Getting to know Canadian Depositary Receipts

It took decades for exchangetraded funds to become a force in investing. Canadian Depositary Receipts (CDR) seem to be on a faster track than ETFS. Introduced in 2021 by Canadian Imperial Bank of Commerce, the 35 CDR stocks listed on the NEO Exchange had a combined market capitalization of close to $1.4-billion as of earlier this month.

CDRS offer a convenient, costeffective way to buy big U.S. tech stocks such as Amazon and Tesla, financials such as Jpmorgan, drug companies such as Pfizer, dividend stars such as Procter & Gamble and many others.

A big reason to consider a CDR instead of buying shares on a U.S. exchange is that your Canadian dollars are converted into U.S. currency at a favourable wholesale rate that beats what your broker would use.

Another benefit is that CDRS are priced at a fraction of the corresponding U.S. stock, making them more accessible to retail investors who may not want to pay hundreds of dollars for a single share.

And the fact that they’re currencyhedged means you make what the U.s.-listed shares make, without distortions caused by currency fluctuations.

As with any new investing product, there’s a get-toknowperiod with CDRS. Reader questions have been piling up, so I referred them to the people at the NEO Exchange for answers.

Q: There is a cost to convert Canadian dollars and to do the hedging. How is that cost recouped? And by whom?

A: NEO said the hedging fee is capped at 0.5 of a percentage point annually; there is no other charge associated with the product itself.

The CDR website adds: “While CDRS do not have any ongoing management fees, CIBC earns revenue for providing the notional currency hedge.” Think of the fee as being baked into the product, similar to ETFS. That means the returns you see are after fees.

Q: How do brokers handle currency exchange rates when clients are buying U.S. stocks, and how does that compare to CDRS?

A: NEO says the cost of converting Canadian dollars into U.S. dollars can be 1 to 2 per cent. Institutional rates fees are inherently less because you’re usually moving large amounts for a small group of clients. In the DIY investor channel, smaller amounts are typically moved across a much larger audience, which increases the cost of a currency conversion.

Q: How are CDR prices calculated, and what are risks/downside to holding them vs. the underlying U.S. stock?

A: NEO says CDRS are a fractionalization of the underlying stock. Example: Unitedhealth Group CDR traded at around $24.65 in the middle of last week, while the Nyse-listed shares were around US$505. NEO points out that there are two issues to be concerned with when buying a U.S. stock – the performance of the company issuing the shares, and the Canada-u.s. exchange rate. Hedging eliminates the exchange aspect.

A big reason to consider a CDR instead of buying shares on a U.S. exchange is that your Canadian dollars are converted into U.S. currency at a favourable wholesale rate that beats what your broker would use. Another benefit is that CDRS are priced at a fraction of the corresponding U.S. stock, making them more accessible to retail investors who may not want to pay hundreds of dollars for a single share.

Q: Are they best held in a specific account type, such as a TFSA?

A: According to NEO, similar rules would apply for holding the underlying stock directly or the CDR in registered accounts. There is no differentiator between owning the U.S. stock directly and owning the CDR.

Q: Do CDRS pay dividends?

A: NEO says dividends are paid in Canadian dollars, passed through at the same time of distribution of the U.s.-dollar dividends for the underlying stock.

Q: Where can one find a complete list of CDRS traded on NEO?

A: There’s a complete roster on the NEO website.