Investing in Non-Domestic Equity Securities

Updated for the 2026-2027 CFA® Level I curriculum.

Investors are not limited to shares listed in their home market. A US investor can own a German automaker or a Brazilian bank without ever placing a trade on a foreign exchange. This note covers the methods CFA Level I candidates need to know for gaining exposure to non-domestic equities, how those methods differ in structure and access, and what added risks come with each choice.

Key Takeaways About Investing in Non-Domestic Equity Securities

• Non-domestic equity exposure comes from two broad approaches: direct investment and indirect investment.

• Direct investment means buying shares on the foreign company's home exchange, in its local currency.

• Depositary receipts (DRs) are certificates issued by a depositary bank that represent shares of a foreign company and trade in the investor's home market.

• Sponsored DRs involve the issuing company's cooperation and usually carry voting rights. Unsponsored DRs do not.

• Global registered shares (GRS) are the same class of ordinary share traded on multiple exchanges worldwide, in different currencies, without a depositary intermediary.

• Baskets of listed depositary receipts (BLDRs) are exchange-traded products holding a basket of DRs, giving diversified exposure without selecting individual foreign names.

• Depositary receipts trade in the home currency, but their value still moves with the foreign share price and the exchange rate.

What You Need to Know for CFA Level I

• Identify the methods available for gaining non-domestic equity exposure.

• Distinguish direct investment from each indirect method by structure and where it trades.

• Recognize the additional exposures, such as currency risk and disclosure differences, that come with each method.

• Match an investor's objective (control, liquidity, cost, diversification) to the appropriate investment method.

• Separate sponsored DRs from unsponsored DRs and GRS by legal form and voting rights.

Methods for Gaining Exposure to Non-Domestic Equities

Direct investment

An investor opens an account with a broker that has access to the foreign exchange and buys the ordinary shares directly, in the local currency. This gives full ownership rights, including voting rights, but requires the investor to manage foreign currency conversion, foreign settlement conventions, and foreign market hours.

Depositary receipts (ADRs and GDRs)

A depositary receipt is a certificate issued by a depositary bank that represents ownership of shares held in trust in the foreign company's home market. The receipt trades on an exchange outside the issuer's home country, in the investor's local currency.

• American Depositary Receipt (ADR): issued and traded in the United States, denominated in US dollars.

• Global Depositary Receipt (GDR): issued and traded in markets outside the issuer's home country, often in more than one market, frequently denominated in US dollars.

Depositary receipts can be sponsored or unsponsored:

• Sponsored DR: created at the request of the issuing company. The company pays the associated fees, provides financial disclosures to the depositary bank, and holders typically receive voting rights.

• Unsponsored DR: created by a depositary bank without the issuing company's direct involvement. Disclosure is limited, and holders typically do not receive voting rights.

Global registered shares (GRS)

A global registered share is the same class of ordinary share, registered to trade on exchanges in different countries and currencies at the same time. Unlike a depositary receipt, there is no certificate standing in for the share. The investor owns the actual registered share, and it settles in the local currency of whichever exchange the trade occurs on.

Baskets of listed depositary receipts (BLDRs)

A BLDR is an exchange-traded security that holds a basket of depositary receipts, usually designed to track an index of non-domestic companies. It trades like a single security in the investor's home market, giving diversified indirect exposure without requiring the investor to select or hold individual DRs.

Indirect investment through domestic companies

An investor can also gain indirect, partial exposure to non-domestic markets by buying shares of a domestic multinational company with substantial foreign revenue or operations. This avoids all cross-border trading and currency conversion at the account level but ties the exposure to the fortunes of one specific business rather than a broad foreign market.

How the Methods Differ in Structure and Access

What Additional Exposures or Frictions May Arise

• Currency risk. Depositary receipts and GRS trade in the investor's home currency, but the underlying value still depends on the foreign currency and the foreign share price. Trading in dollars does not remove currency exposure.

• Withholding tax. Foreign dividends may be subject to withholding tax in the issuer's home country, which can reduce the net return compared with a domestic equity of the same size.

• Settlement and trading hours. Direct investment follows the foreign market's clearing conventions and trading calendar. Depositary receipts settle on the home market's schedule instead.

• Disclosure and regulation. Foreign issuers may follow different accounting standards and disclosure requirements than the investor's home market, especially relevant for unsponsored DRs where the company is not directly involved.

• Liquidity. Direct shares in smaller or less liquid foreign markets can have wider bid-ask spreads. DR liquidity depends on the depth of that specific DR program, not just the underlying share.

How to Match an Investor Objective With an Investment Method

Worked Example

An Indian company trades on its home exchange at INR 1,000 per ordinary share. A US depositary bank sponsors an ADR program in which each ADR represents 10 ordinary shares. The current USD/INR exchange rate is 83.00 (83 rupees per dollar).

Step 1: Find the value of the shares represented by one ADR in rupees.

Step 2: Convert to US dollars.

The ADR should trade near USD 120.48. If the Indian share price rises or the rupee strengthens against the dollar, the ADR price rises too, even though it never leaves the US exchange. The dollar-denominated quote does not remove the underlying currency and market exposure.

Common Exam Traps

• Assuming a depositary receipt removes currency risk. The DR trades in the home currency, but its value still moves with the foreign exchange rate and the local share price.

• Confusing sponsored and unsponsored DRs. Sponsored DRs involve company cooperation and usually carry voting rights. Unsponsored DRs are created independently by a bank and typically do not.

• Treating a global registered share as a depositary receipt. A GRS is the actual ordinary share traded on multiple exchanges, not a certificate issued by an intermediary.

• Memorizing "ADR = US, GDR = global" without checking the facts in the question. The exam may describe the structure and expect the candidate to identify the instrument, not just recall the label.

• Picking direct investment as the answer whenever "non-domestic" appears. Many questions test whether the candidate can identify the indirect method that fits the stated investor objective.

Practice Question

A German company arranges with a US depositary bank to issue a security that trades in US dollars on a US exchange, represents its ordinary shares, and carries voting rights. The company pays the associated fees and provides regular financial disclosures to the depositary bank. This security is most likely a:

1. unsponsored ADR

2. global registered share

3. sponsored ADR

FAQs About Investing in Non-Domestic Equity Securities