If you have explored U.S. stocks as a Canadian, you may have come across CDRs (Canadian Depositary Receipts). They are marketed as a straightforward method to invest in prominent U.S. companies using Canadian dollars, eliminating the complexities of currency exchange and providing inherent currency hedging.
CDRs can indeed provide ease.
However, ease always entails a price. The fundamental question is not about the merits or demerits of CDRs. It’s about when CDRs are logical—and when you might be paying for something superfluous.
Here are several practical suggestions to assist you in investing sensibly in CDRs, without fully revealing our complete guide (which includes an extensive CDR list featuring Dividend Triangle metrics and our assessments).
First: Grasping What You’re Acquiring
A CDR represents a “wrapped” form of a U.S. (or sometimes international) stock that is traded on a Canadian exchange in CAD. The provider (CIBC serves as the Depositary for the CDR program) maintains the underlying shares and issues CDR units to investors.
Here’s the essential information:
– You’re not benefiting from a reduced price simply because the CDR trades at a lower cost.
– You’re purchasing a fractional interest in the underlying stock.
It’s the same pizza—just presented in a different way. Whether you buy one large share or twenty smaller pieces, your return relies on the same foundational business performance.
Guideline #1: Grasping Currency Hedge
CDRs provide the advantage of no currency conversion and no currency fluctuations. They are structured to mitigate the effects of USD/CAD rate variations on your investment.
This can be beneficial if your priority is stability in CAD terms.
Nonetheless, hedging is a double-edged blade:
– If the Canadian dollar declines, hedging can offer protection.
– If the U.S. dollar appreciates, hedging can limit your gains compared to directly owning the U.S. stock.
Before purchasing a CDR due to currency issues, reflect on:
– Am I investing for a year, or for decades?
– Do I genuinely require hedging, or do I simply need a more effective strategy for managing USD?
Guideline #2: View the Fee as a Consistent Disadvantage
The point that concerns me the most: CDRs come with an embedded hedging expense.
While it isn’t labeled as a “management fee,” the hedge incurs an average spread of about ~0.60% per year for U.S. CDRs and ~0.80% for Global CDRs.
This may appear minor in a single year. Over a span of 10–20 years, it becomes a considerable burden.
A straightforward perspective:
– If you can acquire the underlying stock without an annual fee, why choose to incur one—unless it provides something truly worthwhile in return?
Guideline #3: Implement Limit Orders
CDRs are frequently tied to highly liquid underlying stocks, but the CDR itself might trade with less volume than the U.S. equivalent.
This can lead to a broader bid-ask spread, particularly during volatile markets or outside of peak trading periods.
When dealing with CDRs:
– Employ limit orders (especially for larger transactions).
– Be cautious with less frequently traded names.
– If you’re gradually building a position, smaller increments can reduce spread effects.
Guideline #4: Clarifying Dividend Knowledge
Indeed—CDR holders receive dividends (disbursed in Canadian dollars). The focus should be on yield, rather than “dividend per share.”
As you’re holding a fractional interest, you get the corresponding dividend amount based on your investment size. The mechanics of dividends are not magical—it’s still the same company distributing the same dividend.
Additionally:
– Withholding tax regulations typically apply similarly as if holding the U.S. stock (consider the account type—RRSP vs TFSA vs taxable).
– Ensure the necessary W-8BEN documentation is submitted to your broker when applicable.
Guideline #5: Don’t Purchase CDRs Simply Because Stock Appears “Overpriced”
This is where CDR marketing excels: “Costco is nearly $1,000—buy the CDR for about $40!”
It seems simpler. However, it doesn’t address the real challenge, which is often limited capital and insufficient diversification at the beginning.
If you’re starting with $100/month, a better strategy is frequently to:
– Start with one or two broad-market ETFs for immediate diversification.
– Develop the habit of systematic investing (that’s the true advantage early on).
– As your portfolio grows, begin adding individual stocks in USD when it is appropriate.
Guideline #6: If Avoiding USD Conversion Is Your Sole Reason, Discover the Simpler Solution
Currency conversion charges from banks and brokers are genuine, but there’s a well-established workaround: Norbert’s Gambit.
It’s not difficult, and it can save you significant money over time—especially as your account expands. If you’re willing to master one process, you may not need to incur an ongoing hedge spread indefinitely.
Final Thoughts
CDRs aren’t a trap. They aren’t “bad.” For certain investors