How advisors are using CDRs to access foreign stocks with a currency hedge

Canadian depositary receipts are a fast-growing investment vehicle with increasing appeal among advisors seeking targeted U.S. and other foreign equity exposure without many of the headaches of purchasing stocks directly in those markets.

Canadian Imperial Bank of Commerce (CIBC) launched Canada’s first Canadian depositary receipt (CDR), Amazon.com Inc. CDR, in 2021. It now offers CDRs for more than 100 U.S. and European publicly traded companies. Most trade on the Cboe Canada stock exchange, but some of the larger ones trade on the Toronto Stock Exchange.

The CDR market is small compared with the American depositary receipt (ADR) market, which features hundreds of ADRs with exposure to European and Asian securities.

That said, CDRs have been a thriving business since CIBC launched the products four years ago, with about $10-billion in assets. Other listings include Magnificent Seven stocks and large-cap names such as Berkshire Hathaway Inc. (BRK-T) and Honeywell International Inc. (HON-NE).

At first, do-it-yourself investors powered CDR growth, but advisors have been using the products increasingly for clients, says Elliot Scherer, managing director and global head of wealth solutions group at CIBC Capital Markets in Toronto.

“It’s a great tool to allow advisors to expand their U.S. equity allocation without taking on U.S.-dollar exposure,” Mr. Scherer says.

Advisors are requesting CIBC add more offerings, he says, including for European stocks, which it introduced earlier this year.

BMO Global Asset Management (BMO GAM) launched its own lineup this spring. It now has 34 CDRs focused on European and Asian markets, including Spain-based multinational clothing retailer Inditex (ZARA-NE), owner of Zara, and Japan-based conglomerate SoftBank (SFTB-NE).

“The main idea is providing an easy way to get exposure to underlying shares without concerns about access and currency fluctuations,” says David Hudson, head of structured solutions at BMO GAM.

Notably for investors, CIBC and BMO GAM’s CDRs include built-in currency hedges, eliminating the impact of fluctuations between foreign currencies and the loonie.

The hedge is what drew advisors, such as Karen Routledge, portfolio manager with Wellington-Altus Private Wealth Inc. in Calgary, to CDRs.

“We started introducing this to our strategy because the Canadian dollar was hitting near 20-year lows,” says Ms. Routledge, who has used CDRs in client portfolios since early 2024.

The hedge has been beneficial given that, even though many positions – including Nvidia Corp. (NVDA-T) – are up in value in U.S. dollars, the rise in the Canadian dollar in recent months has eroded some of the upside, she adds.

“In the long term, currency effects are generally minimized, but [currency] can affect the short term quite a bit, and we have to consider how we’re living our lives,” she says.

“If we’re mostly living our lives in Canadian dollars, it might be worth eliminating that currency risk from the portfolio.”

The hedge comes with a cost, which Mr. Scherer says is estimated at 60 basis points a year, though CIBC has kept costs lower so far.

The trading costs are worthwhile because of the simplicity CDRs offer in managing foreign exposures, says Diana Orlic, senior wealth advisor and portfolio manager with Richardson Wealth Ltd. in Burlington, Ont.

“It can be challenging, because if we buy U.S. stock, and we’re buying in Canadian dollars, we need to have a conversation with clients about the impact of currency,” she says. “With CDRs, it’s a simpler conversation.”

Dividends are also converted to Canadian dollars, adding a further benefit – especially for retirees.

CDRs typically involve fractional share ownership of high-priced foreign equities, offering a more affordable entry point with share prices far below their underlying exposure.

For example, BlackRock Inc. (BLK-N) trades in the U.S. with a share price of about US$1,100. Yet, CIBC’s BlackRock CDR (BLK-NE) is about $28 a share.

That can make allocating positions in diversified portfolios easier, Ms. Orlic says, especially in smaller accounts. “We’re finding these a little more popular with the younger family members who are opening up TFSAs and [First Home Savings Accounts].”

As well, CDRs’ generally lower price makes it easier to “trim a position that has had substantial growth in the portfolio to rebalance,” Ms. Routledge adds.

She says her team has an interest in adding more CDRs to portfolios, including those focused on Europe and Asia, but one concern is liquidity. Given their relative novelty in Canada, some CDRs have low daily trading volumes.

Mr. Scherer says CDR trading mechanics are similar to those of exchange-traded funds (ETFs). As such, a CDR’s liquidity is more a factor of the liquidity of the underlying stock.

“As each CDR references highly liquid global shares that trade on major exchanges around the world, we can confidently say that low daily trading volumes of CDRs do not impact bid-ask spreads,” he says, noting CIBC’s bid-ask spreads are between $0.01 and $0.04 a share.

CDRs have also come to market at a time when investors have more choice for exposure to foreign markets, including single-stock ETFs. But Mr. Hudson says the two products – which both provide opportunities to own foreign stocks in Canadian dollars, listed on a Canadian exchange – are very different tools.

“[The] single-stock ETFs I’ve seen, at least in Canada, involve some other overlay strategy such as leverage or a covered call,” he says. “Whereas with CDRs, it’s just access to the underlying stock with the currency hedge.”

So far, the formula seems to resonate, he adds, noting that many advisor inquiries have been about future offerings. He expects more foreign stocks to list as CDRs, especially as advisors seek to diversify international exposure beyond the U.S.

“This is a relatively new product with a lot of room to run,” he says. “We think of it very much like where ETFs were 12 years ago.”