Canadian investors can sometimes feel like they are missing out on some of the best stocks in the market since these companies may only be listed on United States stock indexes. Although these stocks are still relatively easy to trade, it requires Canadian investors to trade in US Dollars or foreign currency which is not always ideal. As a work around to this matter, Canadian Depository Receipts (CDRs) are offered by banks as way to invest in some of the biggest companies in CAD.   

What Are Depository Receipts (DRs)

To understand how CDRs work, investors must first understand depository receipts (DR). A DR is a negotiable instrument issued by a bank which represents shares in a foreign public company. A DR used to be a physical certificate, but this has shifted electronically over time. DRs trade on a local stock exchange and allow investors to hold interests in international/foreign stocks without needing to trade directly on outside exchanges. DRs are designed to be less expensive and more convenient than directly investing in international markets. They concept is quite common with American Depository Receipts (ADRs) being the largest class, and Global Depository Receipts (GDRs) being a general term for DRs used across the world.

Understanding Canadian Depository Receipts (CDRs)

Looking at Canadian Depository Receipts (CDRs) specifically, these allow Canadian investors to access foreign listed publicly traded stocks. A Canadian issuer (typically a bank) will purchase a large quantity of foreign shares. The issuer will then redistribute the shares in smaller units on a Canadian exchange with a built-in hedge to the foreign currency for which the issuer may charge a small fee (less than 0.50%). Essentially all Canadian brokerages offer trading of CDR’s, however, CIBC appears to be the sole issuer. Interested investors can invest in over 50 CDRs on the NEO Exchange with popular tickers ending in ‘.NE.’ To provide an example of how CDRs are distributed we have used the following data from the CIBC website:

• Using Amazon.com (AMZN) shares as an example, the AMZN CDR was trading at C$23.85 mid-day on July 8, 2024. At the same time, the original NASDAQ listed shares of AMZN were trading at U$198.98.
• The CDR Ratio was 0.08791883.
• The FX Forward Rate USD/CAD was 1.3626818.
• First, converting the CDR price to USD. $23.85/1.36326818 =  $17.495
• Then backing out the share price from the CDR Ratio. $17.495/0.08791883 =  $198.987

This example displays how the AMZN CDR is economically equivalent to NASDAQ listed shares of AMZN. Keep in mind, this calculation can be difficult to perform mid-day due to the differences in timing of data.

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Pros and Cons of CDRs

As previously mentioned CDRs have a variety of benefits to Canadian investors, primarily being currency related. CDRs allow Canadian investors to avoid currency conversion and the built-in hedge removes the concern of currency fluctuation. An additional pro is the fractional pricing which could make certain company’s more ‘investable.’ This is beneficial if capital availability is a concern. While cons are limited, CDRs are typically much less liquid than their direct listing alternative. Additionally, the small fee charged by the CDR issuer will also be a drag on returns. CDRs are also offered for a smaller group of names tailored to demand and market cap. It is not a guarantee that a CDR exists for any given company which could also be a con.

Overall, we view CDRs as an efficient way for Canadian investors to access companies in US and foreign markets if the goal is to limit foreign currency exposure.

Take Care,