New index from BNY Mellon and OTC Markets highlights potential of ADR ETFs

Dec 3rd, 2012 | By | Category: ETF and Index News

BNY Mellon has linked up with OTC Markets Group, the firm behind the OTCQX, OTCQB and OTC Pink marketplaces, to develop the OTCM ADR Index, the first-ever index dedicated to American Depositary Receipts (ADRs) traded in over-the-counter (OTC) markets.

New index from BNY Mellon and OTC Markets highlights potential of ADR ETFs

R. Cromwell Coulson, President and CEO of OTC Markets Group.

The index, which is powered by the same platform as the established BNY Mellon Depositary Receipt Index series, represents a comprehensive benchmark of ADRs traded on OTC Markets’ marketplaces.

Comprising over 500 international large-cap companies, weighted by adjusted free-float market capitalisation, the index spotlights some of the world’s best-known and fastest-growing companies, including names such as Banco do Brasil, Bayer, Komatsu, Lukoil, National Australia Bank, Nestle, Ping An Insurance, Roche, Standard Bank, China Construction Bank, BG Group and Wal-Mart de Mexico.

In all, 38 countries – a mix of developed and emerging market – are represented in the index, across 10 industries. Japan, the UK, Germany, France and Switzerland have the largest representations, together comprising 58.74% of the index. The top three industry weightings are Financials with 24.42%, Consumer Goods with 17.68% and Industrials with 14.67%.

R. Cromwell Coulson, President and CEO of OTC Markets Group, said: “ADRs offer US investors convenient access to global investment opportunities, and we’re pleased to work with BNY Mellon in offering this first-ever comprehensive benchmark for the largest and most liquid ADRs.”

Michael Cole-Fontayn, CEO of BNY Mellon’s Depositary Receipts business, added: “Providing added visibility to ADRs traded on the OTC Markets will benefit ADR issuers and investors alike. Our collaboration with OTC Markets Group offers the investment community an index that shows the depth, breadth and liquidity of all ADRs traded on the OTC Markets site.”

OTC Markets Group is hoping that the launch of the index will generate added interest in the more than 1,400 international ADRs traded across its marketplaces, and that the index could one day lead to the creation of exchange-traded funds (ETFs) and other passive funds.

From the perspective of an ETF investor, the index does raise some concerns. OTC and ‘Pink Sheets’ companies have the reputation of being somewhat risky. Similarly, Level 1 ADRs (i.e. those traded OTC) have to adhere to only minimal SEC reporting requirements.

That said, the index does have a significant large-cap bias, with an average market cap of $10.6 billion (the median is $6.0 billion), meaning constituents are large and thus more widely traded and scrutinised. The index’s developed-market focus also means that accounting and reporting data are of a higher, more trustworthy quality.

With this in mind, and considering that the index includes a number of liquidity screens to ensure tradability, it is feasible that the index could one day form the basis of an ETF; especially one that follows an optimised replication methodology, where only a liquid sample of constituents are held. Either way, the index’s roll-call of international blue-chip names and exciting emerging-market upstarts certainly highlights the potential of ETFs dedicated to ADRs.

For investors looking to get immediate exposure to the security class via ETFs, a number of options already exist. These include the PowerShares BLDRs range, comprising the PowerShares BLDRs Developed Markets 100 ETF (ADRD), the PowerShares BLDRs Emerging Markets 50 ETF (ADRE), the PowerShares BLDRs Asia 50 ETF (ADRA) and the PowerShares BLDRs Europe 100 ETF (ADRU), and a couple of emerging market funds from Guggenheim, namely the Guggenheim BRIC ETF (EEB) and the Guggenheim Frontier Markets ETF (FRN).

There are also two actively managed ETFs investing exclusively in ADRs that are worth a look: the AdvisorShares WCM/BNY Mellon Focused Growth ADR ETF (AADR) and the AdvisorShares Madrona International ETF (FWDI). AADR offers a concentrated portfolio (20–30 holdings) of ADRs focused on traditional growth sectors such as technology, healthcare and consumer staples/discretionary, while FWDI offers a more diversified option, composed of at least 250 of the largest ADRs from among the biggest issuers of Europe, Australasia and the Far East (EAFE) and Canada.

(The ETFs mentioned are listed on the NYSE).


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