All posts by Pat McKeough

What Investors should know about ADRs and CDRs, and their Fees

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Recently one of our Inner Circle members asked, “You mentioned recently that TSI recommends a handful of ADRs (American Depositary Receipts) providing exposure to European and Japanese stocks. One question: What are the ADR fees charged to investors by U.S.-listed ADRs?”

An American Depositary Receipt, or ADR, is a proxy for a foreign stock that trades in the U.S. and represents a specified number of shares in the foreign corporation. ADRs are bought and sold on U.S. stock markets, just like regular stocks, and are issued or sponsored in the U.S. by a bank or brokerage firm. If you own an ADR, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue to hold the ADR.

One ADR certificate may represent one or more shares of the foreign stock. Or, if the stock is expensive, the ADR may represent a fraction of a share; that way the ADR will start out trading at a moderate price or be in the range of similar securities on the exchange where it trades.

The price of an ADR is usually close to the price of the foreign stock in its home market. There are no redemption dates on ADRs.

When an investor owns an ADR, a custodian — Citi, Bank of New York Mellon, and J.P. Morgan Chase are among the largest — is in charge of holding it. The custodian also maintains the records and collects the dividends paid out by the foreign issuer. It then converts those payments into U.S. dollars and deposits them into stockholders’ accounts. For all these services, the custodian charges an ADR fee.

The custodian may deduct that ADR fee from the dividends, or it may charge the ADR holder separately. If the ADR doesn’t pay a dividend, the custodian will charge the ADR fee directly to the brokerage, which in turn will charge it to a client’s account.

We feel you can find all the foreign investment variety and exposure you need by confining your purchases to U.S. and Canadian stocks, plus low-fee ETFs (exchange traded funds). However, if you want to invest in a particular foreign stock, it’s generally more convenient and economic to hold ADRs of foreign stocks, rather than the foreign stocks themselves.

Bonus: What are CDRs?

CIBC

While I’m on the topic, some investors confuse ADRs, with CDRs. Canadian Imperial Bank of Commerce (CIBC)’s Canadian Depository Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each. CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia currently trades for $610 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want. Continue Reading…

U.S. stocks are a great way to boost your portfolio returns. Here’s why.

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Image courtesy TSInetwork.ca

In my experience — over 40 years of advising investors on how to build wealth — too few fellow Canadians have diversified their stock holdings into U.S. stocks.

Unfortunately, most Canadian investors still believe — falsely —  that it’s too costly or too much hassle to buy U.S. stocks.

Most importantly, these investors have also ignored U.S. stocks’ tremendous safety and profit advantages to Canadians.

I believe that up to 30% of every Canadian stock market portfolio should consist of U.S. stocks, for the following three reasons:

 

  1.   U.S. stocks give you risk-reducing diversity. Canadian stocks are great, but so many are focused on natural resources —so when such commodities sink, so do your returns. U.S. stocks are spread across far more industries, giving you a broader cushion during market volatility.
  2. U.S. stocks give you international opportunities. Top U.S. stocks are multi-national revenue earners, so you benefit from booming international markets. It means your portfolio is safer and stronger than just relying on Toronto exchange stocks.
  3. Investing in U.S. stocks is easy and extremely profitable. Don’t worry: Buying U.S. stocks through your regular broker is as easy as buying Canadian stocks. And no matter the dollar exchange rate, when you get good returns, the currency exchange costs are insignificant.

If your portfolio has no U.S. stocks —or if you’re not satisfied with the performance of your current U.S. stocks — I recommend you take a free look at Wall Street Stock Forecaster.

Here’s how to spot the best U.S. stocks

Now is a particularly good time to follow our three-part Successful Investor investment approach — including for U.S. stocks:

Rule #1: Invest mainly in well-established, profitable, dividend-paying U.S. stocks.

Our first rule in the most successful investment strategies will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses.

Recent standout losers include bitcoin and other cryptocurrencies; a disappointing crop of new issues (IPOs), which tend to come to market when it’s a good time for the new-issue company or its insiders to sell, but not a good time for you to buy; and slapped-together promotional stocks that hit the market thanks to the SPAC phenomenon, which offers a short cut to IPO status.

Instead, focus on well-established, profitable, dividend paying U.S. stocks. But, when looking for dividend-paying stocks, you should avoid the temptation of seeking out stocks with the highest yields — simply because they have above-average yields. That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend. In short, high dividend paying stocks can come with pitfalls. Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Above all, for a true measure of stability, focus on stocks with a high dividend yield that has been maintained or raised during economic or stock-market downturns. Generally, these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth. A track record of dividend payments is a strong sign of reliability and an indication that investing in the stock will be profitable for you in the future.

Rule #2: Spread your money out across most if not all of the five main economic sectors.

This is our key to successful diversification and the widely disparaged resource sector saw some major winners last year. On the other hand, if you had disregarded resource stocks with the intention of doubling down on tech stocks, you might have wound up with excessive holdings in tech stocks just as they entered a plunge. Continue Reading…

Stock Market Anxiety leads to Bad Investing Decisions. Here’s what to do Instead

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Ignore stock market anxiety and negative stock predictions and instead focus your investing strategy on diversification and portfolio balance

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The current state of the world is generating stock market anxiety, as it often does. My guess is that the Israel-Hamas war is just getting started and will last a long time. I also suspect that Russian dictator Vladimir Putin had something to do with getting it started, and will do what he can to keep it going. After all, when it comes to running his country, Putin takes a grasping-at-straws approach.

Putin may think that bringing the longstanding Mideast conflict back into the headlines is going to improve his chances of conquering Ukraine and bringing the Soviet Union back from the dead.

He thinks taking a long shot is better than no shot at all. Who knows? He might get lucky.

Early on in his war on Ukraine, Putin seemed to think that Chinese dictator Xi Jinping was going to take pity on him and his country, and offer free money and/or weapons to shore up Russia’s Ukraine invasion. Instead, Xi insists on staying out of the war, while paying discount prices for Russian oil. He takes special care not to let his country get caught up in the economic sanctions that the U.S. and NATO countries and allies are directing against the Russians.

It’s not that Putin is stupid. If a war between Israel and Hamas turns out to be a big drain on the U.S. budget, the U.S. might have less money available to arm Ukraine.

Up till lately, however, Israel has had little to say about Russia’s treatment of Ukraine. Israel may soon take a more active role in helping Ukraine defend itself.

Any war is a terrible thing, and this one is no different. The stock market seems to be creeping upward. Maybe it knows something that Putin hasn’t figured out.

Meanwhile, if your stock portfolio makes sense to you, we advise against selling due to Mideast fears.

Stock market anxiety recedes with investment quality, diversification and portfolio balance

You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.

You get a much better return on time spent if you devote less of it to worrying about high risk investments, and more of it to an investing strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.

There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run. Continue Reading…

Investment Synergy: From the 1960s Takeover Craze to Today’s AI Revolution

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The term “investment synergy” entered common investor use during the takeover craze of the 1960s — but we see a new synergy that’s a big plus for investors.

Image courtesy TSInetwork.ca

 

The term “synergy” entered common investor use during the takeover craze of the 1960s, when businesses started to expand by taking over companies in unrelated fields. This was supposed to make the combined companies grow faster than if they had stuck to their own fields.

The acquirers borrowed a term from biology to explain their rationale: this mix-rather-than-match growth strategy brought synergistic benefits. Synergy refers to an interaction between two or more drugs. The total effect of the drugs is greater than the sum of the individual effects of each drug if taken separately. For instance, today’s treatments for cancer, prostate and other health issues often call for prescribing two or more drugs. The combined impact may be more powerful and beneficial than you’d expect from adding up what they could do separately.

However, the synergy effect can also be negative. For example, combining alcohol with tranquilizers or opiates can lead to negative outcomes, even death.

The impact of 1960s investment synergy-seeking growth was uneven. Sometimes it worked, but it was better at producing temporary gains in stock prices than lasting gains in corporate earnings. In later decades, however, it turned out that unwinding synergy-seeking takeovers could lead to even larger profits.

This unwinding broke companies up into a “parent” and one or more “spinoffs.” The parent would then hand out shares in the spinoff to its own shareholders, as a special dividend.

A number of academic researchers have studied the outcome of spinoffs. Most found that spinoffs produce some of the most dependable profits you can find in the stock market, at least for patient investors. The academic findings were so impressive that we called spinoffs “the closest thing to a sure thing that you can find in investing.” (In fact, we were so impressed that it spurred us to launch our Spinoffs & Takeovers newsletter.)

You can find a number of processes in finance and investing that seem vaguely biological or scientific. For instance, consider Moore’s Law. It refers to the 1965 observation made by Gordon Moore (co-founder of Intel Corp.) that the number of transistors in a dense integrated circuit (now called a microprocessor) doubles about every two years. As a result, costs drop by half, and computing speed doubles. (Manufacturing progress later cut that time down to 18 months.)

This high growth rate was due to improvements in the basic design of early transistors. The continuing improvements spurred fast growth in the profits of Intel and other microprocessor stocks, and sharp gains in their stock prices in the 1980s and 1990s. Around 2005, however, the rise in computer processing speed began to slow. Now some bearish analysts predict that Moore’s Law is dead. They say the effect is bound to peter out because microprocessors can only get so small before they quit working. Meanwhile, cramming too many processors on a chip can lead to over-heating. Continue Reading…

The Benefits of Geographic Diversification for your Portfolio

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One key factor in successful investing — apart of course from picking good stocks (or ETFs that invest in those stocks) — is to diversify your portfolio.

Our main suggestion would be to make sure that your holdings are always well-balanced among most if not all of the five economic sectors: Manufacturing, Consumer, Utilities, Resources, and Finance.

That way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor fashion.

By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar: a stock that does two to three or more times better than the market average. These stocks come along every year. By nature, though, their appearance is unpredictable.

It’s also essential to diversify within each sector. For example, you shouldn’t let technology stocks dominate your Manufacturing holdings, nor let telecommunications or phone stocks dominate your Utilities holdings.

What about geographic diversification?

We’ve long said that most Canadian investors should hold the bulk of their portfolio in high-quality, dividend-paying Canadian stocks well balanced across the five sectors (or ETFs that hold those stocks).

We also feel that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in U.S. stocks (many of which also offer you international exposure through their foreign operations).

Beyond that, top international stocks or ETFs can also add valuable diversification to your portfolio—through exposure to foreign businesses and to foreign currencies.

To demonstrate how geographical diversification can benefit investors, we examined the risks and returns of an ETF portfolio consisting of 50% Canadian equities, 30% U.S. equities, and with 20% in equities around the rest of the world. We then compared the risk and returns of this diversified portfolio with a broad Canada-only index.

Geographic diversification can cut risk and raise returns

Our results showed that the risk of the diversified portfolio was lower than the Canadian-only portfolio, while the returns were higher. Continue Reading…