•Companies must follow U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
•Annual reports and proxy materials are in English.
For direct investors who are not content to limit their holdings in foreign 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. Their 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.
Customers of discount broker TD Waterhouse can use the firm's global-trading platform to 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 charges flat-fee commissions for online trades. On European exchanges, the fee is €29 ($40); in the U.K., it's £29($47). These rates are generally much cheaper than HSBC InvestDirect's percentage-of-trade commissions. For instance, a £25,000 ($40,610) trade on the London exchange would cost £29 at TD Waterhouse; at HSBC InvestDirect it's 0.45% of the trade, or £112.50 ($183).
In Hong Kong, the HSBC flat-fee commission of HK$288 ($38) is competitive with TD's HK$299 ($39), whereas HSBC's percentage-of-trade commissions in Singapore and Australia are typically higher than TD's flat rates.
Additional market-specific 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, such as navigating the time difference 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 foreign stocks in your investment portfolio, but the question is how best to do it. Trading directly on foreign exchanges beyond Canada and the United States entails more challenges than many investors 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. The investing route you choose will ultimately depend on how much time you care to spend managing your investments.