Posted By Are CDRs the better way to hold U.S. investments? What are the pros and cons?
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.
CIBC makes money hedging the CDRs: and that costs investors 0.60% of the value of their CDR holdings per year. It’s revenue for the bank, but of minimal value for investors in our view. In addition, if you wind up holding the CDR for a lengthy period, the foreign-exchange differential may fluctuate widely during your ownership, but end up not far from where it was when you bought the CDR.
At the same time, CIBC earns currency-conversion commissions when investors buy and sell the CDRs, or on dividends paid to holders. But rather than the 1.5%, say, that most retail investors pay, CDR investors will pay “institutional rates,” which may be lower.
We see no need for hedging against U.S. dollar exposure. In fact, we see U.S. dollar exposure as a long-term plus: a valuable form of diversification.
We don’t recommend CDRs. The built-in foreign exchange hedge of CDRs is only a plus if you feel strongly that the U.S. dollar is headed downward in relation to the Canadian dollar. But if that’s the case, why buy a U.S. stock?
Bonus tip: Use our three-part Successful Investor approach for all of your investments:
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
Do you invest in CDRs? Why or why not?
