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There are certainly plenty of examples to support the old cliché that ‘the world is becoming a smaller place’ – at least in some ways. However as a colleague pointed out recently, there is also a good argument that the world is in fact becoming a bigger place because of the huge amount of information that is now only a key stroke away.
This week’s article discusses a topic which could really be used to argue both cases. Much of the change associated with the world becoming a smaller and bigger place can be linked back to the Internet. Through products like exchange traded funds and depository receipts, private investors can more easily access markets and stocks outside their country, making the world a smaller place from one angle, but a far bigger place on the on the other hand because the increased number of choices makes their potential investment universe far larger.
This has been a common question recently. After all, how can a company be on more than one exchange? Some make the mistake of thinking that the stock has actually been floated on more than one exchange. However this is not the case. Instead Depository Receipts or Interests are used. These allow a stock to be traded on an exchange even though it isn’t listed there. From the purchaser’s point of view, they allow exposure to a foreign stock without having to deal with currency transfers or the higher fees normally applied to buying shares from other countries.
The exact workings vary from country to country, but often the holder of these securities may choose to convert them to actual shares at some point in the future. In this manner they are similar to options or futures, but without the leverage and time premium/cost of carry because there is no expiry date. While often they aren’t given voting rights, depository receipt/interest holders typically participate in most other corporate actions like rights issues, bonus issues and dividends.
For companies from other countries (like China, the UK and Australia) wanting a listing in the United States, the US listed shares are called American Depository Receipts or ADRs. This can be seen in the top right hand corner of Chart 1 which shows the Vodafone ADR traded on the NASDAQ. Also note that each ADR is worth 10 ordinary VOD shares in the UK (traded on the LSE). Other examples in include ANZ - Australia, BHP - Australia, Rio Tinto (RTP) - Australia, British Petroleum - UK (VOD: NASD), Nokia – Finland (NOK) and PetroChina - China (PTR). In all examples, the words ADR can be seen in HUBB products in the security name.
Chart 1
click to enlarge
In Australia the term CDI is used, which stands for Chess Depository Interest. Chess being the system used by the Australian Stock Exchange to transfer legal title. As foreign stocks cannot be traded on Chess directly, a depository interest is used instead. Like an ADR, a CDI gives the holder the right to convert to the actual foreign security at a later date. As a side note, CDI is actually the general term referring to both equity and debt products, with equity products known specifically as CUFs or Chess Units of Foreign Securities.
An example of a CDI on the ASX is News Corporation who a few years ago moved its operations to the US (NWS: NASD). News Corporation now has a CDI on the ASX also under the symbol NWS shown below in Chart 2.
Chart 2 – NWS:ASX
click to enlarge
Many stock exchanges around the world offer these securities, other examples include Chinese Depository Receipts, International Depository Receipts, Global Depositary Receipt and simply Depository Receipts/Interests in the UK.
While it cannot be said that depository products remove currency risk – they are still based on a foreign stock – in most cases they do offer a far cheaper and simpler method of owning international stocks. Another benefit is often that you will be better protected by financial regulations in your own country with regard to the brokers/financial institutions that you deal with than you would be overseas.
With products like these and Exchange Traded Funds (ETFs), it has never been easier or cheaper for investors to build a well diversified portfolio. The challenge stems from sifting through the many opportunities available and this is where software products like ProfitSource become a valuable tool.
Happy trading
Jordan Craw
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