Canadian Depositary Receipts (CDRs) are an investment product enabling Canadian investors to invest in U.S. stocks without currency risk. Even better, CDRs often trade at a smaller nominal price so Canadians participate in big US companies’ growth.
Are CDRs the 8th wonder of the world? For many years, we have been used to the term ADRs (American Depositary Receipts) which were stocks issued by companies based outside of North America, but that wanted to access the U.S. markets. We cover a few of them at DSR, but we prefer investing in North America for several reasons. Earnings reports aren’t produced following the same calendar, information could be in a different currency, and there is usually a better (or as good) option on North American soil.
But CDRs are a bit different since they are U.S. based companies now trading on the Canadian market. Financial firms sweeten the deal by offering investors a hedge against currency fluctuations on top of buying fractional shares. In other words, instead of buying one share of Amazon at $3,000 USD, you can now buy one fractional share of Amazon on the NEO stock exchange for $19 CAD! So far, so good!
CDRs are offered by CIBC but can be bought through any online broker. CIBC doesn’t charge any management fees on CDRs, but there is a currency hedge fee capped at 0.60%. It’s not much, but this is something to consider. As you can see, there is a small difference in price fluctuations:
However, the biggest difference lies within the currency fluctuation. As you can see, since AMZN Canadian Depositary Receipt was launched, the U.S. dollar gained almost 8% in value versus the Canadian dollar. In this situation, your currency hedge made you lose that 8% gain. CDRs’s currency protection goes both ways…
Do you get the dividend?
Yes, if you purchase CDRs, you will be entitled to the dividend paid by the company. Keep in mind that since you hold fractional shares, you will be entitled of the dividend in % (yield), not the dividend “per share” as declared by the company. For example, when Microsoft (MSFT) pays a dividend of $0.62/share for a 0.85% yield, you will receive the equivalent of 0.85% of your investment, not $0.62 per fractional share.
For tax consideration, dividends should be treated the same way as if you hold the original U.S. shares. Be sure to have the applicable W-8 form on file for the account holder.
What’s the catch on CDRs?
Honestly, it’s a great product and there is no catch. However, this will not change your entire life either.
Besides the hedging fee discussed previously, there are no real downsides of buying CDRs. Keep in mind the list of available companies is limited and it doesn’t include many dividend paying stocks. The complete list can be found here. If all dividend paying US stocks were available (as opposed to a little more than a dozen), I would be tempted to have only one Canadian account and buy only CDRs. Right now, I am still stuck with a USD account for most of my US holdings. Therefore, adding CDRs to my portfolio isn’t that revolutionary in my case.
| ADVANTAGES | DISADVANTAGES |
| Simple (keep it in your CAD account) | Limited Choices (you will likely need a US account anyway), less liquidity |
| Small amount of money required (fractional shares) | CDRs 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. (W-8 form). |
| Currency hedged | 0.60% fees |
An exclusive list of dividend growers with more potential…
Moose Markets presents the Canadian Dividend Rock Stars list: a selection of Canadian companies showing income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada.
