As our site grows, we are fortunate to receive some questions from passionate readers/investors who subscribe to our free newsletters – including this new question about Canadian Depositary Receipts (CDRs).
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Recently, we received an email from a new client and passionate investor about the Canadian Depositary Receipts (CDRs) now being offered by CIBC.
What are CDRs?
Are these CDRs too good to be true?
Reader Question about Canadian Depositary Receipts (CDRs)
First up, the reader question (adapted slightly for the site):
Just read an article on Canadian Depositary Receipts (CDRs) from CIBC. I am excited. I am curious but cautious. Seems to be a great thing to do to own partial stocks of high-priced sexy stocks. The “glossy brochures” and news releases about this product all seem too good to be true. Will this be a thing for Canadians (young, middle-aged or retired) in their portfolios to buy US stocks in CDN funds. Supposedly there are going to be dividends? Maybe after I read more and sleep on it a carefully chosen ETF may be a realistic answer. Then again will I miss jumping on the Band Wagon?
Thanks for your email and question.
Yes, this is great news but we agree – be cautious!
A Quick Look at American Depository Receipts (ADRs)
Before we get into CDRs, let’s look at ADRs which are common on US exchanges (in USD) that give investors access to companies around the world without having to buy directly from the company’s home exchange (eg. Alibaba).
For background, ADRs work like this:
- ADRs trade on a major stock exchange where investors can buy/sell them like equities.
- ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution, often by an overseas branch.
- ADR holders do not have to transact the trade in the foreign currency or worry about exchanging currency on the forex market. Buying ADRs allows investors to own securities priced and traded in U.S. dollars and cleared through U.S. settlement systems.
To offer ADRs, a U.S. bank will purchase shares on a foreign exchange. The bank will hold the stock as inventory and issue an ADR for domestic trading. ADRs list on either the New York Stock Exchange (NYSE) or the Nasdaq for the most part.
An ADR may represent the underlying shares on a one-for-one basis, a fraction of a share, or multiple shares of the underlying company.
If an ADR is listed on an exchange you can buy and sell through your broker like any other share. Because of this, and since they are priced in U.S. dollars, ADRs allow American investors a way to diversify their portfolios geographically without having to open overseas accounts or dealing with foreign currency exchange and taxes.
This is a great benefit now coming to Canada via CIBC.
What are CDRs?
Modelled after American Depositary Receipts (“ADRs”) market, Canadian Depositary Receipts (CDRs) now being offered by CIBC are supposed to make it easier to invest in some of the world’s largest companies – in Canadian dollars. Overall, we believe this new option is great news for investors.
- Some Canadian Depositary Receipts (CDRs) related to some of the largest U.S. companies listed on NYSE and NASDAQ are now trading in Canadian Dollars.
- Canadian investors now have the flexibility of investment through fractional ownership of some large U.S. stocks.
- Your exposure to the U.S. dollar is now minimized through built-in currency hedging, allowing you to own the company and not the currency per se.
- In fact, because you can own some fractional shares, CDRs make it possible for Canadians to obtain fractional share investments in some U.S. stocks for less. (Example: instead of paying thousands for one (1) Amazon.com share, “you can now buy a CDR giving you fractional ownership of a share for as little as $20 Canadian Dollars.)”
Why would foreign companies offer ADRs or CDRs?
Well, foreign companies often seek to have their shares traded on U.S. exchanges through ADRs in order to obtain greater visibility in the international market. Think of this approach to expand the pool of potential investors. The same would apply to CDRs.
Why consider ADRs or CDRs?
Buying shares of companies listed on exchanges outside of Canada can come with an extra hurdle and additional fees to convert cash to a foreign currency.
To avoid Norbert’s Gambit altogether CDRs make some U.S. stocks available in Canadian Dollars.
What CDRs can I own right now?
The first CDRs that will be available for trading with CIBC on the NEO Exchange at the time of this post are:
- Alphabet Canadian Depositary Receipts (CAD Hedged) – GOOG
- Amazon.com Canadian Depositary Receipts (CAD Hedged) – AMZN
- Apple Canadian Depositary Receipts (CAD Hedged) – AAPL
- Netflix Canadian Depositary Receipts (CAD Hedged) – NFLX
- Tesla Canadian Depositary Receipts (CAD Hedged) – TSLA
From the article we read:
“CIBC is committed to developing innovative, market-based solutions that address investor needs,” said Christian Exshaw, Managing Director and Head, CIBC Global Markets and Direct Financial Services. “As a Canadian industry-first, CDRs will allow investors to affordably purchase global equities, access institutional FX rates, and efficiently manage their currency risk.”
Are there implications to owning ADRs or CDRs?
For one, holders of ADRs realize any dividends and capital gains in U.S. dollars. We believe the same would apply to CDRs depending on where the security is held.
While CDRs make it easier for Canadian investors, financial advisors, and institutions to invest in some of the world’s largest companies, in Canadian dollars, you should ensure you have the applicable W-8 form on file for any account holder.
A W-8 (W-8BEN) form is a tax document used to certify that your country of residence for tax purposes is outside of the United States. A completed W-8BEN form confirms that:
- You are not a resident of the U.S.
- You are the owner of the income to which the form relates.
- You are claiming a reduced withholding tax rate because you’re a resident of a foreign country with which the U.S. has an income tax treaty.
“As a result of agreements between the Canadian and U.S. governments, a W-8BEN is required for holders of all non-registered accounts – even if you don’t hold any U.S. investments. The U.S. Internal Revenue Service (IRS) also requires brokers of U.S. securities to collect a W-8BEN for all holders of Tax-Free Savings Accounts (TFSA), as well as for holders of Registered Education Savings Plans (RESPs) who wish to trade in U.S. securities.”
This form is a big deal since the U.S. withholding tax is normally 30%. With a current W-8BEN in place, you may qualify for the reduced rate of 15% on dividends or zero tax on interest.
This is not a huge drawback just sometjihng to be mindful of!
Two, while investing directly in U.S. companies exposes you to currency fluctuations, currency hedging can come at a cost. At best, currency exchange rates can improve or reduce investment returns when translated into your home currency. Yet cost is an ever-present risk to hedging. Costs for hedging often include but may not be limited to compensating currency dealers for facilitating hedging transactions, custodian banks for recordkeeping and investment managers for maintaining the hedge.
A decision to hedge is often a personal risk-based decision. One could argue you want to avoid hedging for long investment horizons because without hedging that approach may deliver more optimal (higher) performance than any unhedged approach.
Again, personal finance is personal.
Three, for any investment, investing in any individual foreign corporation needs some due diligence – even if it is Amazon via fractional shares. On that note, we believe owning fractional shares has some issues along with the CDRs listed above:
- Limited selection of stocks: Not every stock is available for fractional investing let alone CDRs – yet.
- Less liquidity: We believe you do not have great asset liquidity with your fractional shares as compared to whole shares although the NEO Exchange has posted on their site: “CDRs will reference highly liquid global shares that trade on major exchanges around the world. Generally speaking, where the underlying shares has a high trading volume, the corresponding CDR is expected to have a high degree of liquidity.”
- Less dividends: Just as fractional stocks represent a portion of a full share, if you own fractional shares, you’ll get the portions of stocks’ dividends. So, if you are going to own CDRs and fractional shares with CDRs, consider that in your income planning approach.
Absolutely there are benefits with CDRs and fractional shares. This is great!
These include starting/investing small, diversification with less money, and investing via a dollar-cost averaging (DCA) approach. That said, you can start small, get huge diversification, and follow the same DCA approach owning low-cost ETFs without any individual stock risk.
On that note, make sure you check out these posts about low-cost ETFs below. We have highlighted why, generally speaking, we are gravitating to owning more of these funds ourselves with time!
- Build Long-Term Wealth using our Diversified ETF Model Portfolios.
- Investing in Index Funds and/or ETFs – What is Index Investing and Why it Matters!
Final Thoughts on Canadian Depositary Receipts (CDRs)
We believe that CDRs are a great innovation and in fact, maybe even better than some other recent product launches!
The benefits of ADRs and/or CDRs are very clear: you can get immediate, simple exposure to a global company without worrying about exchange rate fluctuations – you own foreign stocks in your home currency.