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Buy popular stocks listed in the United States, such as Amazon, Apple, You’re here, Alphabet, and Microsoft, is not always easy for Canadian investors. Because we typically get paid and invest in CAD, Canadians have quite a few hurdles to jump through.
First, currency conversion fees. Most brokers will charge 1-2% on top of the spot exchange rate to convert CAD to USD. This can add up over time to ding your returns.
Also, even if you use Norbert’s Gambit to trade CAD-USD at low prices, you still have to pay a commission, transaction fees, and wait a while for the trade to settle.
However, a cool new set of investment products from CIBC listed on the NEO Exchange makes investing in popular US stocks very easy and affordable. We’ll take a look!
What is a CDR?
CIBC and the NEO Exchange have partnered to issue a series of Canadian Certificates of Deposit (CDRs). You can think of these CDRs as instruments that represent ownership of shares in various US corporations.
For example, buying an AMZN CDR would be equivalent to owning a certain number of AMZN shares. The specific number of shares that each CDR represents is called the “CDR ratio”. CDRs act like stocks – they trade on the stock exchange, pay dividends and even give the shareholder voting rights!
Currently, the NEO exchange has 23 popular large-cap US blue chip stocks listed as CDRs on its webpage. I expect many more to come, but the current list represents some of the best performing and hottest stocks in the market right now.
What are the benefits of CDRs?
For investors, the biggest advantage is that CDRs trade in CAD. For example, an AAPL CDR can be bought and sold in CAD, while AAPL shares can only be bought in USD. This saves you from having to convert CAD to USD, which eliminates exchange fees.
Additionally, CDRs often trade at prices well below those of stocks. If you can’t afford the current TSLA stock price of US$1,017, you can buy a TSLA CDR of CA$33.20 instead, giving you exposure to the stock at a price much more affordable. This is particularly suitable for investors with a small account.
CDRs are also very liquid. As noted earlier, the underlying stocks they track are popular large-cap US stocks contained in the S&P 500. This gives CDRs excellent liquidity and a good bid-ask spread, despite the CDR’s low trading volume. -same.
Compared to CAD-listed ETFs that hold US stocks, CDRs have no management fees. However, like any other US investment, CDRs are subject to a 15% foreign withholding tax on dividends paid. This is an unavoidable drag, unless you hold US-listed stocks directly in an RRSP.
What are some of the risks of CDRs?
CDRs carry the same risks as owning stocks – if the value of the underlying stock drops, the value of the CDR will also drop. Before investing in a CDR, be sure to do your due diligence on the underlying company’s fundamentals and audited financial statements.
Since CDRs trade in CAD but track the underlying stocks which trade in USD, fluctuations in the CAD-USD exchange rate must also be taken into account. A simple way to understand this relationship is as follows:
- If the CAD strengthens, each CDR will represent a greater number of underlying stocks.
- If the CAD weakens, each CDR will represent a smaller number of underlying stocks.
Since currency fluctuations will only affect the CDR ratio (and not the price of the CDR), the CDR is said to be “currency hedged”. Your returns will only reflect the performance of the underlying stock.
The insane takeaway
CDRs offer investors a capital-efficient and cost-effective method of investing in US equities. Add to that a commission-free brokerage, like Wealthsimple Trade, and you have a winning formula for buying US stocks cheaply and easily!