Why Not Diversify into Emerging Equity Markets via ADRs?

Abstract

American depositary receipts (ADRs) are typically issued by a U.S. depository bank to represent shares in non-U.S. companies. This article seeks to identify whether investing in ADR market indexes provides greater diversification benefits for U.S. investors compared with those gained from investing in foreign stock market indexes. Using data from the world’s four largest emerging markets—Brazil, Russia, India, and China (BRIC), the authors find that diversification benefits tend to vary with time and investors diversifying into the ADR market can enjoy higher rewards for the level of risk. The incremental wealth may be attributed to the default security analysis, resulting in a nonmarket premium for investors.