If in the past, you've considered expanding your portfolio with US stocks, it typically involved converting your Canadian dollars into US dollars. Such a procedure could yield considerable charges on currency conversion or commission costs from performing a currency strategy like Norbert's Gambit.
There's also some frustration among beginner investors here in Canada that are just learning how to buy stocks, particularly those with smaller portfolios, as they want exposure to companies like Tesla, Costco, Amazon, or Google but cannot afford the high share costs.
However, with the introduction of Canadian Depository Receipts, or CDRs, Canadians can not only buy US listed stocks in their home currency, with zero up front conversion fees, but they can also buy them on a fractional basis, allowing you to own Amazon without having to put up over $3000 USD.
Speaking of currencies, are you interested in Canadian companies related to the crypto market? Check out our piece on Canadian crypto stocks?
How does a Canadian Depository Receipt work?
Much like American Depository Receipts, which have been around for decades, Canadian Depository Receipts are a financial instrument that allows Canadians to gain exposure to stocks in foreign markets, while keeping the price in Canadian dollars.
A prime example of an ADR would be Alibaba Holdings, which is a Chinese e-commerce company but trades on the NYSE under the ticker BABA.
The simplest way to explain a CDR is that it is a representation of a stock that is held in trust by the financial institution. In the case of Canadian CDRs, at least for the time being, it is CIBC.
The share of the underlying US stock is held in trust by the financial institution and then a set amount of CDR's are released for Canadians to buy. How much fractional ownership you have of that stock depends on the CDR ratio at the time, which are constantly being updated.
The CDR ratio is a reflection of the current exchange rate when it comes to CAD/USD. As the exchange rate fluctuates, the amount of shares of the underlying US company that back the CDR will fluctuate as well.
How much do CDR's cost, and where do they trade?
First off, these CDRs trade on the Neo Exchange, which is a senior exchange that competes with the Toronto Stock Exchange. You'll find the CDR information on a site like Yahoo Finance by typing in the ticker with a ".NE" at the end, representative of the Neo.
However, some brokerages will display the tickers differently. For example, Qtrade uses CA:AMZN. So, it is important that you're purchasing the CDR, not the US stock.
For the most part, the two will be very easy to tell apart. That is because when the CDRs start trading on the exchange, they're all given an initial price point of $20 CAD. So, it would have to be a pretty big error to purchase a stock with a $3000 price tag on it in Amazon over its $20~ CDR.
Are there management fees with CDRs?
There are no management fees with CDRs. The only fees you will currently pay are up to 0.6% to execute currency hedging strategies. So, although it is ultimately a fee, there is a service provided for the fee.
What are the pros and cons to CDRs?
As with any financial product, it's very important to sit back, analyze, and determine whether a product is right for you.
Some pros of CDRs:
- They allow fractional ownership of US companies
- They allow Canadians to trade in their home currency
- Investors avoid paying large currency transaction fees
- Tracking portfolio returns becomes much easier in a single currency
- Ownership of a CDR is no different than holding the underlying US stock
- Currency hedged so fluctuations in the dollar do not impact returns
- Wealthsimple Trade clients can finally own US stocks without paying large in and out currency fees
Some cons of CDRs:
- On large amounts of capital, performing Norbert's Gambit and purchasing the US stock can be cheaper than paying the 0.6% annual fee
- Some investors may prefer to be unhedged
Overall, buying shares of companies like Amazon, Tesla, Alphabet and Apple in Canada just got way easier
We're seeing CDRs take off in a big way, with some exceeding volumes of 65,000 shares per day. As these products become more widespread, more and more Canadians will ultimately choose to own them over their US counterparts.
Although there is a charge (0.6% annually) for the convenience, for many, especially those who do not have large amounts of capital, it will actually be a cost savings.
As we move forward, I have no doubt more and more products will become readily available to Canadians as well. Not too long ago, there were only four options that Canadians could buy. Now, there are 18 with more coming in the near future. What are those 18 options right now? Lets take a look.
A list of current CDRs for Canadians to buy
Keep in mind, we'll update this table as soon as we hear of any newly listed or even pending CDRs.
