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By Scott Burns | 03-03-2010 11:27 AM

Invest Internationally at Home

Bank of New York Mellon's Julio Lugo sees ADRs as a good way for U.S. investors to access foreign markets without the complexity of directly investing money in a foreign stock exchange.

Scott Burns: Invest internationally, right here at home in the U.S. Hi there, I'm Scott Burns with Morningstar. Joining me today is Julio Lugo, Vice President of Index Products with Bank of New York Mellon. Julio, thanks for joining me.

Julio Lugo: Thank you for having me, Scott.

Burns: So the Bank of New York Mellon is actually one of the biggest custodians, if not the biggest custodian, in what's known as the ADR market. And that's a way for international companies to list their stocks here on the U.S. exchanges. Let's just bring it all back and talk about what an ADR is, in general.

Lugo: Sure. My pleasure. Well, the ADR itself is a U.S. dollar denominated security which represents the foreign shares that happen to trade overseas. They follow all SEC rules and regulations. So, for all intents and purposes, they are a U.S. security.

Burns: So investors in the U.S. don't actually have to have access to a foreign market to invest in a foreign-based company, right? They can do that right here in the U.S.

Lugo: Exactly. If you're looking for cost, convenience, and accessibility to those foreign companies, you can buy the ADR on the New York Stock Exchange. New York Stock Exchange Arca, or as well as on Nasdaq. And they're also available on the OTC here in the United States. They trade and settle under SEC rules and regulations. So, for all intents and purposes, they are U.S. securities.

Burns:  So what we're actually talking about with an ADR, though, and I think this is where people get a little confused, is Bank of New York Mellon is holding these receipts in trust, in a way...

Lugo: In custody.

Burns: In custody, in a sense. And each one of those certificates is good for a certain amount of shares of the company, correct?

Lugo: Yes. The ADR represents the foreign share overseas. We at the Bank of New York act as a depository, which is nothing more than a registrar and transfer agent. We custodize the shares locally, and here in the United States, we pass on the information, we announce the record dates, and then pay out dividends or any other corporate actions that may follow through.

Burns: Well, that sounds great. So it sounds like they're liquid, they're transparent, they're safe, they're in custodian. It actually sounds a lot like ETFs, which is another hot growing area in the market right now. What are some of the similarities here?

Lugo: Lots of similarities. The ADR actually was created in 1927, so it's been around for quite some time. And when you look at the SPDR, the SPDR in itself has depository receipts at the end. So that was the beginning of the ETF trend. And there's the creation process. There's the redemption process. The actual mechanism represents, in the ADR in this case, one security. Where, in the ETF, it's a multiple or a constituent of securities.

Burns: So it's really, the ADR, I guess we can look back and say that was the grandfather of the ETF.

Lugo: Absolutely.

Burns: All right. Well, Julio, thanks for joining me and explaining some of the basics of ADRs. For this and other coverage of ADR-listed securities, please check out Morningstar.com. I'm Scott Burns. Thanks for joining me.

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