All posts by Pat McKeough

What are Canadian Depositary Receipts (CDRs) and should you invest in them?

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Are CDRs the better way to hold U.S. investments? What are the pros and cons?

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Canadian Imperial Bank of Commerce (CIBC)’s Canadian Depositary Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each.

CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia recently was trading for $475.06 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want.

CDRs represent shares of U.S. or other foreign companies but are traded on a Canadian stock exchange in Canadian dollars.

CIBC currently offers about 47 CDRs that trade on Cboe Canada (formerly NEO Exchange). Here’s just a few of them:

  • Alphabet Canadian Depositary Receipts – GOOG
  • Amazon.com Canadian Depositary Receipts – AMZN
  • Apple Canadian Depositary Receipts – AAPL
  • Meta Platforms Canadian Depositary Receipts – META
  • Microsoft Canadian Depositary Receipts – MSFT
  • Netflix Canadian Depositary Receipts – NFLX
  • Nvidia Canadian Depositary Receipts – NVDA
  • PayPal Canadian Depositary Receipts – PYPL
  • Starbucks Canadian Depositary Receipts – SBUX
  • Tesla Canadian Depositary Receipts – TSLA
  • Visa Canadian Depositary Receipts – VISA
  • Walt Disney Canadian Depositary Receipts – DIS

Cboe Canada is recognized by the Ontario Securities Commission.

An individual CDR is not intended to equal the cost of a single share. Instead, each new CDR started out trading at around $20 Cdn., representing ownership of one or more shares and/or a fraction of one share of the underlying stock, depending on the stock’s price. As mentioned, shares of many of the largest companies in the world trade at significantly higher prices, although some trade much lower as well.

Dividends paid on the shares underlying CDRs will be passed through to CDR investors in Canadian dollars when received, based on the current foreign exchange rates.

The main negative about CDRs is the Fees

CIBC charges no direct management fees for CDRs. However, the CDRs are hedged against movements of the U.S. dollar relative to the Canadian dollar. That means the Canadian-dollar value of the CDRs rises and falls solely with the movements of the underlying stock.

Of course, hedging has costs: and hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, that reduces any gain you’d otherwise enjoy, or expands any loss. Continue Reading…

Investing in AI: what stocks will it pay off for?

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Investing in Artificial Intelligence: We feel it could have a huge positive potential, but watch for these risks and rewards

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Artificial Intelligence (AI) only crossed the fiction-to-news barrier in recent years, after decades as a staple of Arnold Schwarzenegger films, but it’s already influencing the economy and is likely to increase its impact. We feel it could have a huge positive potential. This development has also caught the attention of many investors who are contemplating the prospects of investing in AI.

Media comments on this subject abound, as do surveys.  The average person seems fascinated with AI’s potential for good, but wary of its potential for harm. You might say this resembles the atmosphere a decade or so ago when self-driving cars started appearing in the news.

In both cases, middle-of-the-roaders were in the majority. Extreme types came up with much different outlooks.

Negative observers said self-driving vehicles would lead to an economic collapse because multitudes of drivers of trucks, taxis, buses and so on would lose their jobs.

At the other end of the spectrum, a smaller extreme felt driver-less vehicles would balloon human productivity and expand wealth around the world. After all, people could do valuable work in traffic, just as well as in an office, or use the time for a nap. They looked forward to a day when owning your own car would be a needless extravagance. When you needed a lift, you’d just summon a driver-less limo on your cellphone. A little further along, new homes will be available with or without garages or parking spots. Your self-driver will be able to valet itself to a community parking lot.

Looking a little further still, your car might be able to take itself out for maintenance, service, fuel, or any number of errands. Artificial Intelligence just might speed the arrival of these advances.

However, there’s an even wider opinion spectrum on Artificial Intelligence. Rather than a booming jobless rate, the negative side foresees Armageddon: humans versus machines.

It seems conflicts of interest are playing a role, along with honest differences of opinion, in disputes over Artificial Intelligence. This reminds me of the debate over Y2K.

The Y2K debate showed there is big money in alarmism. Some of the top Y2K promoters used Y2K fears to build a following and boost their incomes from writing, consulting or public speaking. Pessimists worried needlessly about Y2K and made a lot of money. I expect the same reaction to AI.

Mainstream opinion or Al Gore on steroids?

Ratings for cable news pioneer CNN have been slumping for a decade. Coincidentally, CNN.com recently published an essay entitled: “Experts are warning AI could lead to human extinction. Are we taking it seriously enough?”

The essay begins: “Think about it for a second … The erasure of the human race from planet Earth. That is what top industry leaders are frantically sounding the alarm about … potential dangers artificial intelligence poses to the very existence of civilization.”

It passes along a warning: “… hundreds of top AI scientists, researchers, and others … voiced deep concern for the future of humanity, signing a one-sentence (italics added) open letter to the public … mitigating the risk of extinction from AI should be a global priority alongside other societal-scale risks such as pandemics and nuclear war …”

You have to give them credit for leaving climate change off the list.

Read Marc Andreessen’s essay on AI

If you’re investing in AI and Artificial Intelligence fears keep you awake at night, I’d suggest a 7,000-word remedy by Marc Andreessen, entitled, “Why AI will save the world.”

In all I’ve read about AI, this is the best comment I’ve seen. It describes AI in plain English; explains how AI can expand human intelligence; how we have used human intelligence over millennia to create today’s world. It also speculates about the gains we may see in the new era of AI. Continue Reading…

What Investors should know about ADRs and CDRs, and their Fees

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Recently one of our Inner Circle members asked, “You mentioned recently that TSI recommends a handful of ADRs (American Depositary Receipts) providing exposure to European and Japanese stocks. One question: What are the ADR fees charged to investors by U.S.-listed ADRs?”

An American Depositary Receipt, or ADR, is a proxy for a foreign stock that trades in the U.S. and represents a specified number of shares in the foreign corporation. ADRs are bought and sold on U.S. stock markets, just like regular stocks, and are issued or sponsored in the U.S. by a bank or brokerage firm. If you own an ADR, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue to hold the ADR.

One ADR certificate may represent one or more shares of the foreign stock. Or, if the stock is expensive, the ADR may represent a fraction of a share; that way the ADR will start out trading at a moderate price or be in the range of similar securities on the exchange where it trades.

The price of an ADR is usually close to the price of the foreign stock in its home market. There are no redemption dates on ADRs.

When an investor owns an ADR, a custodian — Citi, Bank of New York Mellon, and J.P. Morgan Chase are among the largest — is in charge of holding it. The custodian also maintains the records and collects the dividends paid out by the foreign issuer. It then converts those payments into U.S. dollars and deposits them into stockholders’ accounts. For all these services, the custodian charges an ADR fee.

The custodian may deduct that ADR fee from the dividends, or it may charge the ADR holder separately. If the ADR doesn’t pay a dividend, the custodian will charge the ADR fee directly to the brokerage, which in turn will charge it to a client’s account.

We feel you can find all the foreign investment variety and exposure you need by confining your purchases to U.S. and Canadian stocks, plus low-fee ETFs (exchange traded funds). However, if you want to invest in a particular foreign stock, it’s generally more convenient and economic to hold ADRs of foreign stocks, rather than the foreign stocks themselves.

Bonus: What are CDRs?

CIBC

While I’m on the topic, some investors confuse ADRs, with CDRs. Canadian Imperial Bank of Commerce (CIBC)’s Canadian Depository Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each. CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia currently trades for $610 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want. Continue Reading…

U.S. stocks are a great way to boost your portfolio returns. Here’s why.

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In my experience — over 40 years of advising investors on how to build wealth — too few fellow Canadians have diversified their stock holdings into U.S. stocks.

Unfortunately, most Canadian investors still believe — falsely —  that it’s too costly or too much hassle to buy U.S. stocks.

Most importantly, these investors have also ignored U.S. stocks’ tremendous safety and profit advantages to Canadians.

I believe that up to 30% of every Canadian stock market portfolio should consist of U.S. stocks, for the following three reasons:

 

  1.   U.S. stocks give you risk-reducing diversity. Canadian stocks are great, but so many are focused on natural resources —so when such commodities sink, so do your returns. U.S. stocks are spread across far more industries, giving you a broader cushion during market volatility.
  2. U.S. stocks give you international opportunities. Top U.S. stocks are multi-national revenue earners, so you benefit from booming international markets. It means your portfolio is safer and stronger than just relying on Toronto exchange stocks.
  3. Investing in U.S. stocks is easy and extremely profitable. Don’t worry: Buying U.S. stocks through your regular broker is as easy as buying Canadian stocks. And no matter the dollar exchange rate, when you get good returns, the currency exchange costs are insignificant.

If your portfolio has no U.S. stocks —or if you’re not satisfied with the performance of your current U.S. stocks — I recommend you take a free look at Wall Street Stock Forecaster.

Here’s how to spot the best U.S. stocks

Now is a particularly good time to follow our three-part Successful Investor investment approach — including for U.S. stocks:

Rule #1: Invest mainly in well-established, profitable, dividend-paying U.S. stocks.

Our first rule in the most successful investment strategies will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses.

Recent standout losers include bitcoin and other cryptocurrencies; a disappointing crop of new issues (IPOs), which tend to come to market when it’s a good time for the new-issue company or its insiders to sell, but not a good time for you to buy; and slapped-together promotional stocks that hit the market thanks to the SPAC phenomenon, which offers a short cut to IPO status.

Instead, focus on well-established, profitable, dividend paying U.S. stocks. But, when looking for dividend-paying stocks, you should avoid the temptation of seeking out stocks with the highest yields — simply because they have above-average yields. That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend. In short, high dividend paying stocks can come with pitfalls. Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Above all, for a true measure of stability, focus on stocks with a high dividend yield that has been maintained or raised during economic or stock-market downturns. Generally, these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth. A track record of dividend payments is a strong sign of reliability and an indication that investing in the stock will be profitable for you in the future.

Rule #2: Spread your money out across most if not all of the five main economic sectors.

This is our key to successful diversification and the widely disparaged resource sector saw some major winners last year. On the other hand, if you had disregarded resource stocks with the intention of doubling down on tech stocks, you might have wound up with excessive holdings in tech stocks just as they entered a plunge. Continue Reading…

Stock Market Anxiety leads to Bad Investing Decisions. Here’s what to do Instead

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Ignore stock market anxiety and negative stock predictions and instead focus your investing strategy on diversification and portfolio balance

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The current state of the world is generating stock market anxiety, as it often does. My guess is that the Israel-Hamas war is just getting started and will last a long time. I also suspect that Russian dictator Vladimir Putin had something to do with getting it started, and will do what he can to keep it going. After all, when it comes to running his country, Putin takes a grasping-at-straws approach.

Putin may think that bringing the longstanding Mideast conflict back into the headlines is going to improve his chances of conquering Ukraine and bringing the Soviet Union back from the dead.

He thinks taking a long shot is better than no shot at all. Who knows? He might get lucky.

Early on in his war on Ukraine, Putin seemed to think that Chinese dictator Xi Jinping was going to take pity on him and his country, and offer free money and/or weapons to shore up Russia’s Ukraine invasion. Instead, Xi insists on staying out of the war, while paying discount prices for Russian oil. He takes special care not to let his country get caught up in the economic sanctions that the U.S. and NATO countries and allies are directing against the Russians.

It’s not that Putin is stupid. If a war between Israel and Hamas turns out to be a big drain on the U.S. budget, the U.S. might have less money available to arm Ukraine.

Up till lately, however, Israel has had little to say about Russia’s treatment of Ukraine. Israel may soon take a more active role in helping Ukraine defend itself.

Any war is a terrible thing, and this one is no different. The stock market seems to be creeping upward. Maybe it knows something that Putin hasn’t figured out.

Meanwhile, if your stock portfolio makes sense to you, we advise against selling due to Mideast fears.

Stock market anxiety recedes with investment quality, diversification and portfolio balance

You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.

You get a much better return on time spent if you devote less of it to worrying about high risk investments, and more of it to an investing strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.

There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run. Continue Reading…