A Canadian investor would need more than $4,000 to buy a single share of Amazon.com Inc. But with CIBC launching the first Canadian depositary receipts (CDRs) on the NEO Exchange this past summer, a fractional exposure to an Amazon share can be accessed for about $20.
CDRs are modelled after the massive American depositary receipts market. For Canadians with small accounts, CDRs provide greater accessibility to selected big-name U.S.stocks, and effectively eliminate currency risk through daily hedging back to the Canadian dollar.
CIBC’s offerings began with the Amazon CDR on July 26 and grew to five in August with the addition of CDRs for Alphabet Inc., Apple Inc., Netflix Inc.and Tesla Inc.
Another five began trading on Oct. 5, providing exposure to Microsoft Corp., Walt Disney Co., Facebook Inc., Visa Inc.and PayPal Holdings Inc.
Twenty-four CDRs should be listed by early January, said Elliot Scherer, managing director and head of sales, wealth solutions group, with CIBC’s capital markets division.
Scherer said creating CDRs and obtaining regulatory approval took three years, and that CIBC acted in response to feedback from financial advisors. Many clients, he said, have been hesitant to diversify away from Canadian equities into the U.S.because they don’t want their portfolios to be overly weighted in U.S.dollars. Another deterrent is the upfront cost of 1%–1.5% to convert Canadian cash into greenbacks.
For advisors who build stock portfolios for clients, Scherer added, there was no easy way to manage currency risk if clients preferred investing in U.S.stocks to achieve greater diversification and higher returns, but also believed the U.S.dollar to be valued relatively highly.
Each trading day, the fraction of shares of the underlying U.S.stock that a CDR represents — known as the CDR ratio — is adjusted to take account of exchange-rate fluctuations. If the Canadian dollar appreciates that day, the CDR will represent a larger fraction of the underlying stock.
Conversely, a falling Canadian dollar will lower the fractional exposure.
Protection from foreign-exchange risk comes with a daily hedging cost for clients who invest in CDRs, which is capped at 60 basis points per year.
Otherwise, there’s neither a management fee nor any charge for the depositary, custodial and other administrative services provided by Toronto-based CIBC Mellon Trust Co.
The CDRs’ prospectus gives CIBC wiggle room on fees, stating that new types of fees and expenses may be charged subject to 30 business days’ notice posted on the CDR website.
The other key benefit of CDRs — fractional exposure to U.S.shares — can be useful for advisors who build model portfolios for large clients with the same holdings across multiple accounts, Scherer said. Without CDRs, some U.S.names have to be excluded for smaller accounts such as TFSAs or RESPs.
Dividends will flow through to CDR investors in Canadian dollars, based on current exchange rates and the CDR ratio. While CIBC recommends investors seek their own tax advice, the bank anticipates the tax consequences of owning CDRs will be the same as if the investor held the underlying stock directly.
CDR investors are also entitled to voting rights based on how many CDRs they hold and how much of a share each CDR represents.