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How to use DR and DRx to Build a Globally Diversified Portfolio
Depositary Receipts (DR) and Fractional Depositary Receipts (DRx) enable Thai investors to trade in foreign securities on the Stock Exchange of Thailand using Thai Baht, thus obviating the need for foreign accounts and currency conversion.
In an increasingly interconnected world, investment information from around the globe can be quickly accessed through various online platforms. Investing in foreign securities has gained more and more interest from Thai investors to diversify risk and increase the opportunity to receive better returns.
However, direct investment in international stock markets may bring multiple challenges, such as complexity and transaction procedures. These challenges include dealing in foreign currencies, opening foreign trading accounts, and tax-related issues.
Key Takeaways
- Depositary Receipt (DR) and Fractional Depositary Receipt (DRx) allow Thai investors to trade foreign securities on the Stock Exchange of Thailand using Thai Baht, eliminating the need for foreign accounts and currency exchange.
- DR and DRx provide a mechanism to invest in foreign securities with a small initial investment and offer the Dollar Cost Averaging (DCA) strategy for long-term portfolio building.
- Investors should consider regulatory protections, taxation, and the risks associated with DR and DRx, but these products offer a convenient way to diversify portfolios across different countries and industries.
To address these challenges, the Stock Exchange of Thailand has developed investment products called Depositary Receipt (DR) and Fractional Depositary Receipt (DRx). These are certificates representing foreign securities or shares of leading companies worldwide, allowing investors to trade them on SET using Thai Baht through accounts opened with local SET member securities companies. This process is similar to ordinary securities trading, eliminating the need to open foreign accounts, exchange currencies, or make international money transfers. It also helps reduce complexity and increase investment flexibility, making DR and DRx an attractive alternative for efficiently diversifying investments into foreign markets.
DR and DRx have mechanisms that reference the price of foreign securities. The issuers of DR and DRx are not the foreign companies issuing the securities but rather entities that hold the foreign securities by purchasing and keeping them. The issuers then pass on the investment benefits to the DR and DRx holders. Since DR and DRx are certificates representing foreign securities, 1 unit of DR or DRx may be equivalent to 1 unit of the underlying stock or less, depending on the conversion ratio. For example, a ratio of 10 DR: 1 underlying securities means that 10 units of DR are equivalent to 1 unit of the underlying securities, or a ratio of 2,000 DRx: 1 underlying securities means that 2,000 units of DRx are equivalent to 1 unit of the underlying securities.
Therefore, investors should check the conversion ratios to appropriately assess the trading prices of DR and DRx in comparison to the prices of the underlying securities. This pricing mechanism aims to make investing in DR or DRx more accessible with smaller amounts of money than directly purchasing foreign stocks, especially large-cap stocks that may have high per-share prices. Additionally, the issuers of DR and DRx, or their designated representatives, typically act as market makers of respective DR or DRx to help provide liquidity for investors.
Another notable feature of DR and DRx is that it requires a small initial investment. For DR, it is possible to start investing with just one unit, which currently costs only a few baht. Trading fees are similar to those of regular stock trading. DRx can be invested in fractional shares by trading in terms of baht or the nubmer DRx units, and issuers typically charge a trading fee of only 0.16% (excluding VAT). This allows investors to participate conveniently, even with limited resources, and they can choose to gradually accumulate investment units in the long term using the Dollar Cost Averaging (DCA) strategy.
DCA is a disciplined investment strategy that involves investing a fixed amount of money regularly, regardless of market conditions, helping to average the cost of long-term investments. For example, investing 500 baht every month to build a portfolio of leading global stocks. Learn more about DCA at SET Invest Now.
To make sure that investments in DR and DRx are reliable and investors’ rights are fully protected, multiple mechanisms are designed to ensure investors’ confidence. . Issuance and offering of DR and DRx are regulated under under the supervision of the Securities and Exchange Act and the regulatory authorities have established clear rules to protect investors’ rights. Regulatory guidelines include requirements such as issuers of DR and DRx must be stable financial institutions; Issuers must fully back the issued DR and DRx with the corresponding underlying securities; Issuers must keep investors informed of any significant information related to the underlying securities; issuers must clearly specify the rights of investors, e.g. rights to dividends and subscription rights, similar to those of direct shareholders.
Regarding taxation, individual investors will be subject to a 10% withholding tax deducted from any dividends received from their DR and DRx investments, and this income shall not be included in the total calculation for further tax liability.
As of April 22, 2024, 24 DRs and 10 DRx are listed on the Stock Exchange of Thailand, covering major indices and stocks from various countries around the world. These range from developed markets such as the United States, Europe, Japan, and Singapore, as well as promising emerging markets like China and Vietnam.
The available products include DRs linked to stock indices and single stocks. Examples of the latter are Alibaba, Tencent, BYD, Xiaomi, Ping An, NetEase, and Baidu from China; Singapore Airlines from Singapore; and ASML from Europe. DRx products feature large U.S. companies such as Apple, Tesla, Microsoft, NVIDIA, Alphabet, Meta, Amazon, Starbucks, Netflix, and Booking Holdings.
With this diverse range of investment options in terms of countries and industry sectors, DR and DRx products allow investors to conveniently and easily diversify their portfolios into high-quality assets worldwide. This helps investors manage risk and increase their opportunity for better returns.
However, investing in DR and DRx still involves risks that investors should thoroughly understand, similar to investing in other securities. These include fundamental factors and price volatility of the underlying securities, which can be influenced by company performance, business plans, competition, and various risks in the economic system and financial markets.
Additionally, DR and DRx carry exchange rate risks similar to direct foreign investments. Although transactions are made in Thai Baht, the underlying securities are priced in foreign currencies. Therefore, investors should study all relevant information about these investments and consider diversifying their portfolios across different countries and industries. It is also important to assess the credibility of the DR and DRx issuers, including their operational and service conditions, as well as the terms and methods for managing investment benefits specified by the issuers.
For individuals keen on investing in DR and DRx, the procedure is straightforward and similar to setting up a trading account with a securities firm. For DR, trading orders can be placed via any platform, similar to trading conventional stocks. For DRx, trading is accessible through the Streaming Mobile Application, which collaborates with more than 27 brokerage firms providing DRx trading services. Initiating DRx trading is as simple as navigating to the Streaming app, accessing “My Menu,” choosing the “DRx” section, and activating the “Request DRx Trading” option.
In today’s world, diversifying investments across various assets is increasingly gaining attention. DR and DRx are an additional option for building an investment portfolio that allows investors to diversify risk and spread investments across multiple industries and countries conveniently. This includes both developed and emerging markets. With regulatory mechanisms in place and ease of investment, DR and DRx present an appealing investment choice for Thai investors looking to enter the global investment stage.
For more information about DR and DRx, visit the SET website or SET Invest Now for DR and SET Invest Now for DRx.
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