Two Disadvantages of Holding Foreign Stocks in Retirement Accounts

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In this blog, I have written many posts about the advantages of owning foreign stocks. For example, they offer a portfolio the benefits of diversification. However holding overseas equities in retirement accounts such as Traditional IRA, Roth IRA and other qualified retirement has many disadvantages. In this post, let’s take a quick look at two expenses that will reduce the return of an investment. This cut in returns can sometimes be substantial.

1.ADR Fee:

This is a fee that a custodian such as BNY Mellon, Citibank, etc. charges for an ADR stock. From an investor perspective this is simply a fee that one has to pay for the privilege of owning a particular overseas stock. This fee is usually a few cents a share. Still it is money that is lost as this fee cannot be written off in taxes and also it reduces the return. Moreover if a company does not pay a dividend this fee will be taken by the broker directly from an investor’s account. If a dividend is paid, then this fee will be deducted from the dividend by the broker and passed on to the custodian. So either way the money that could help grow the portfolio goes out as fees.

Here are a few a examples of the ADR fee:

a.Company: Ecopetrol SA (EC)
Country: Colombia

The ADR fee for Ecopetrol this year is $0.04 per share. So for 100 shares this fee equals to $4. Someone holding 1,000 shares would pay $40. So this year an investor loses $40 from his retirement account just for holding Ecopetrol.

An investor holding a US company would not have to pay this fee. When this fee is deducted from a dividend payment, then the effect of compounding for the $40 is lost forever as well. At about the current trading range of $10 a share one could have easily accumulated another 4 shares for this $40.

b.Company: Valeo SA (VLEEY)
Country: France

The ADR fee for Valeo this year is $0.02 per share. So for 100 shares this fee equals to $2.

c.Company: National Australia Bank Ltd (NABZY)
Country: Australia

The ADR fee for NABZY this year is $0.01 per share. This is the least amount charged by custodians.

2.Dividend Withholding Tax:

Dividend Withholding Tax is simply a tax imposed by the government on dividends paid out to foreign investors by a domestic firm. For example, the German government imposes this tax on Americans receiving dividends from a German company. From an investor point of view this is again an unnecessary expense just to own shares of a German firm. This tax is charged by most governments because a local resident would report this dividend on their tax returns and pay applicable taxes. Since a foreigner does not file taxes in the country where the firm is based this tax is automatically cut from any dividends paid. The DWT can range from 0% to as high as 35%.

Owing a Swiss stock in retirement account will lead to a 35% cut in dividends received. This is huge indeed especially since account is designed for building a nest egg for retirement.

In the case of Ecopetrol until last year there was no Dividend Withholding Taxes. But this year a 10% rate has been introduced. So 1/10th of all dividends paid goes to Colombia. While a 10% rate may not be too high over the course of many years it can turn into a big amount.

Germany charges about 27% in DWT. If a $100 dividend is paid out, $27 goes to the German government.

It should pointed out that some countries such as Singapore, Sweden, UK (excluding REITs), etc. do not charge this tax. So holding stocks from these accounts in retirement accounts is not so bad.

So the key takeaway is to consider the implications of owing foreign stocks in retirement accounts. Otherwise one would lose a nice chunk of change each year unnecessarily.

Disclosure: Long EC, VLEEY, NABZY

The Evolution of the U.S. Railroad Industry: Infographic

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The railroad industry in the U.S. is a multi-billion industry and the backbone of the economy. Despite the inter-state highway system and the air fright sector the importance of the railroad for the nation’s economy cannot be understated. Below are some of the fascinating facts of the railroad industry:

  • Unlike many other countries the freight railroad network in the US is privately-owned
  • The network covers over 140,000 miles
  • The majority of the goods moved are transported by 7 Class I railroad companies (including 2 Canadian firms). These firms can be found here
  • US railroads are the most efficient and safest in the world
  • Railroad employees are some of the highest paid workers in the country. According to AAR, in 2019, the average U.S. Class I freight rail employee earned wages of $ 94,400 and fringe benefits of $ 38,500, for total compensation of $ 132,900
  • Railroads supported about 11 million jobs and directly employ about 140,000 workers
  • The industry generated $220 billion in economic output in 2019 and $26 billion in tax revenues

Sources: AAR, FRA

The following infographic shows the evolution of the railroad industry from the 1880s to the 1990s:

Click to enlarge

Source: Proportion Air

Related companies – Class I Railroads :

  1. BNSF Railway Co. (Private)
  2. Canadian National Railway Co (CNI)
  3. Canadian Pacific Railway Ltd(CP)
  4. CSX Corp (CSX)
  5. Kansas City Southern (KSU)
  6. Union Pacific(UNP)
  7. Norfolk Southern Corp(NSC)

Disclosure: Long CNI, CSX, UNP and NSC

The Top 15 Pharmaceutical Companies in India

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India is known around the world as a powerhouse for software services. It may be surprising for some investors to learn that India is a global leader in the pharma industry also. Many of the cheap generic drugs that are sold in the US market are manufactured in India. Many years ago Israel used to be a major generic drug manufacturer. But competition has increased in this sector and today countries like India have become major exporters of generic drugs. Below is an excerpt from an article on India’s pharma industry:

Indian Pharmaceuticals: A USD 55 billion market by 2020 and growing

India is a prominent and rapidly growing presence in global pharmaceuticals. Globally, the Indian pharmaceutical industry is the largest provider of generic medicines and ranks 3rd worldwide for production by volume and 13th by value; thereby, accounting for around 10% of the world’s production by volume and 1.5% by value. According to the Department of Pharmaceuticals (DoP), India is the source of 60,000 generic brands and home to 3,000 pharma companies with a strong network of over 10,500 manufacturing facilities. The DoP aims to make the country a hub for end-to-end drug discovery under its ‘Pharma Vision 2020’

Source: POST COVID-19: Challenges and Opportunities for the Indian Pharmaceutical Industry, Global Pharma Insights

According to European Pharmaceutical Review, India-based Lupin Pharmaceuticals and Sun Pharmaceuticals were among the top five global generic drug makers in the world.

The current coronavirus pandemic brings renewed attention to India’s drug industry. India is poised to supply coronavirus vaccines to the world potentially saving millions of lives. For example, Serum Institute of India in Pune, India has an agreement to manufacture one billion doses of a vaccine currently developed by scientists at the University of Oxford, UK, and British pharma giant AstraZeneca (AZN).

With that brief intro on the Indian drug industry, let’s take a quick look at The Top 15 Pharmaceutical Companies in India in the infographic below:

Click to enlarge

Note: The data shown are revenues in Fiscal Year 2018 and in Indian Rupees

Source: Market Research Reports

Of the firms listed above, Dr.Reddy’s Laboratories Ltd (RDY) trades on the NYSE as an ADR. From about $40 a share in the beginning of the year RDY has soared to reach a 52-week high of over $73.

Related Companies:

  • Abbott Laboratories (ABT)
  •  Teva Pharmaceutical Industries Ltd (TEVA)

Disclosure: No Positions

The Top 10 Gold Producing Countries in 2019: Chart

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The Top 10 Gold Producing Countries in 2019 are shown in the chart below. China was the top producer of gold followed by Russia and Australia. It is surprising that China is a big gold producer. Though one would expect South Africa to be the top producer the country was the eighth producer behind Ghana.

Click to enlarge

Source: Top 10 Gold Producing Countries, U.S. Global Investors