CIBC CAPITALMARKETS Canadian Depositary Receipts
CIBC CAPITALMARKETS Canadian Depositary Receipts
U.S. Dollar Still Too Strong? Here’s the New Way for Canadians to Invest in U.S. Stocks
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Do you just hate converting between Canadian dollars and U.S. dollars when you invest? It may be time to explore CDRs.
The U.S. dollar has weakened a bit from the peak of about US$1 to CA$1.38 in March. However, the current foreign exchange of US$1 to CAD$1.3367 isn’t exactly cheap either. Plus, our banks charge a fee for currency conversion. Doing a quick check at writing, I find that my bank charges about 0.86% to 1.68% for conversion amounts between CAD$1 and below CAD$100,000.
If you find it painful to convert your Canadian dollars to U.S. dollars to invest in U.S. stocks, I would like to introduce you to Canadian Depository Receipts (CDRs) as another option. CDRs have a currency hedge built in. It provides Canadian investors access to a basket of global companies listed on U.S. exchanges.
Researching for CDRs
You can invest in CDRs like you invest in the respective U.S. stocks. The idea is that CDRs will move in accordance with the respective U.S. stocks except for the foreign exchange rate fluctuations. So, it reduces the foreign exchange risk.
Researching for CDRs is the same as researching for the respective U.S. stocks. If you find a U.S. stock to be a wonderful business and is undervalued, it means the CDR could be a good buy, too.
Currently, there are 41 CDRs to choose from that trade on the Canadian NEO Exchange, including AbbVie, Advanced Micro Devices, Apple, Berkshire Hathaway, Citigroup, Chevron, Coca-Cola, Home Depot, Honeywell, McDonald’s, Pfizer, etc.
For the full list of the CDRs and more information about the subject, search the internet for the “CDR Directory,” which can be found on the CIBC website. There are no ongoing management fees for investors of CDRs. However, we all know that there’s no free lunch. CIBC does provide the notional currency hedge based on a foreign exchange forward rate that will on average have a spread of less than 0.50% per year.
The liquidity, the ease of converting your stocks to cash, is important for many investors. The liquidity of a CDR is largely based on the trading volume of the underlying U.S. stock.
The CIBC website explains that “each CDR is economically equivalent to owning a number of shares of a global company’s stock. The specific number of shares that each CDR represents is called the ‘CDR ratio.’ The CDR ratio is published on the ‘CDR Directory.'”
Undervalued stocks
Within the CDRs, the banks, including Citigroup, appear to be particularly undervalued, as there has been increased uncertainty in the macro environment from higher inflation and interest rates compared to the recent history. In fact, both the United States and Canada are expected to experience a recession this year. However, Citigroup operates in almost 100 countries.
At US$48.45 per share, Citigroup stock trades at a discount of about 16%, as suggested by the analyst consensus price target. The large-cap stock also offers a dividend yield of approximately 4.2%.
Most CDRs have the same trading symbol as on the U.S. exchange. However, Citigroup’s symbol is notably “CITI” on the NEO exchange.
CDRs: Qualified investments that pay same dividends as U.S. counterparts
As the CIBC website indicates, Canadian Depository Receipts are qualified investments that can be held in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds, Registered Disability Savings Plans, Registered Education Savings Plans (RESPs), Deferred Profit Sharing Plans, and Tax-Free Savings Accounts (TFSAs). The CDR shares pay the same dividends as their U.S. counterparts and are subject to the same withholding taxes on the foreign dividends.
For instance, there’s a 15% withholding tax on qualified U.S. dividends received in the RESPs, TFSAs, and non-registered accounts. Holding CDRs that pay qualified U.S. dividends in RRSPs would result in the full dividend being received just like if you held the respective U.S. shares. As you probably know, U.S. dividends received in your non-registered accounts will ultimately be taxed at your marginal tax rate.
Canadian investor takeaway
Canadian Depository Receipts are an option for Canadians to invest in global businesses listed on the U.S. exchanges with no currency conversion needed. That is, you would use the Canadian currency to invest in U.S. stocks on the Canadian NEO Exchange. CDRs could particularly be a great option when the U.S. dollar is strong against the Canadian dollar.
This article was originally posted on The Motley Fool website.
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Each Series of CDRs shall relate to a single class of equity securities (the “Underlying Shares”) of an issuer incorporated outside of Canada (the “Underlying Issuer”). For each Series of CDRs, the Prospectus will provide additional information regarding such Series, including information regarding the Underlying Issuer and Underlying Shares for such Series. Neither CIBC nor any other person involved in the distribution of CDRs accepts any responsibility for any disclosure provided by any Underlying Issuer (including information herein or in the Prospectus that has been extracted from any Underlying Issuer’s publicly disseminated disclosure).
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Any investment in CDRs presents risks. Prior to making any investment decision, investors should conduct such investigations as they deem necessary to determine if an investment in such CDRs is appropriate and suitable and should consult their financial, legal, accounting and tax advisers in order to determine the consequences of an investment in such financial products and the suitability of the investment product for their purposes and in their particular circumstances.
Certain risk factors are described in the Prospectus. An investment in CDRs is subject to various risks including but not limited to risks inherent to the holding of investments through a custodian under the Deposit Agreement as well as risks specific to each Underlying Issuer to which a Series of CDRs relates. Before deciding whether to invest in CDRs, purchasers should consider carefully the risks set out in and incorporated by reference in the Prospectus.
Prospective purchasers should also consider any categories of risks identified and discussed in the applicable Underlying Issuer’s publicly disseminated continuous disclosure documents. [Neither CIBC nor any other person involved in the distribution of CDRs accepts any responsibility for any disclosure provided by any Underlying Issuer (including information included herein or in any Prospectus Supplement that has been extracted from any Underlying Issuer’s publicly disseminated disclosure). Furthermore, neither CIBC nor any other person involved in the distribution of CDRs is providing any express or implied representations, warranties or opinions regarding investing in the Underlying Shares or the value thereof.
There is no guarantee that an investment in a CDR will earn a positive return. CDRs are not deposits that are insured under the Canada Deposit Insurance Corporation Act or any other deposit insurance regime. The value of the CDRs may increase or decrease depending on market, economic, political, regulatory and other conditions affecting a CDR or the related Underlying Share. All prospective investors in CDRs should consider an investment in a CDR within the overall context of their investment policies. Investment policy considerations include, but are not limited to, setting objectives, defining risk/return constraints and considering time horizons.
The value of a CDR will vary according to, among other things, the value of the Underlying Shares held in the applicable custodial account for the Series of CDR. CIBC has no control over the factors that affect the value of Underlying Shares. The value of the Underlying Shares in respect of a Series of CDRs may fluctuate in accordance with changes in the financial condition of the applicable Underlying Issuer, the condition of equity and currency markets generally and other factors.
CIBC has applied or intends to apply to list each Series of CDRs on the securities exchange operated by the NEO Exchange Inc. and/or other Canadian securities exchanges. The listing of each Series of CDRs will be subject to CIBC fulfilling all of the listing requirements of the applicable securities exchanges. There is no assurance that CIBC will fulfil all of the listing requirements of the applicable Canadian securities exchanges, that the applicable Canadian securities exchanges will approve a listing application in respect of any Series of CDRs or that, if listed, an active public market for any Series of CDRs will develop or be sustained.
The offering of CDRs constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the “1933 Act”), and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the 1933 Act). No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.
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