What is a Canadian Depositary Receipt (CDR)?

CDRs, or Canadian Depositary Receipts, represent shares of global companies but are traded in Canadian dollars on a Canadian stock exchange – making it easy for you to get exposure to the world’s biggest companies.

CDRs are a lot like traditional stocks; they trade on an exchange, flow through dividends and have voting rights. What makes CDRs different is the built-in notional currency hedge which effectively eliminates the impact of foreign exchange fluctuations between the currency of the global security vs. the Canadian dollar. This means your returns depend on the performance of the underlying shares, effectively eliminating currency fluctuations.

New to Canada, CDRs are a Canadian take on American Depositary Receipts (ADRs), which were first introduced in 1927. Today, the global Depositary Receipts (DRs) market is now close to US$1 trillion in assets.¹

What are the key features?

Notional currency hedge

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 automatically adjusted on a daily basis to account for the notional currency hedge. If the Canadian dollar increases in value compared to the U.S. dollar (or other relevant foreign currency), the CDR Ratio for each CDR is adjusted to represent a larger number of underlying shares. Conversely, if the Canadian dollar decreases in value compared to the U.S. dollar, the CDR Ratio for each CDR is adjusted to represent a smaller number of underlying shares.

Lower investment price

The initial price per CDR will be approximately $20. In comparison, shares of many of the largest companies in the world trade at prices significantly higher. For example, as of June 30, 2021, AMZN was trading at US$3440 per share on the NASDAQ. This means CDRs make investing in these companies more accessible to the average retail investor, by effectively permitting the investor to purchase a small percentage of a share rather than an entire share.

Dividends

Dividends paid on the reference shares underlying CDRs will be passed through to CDR investors in Canadian dollars when received based on the current foreign exchange rates.

Voting rights

CDR investors will be entitled to vote the underlying securities shares. The number of shares each investor can vote will depend on how many CDRs they hold and how many shares each CDR reflects (CDR Ratio).

Liquidity

Many investors know that the liquidity of an individual stock is based solely on its average daily volume. But that’s not the case with CDRs.

Similar to the trading mechanics of exchange traded funds (ETFs), the volume traded of the underlying security is a significant indicator of the CDR’s liquidity.

Generally speaking, the higher the trading volume of the underlying security, the higher the degree of liquidity of the corresponding CDR. Liquidity can be observed by comparing the difference between the buying and selling prices of the CDR in the market. This difference is referred to as the bid-ask spread. If the bid-ask spread of the CDR is smaller, this generally means that the underlying security also has a smaller bid-ask spread and is more liquid. It is possible for a CDR to have low daily trading volumes but still be liquid, with a tight bid-ask spread. CDRs will reference highly liquid global shares that trade on major exchanges around the world.

Best practices when buying or selling CDRs are similar to those for ETFs – including that investors may wish to consider placing a limit order, which specifies the price at which you will buy or sell, in contrast to a market order, which will attempt to complete your trade as soon as possible at the current price.

Fees

CDRs don’t have any ongoing management fees.

Tax

Every investor must always seek their own tax advice regarding their investments, including CDRs. It’s the expectation that the Canadian tax consequences of owning CDRs will be the same as if the investor held the underlying security directly. Taxes may be withheld by the CDR company’s local government. For example, for an underlying security issued out of the U.S., an investor may be subject to U.S. withholding taxes. For this purpose, an investor should provide their securities dealer an applicable U.S. Internal Revenue Service Form W-8 (i.e. Form W-8BEN for individuals, W-8BEN-E for entities, etc.).

Understanding CDRs through an apples to apples comparison²

The diagram below compares a Canadian investor’s hypothetical Canadian dollar returns from purchasing Apple Inc. shares in U.S. dollars to Apple CDRs on a Canadian Exchange in Canadian dollars. With CDRs, changes in the exchange rate don’t impact your Canadian dollar returns due to the notional currency hedge. This allows you to make a true apples-to-apples investment decision.