What is a Canadian Depositary Receipt?

A Canadian Depositary Receipt (CDR) is a type of investment that allows Canadian investors to purchase shares of global companies that are normally listed on foreign exchanges. CDRs are listed on a Canadian exchange and priced in Canadian dollars and have a number of features that can make them attractive to Canadian investors:

Avoiding currency conversion: A CDR allows a Canadian investor to purchase American stocks with Canadian dollars, on a Canadian exchange. This can help reduce the costs of currency conversion when buying American stocks.

Currency hedging: CDRs allow investors to capture the performance of the underlying company and to strip away the impact on performance of currency fluctuations between the Canadian dollar and the U.S. dollar.

Fractional investment: Some stock prices can be in the thousands of dollars per share range. CDRs allow investors to purchase smaller units of these shares. When they are first set up, many shares of the underlying stock are bought and then divided up into CDR units priced at $20. This allows more investors to make purchases of stocks that might otherwise be unattainable.

Dividend and voting rights retained: CDR investors retain the same proportional right to dividends and voting. Additionally, any dividends are also paid in Canadian dollars.

Easy to buy and sell: CDRs trade just like other shares on Canadian exchanges.

Canadian Depositary Receipts are relatively new, but are close cousins to the American Depositary Receipt (ADR) which were first established in 1927. ADRs allow for U.S. investors to get exposure to public companies listed around the world without being subject to foreign currency fluctuations. ADRs are only available on U.S. exchanges.

A Global Depositary Receipt (GDR) is generally issued in multiple countries, while depositary receipts with a specific domicile in its name (like a Canadian Depositary Receipt or an American Depositary Receipt) are only issued in those specific countries.

How do CDRs work?

A Canadian issuer will buy up many shares of the U.S. listed stocks, and then repackage that pool into smaller units on a Canadian exchange (the CBOE Canada exchange). The issuer also maintains the currency-hedged pricing of the units in exchange for a fee to maintain the hedge. Other than that, a CDR essentially looks and behaves like any other stock you would buy on a Canadian exchange. You can receive dividends and you have the voting rights similar to someone holding the U.S. listed stock.

There are over 40 CDRs available to Canadian investors and include names such as Alphabet, Amazon, Apple, Berkshire Hathaway, Coca-Cola, IBM, Meta, Microsoft, Netflix, Nvidia, Tesla, and more.

Let’s suppose a Canadian investor would like to buy around a CAD$250 stake in Netflix, an American company whose stock is listed on the NASDAQ exchange. If the current price of Netflix stock is US$432.36 per share, they would not be able to purchase one single share unless they had the ability to buy fractional shares. A CDR for Netflix could be one way for this investor to do just this. CDRs are available on the CBOE Canada exchange and there is a CDR for Netflix with the ticker symbol and description NFLX:CA - NETFLIX CDR (CAD HEDGED). The price per share is significantly lower than for Netflix’s stock listed on the NASDAQ. The CDR version could be around CAD$17. For our Canadian investor who wants CAD$250 in exposure to Netflix, they can divide $250 by $17 to get 14.7. Rounding down to a whole number, that means they could place an order for 14 shares and have an exposure of CAD$238 to Netflix’s stock. Normal trading commissions would apply.

Conversely, if they decided to buy a single share of Netflix stock listed in the U.S., they would first need to ensure that they either had U.S. funds in their account or they would need to incur costs for converting their Canadian funds into U.S. funds first. If the current exchange rate was US$1 to CAD$1.3671, then the would have to convert around CAD$600 in order to purchase one share of Netflix in the U.S. This might be more exposure than they want. In this case a CDR not only allowed them to get the exposure they wanted, they avoided currency conversion costs. In addition, going forward, their investment performance will not be affected by changes in the U.S. dollar to Canadian dollar exchange rate.

How does currency hedging affect performance?

If a Canadian normally buys an American company’s stock listed on a U.S. exchange, there are two components to the investment’s performance: 1. The performance of the stock, and 2. The performance of the U.S. dollar versus the Canadian dollar.

For example, let’s look at a situation where the stock itself increases in price by 10% and then consider the impact of the U.S. dollar increasing 5% in value relative to the Canadian dollar, and then vice versa.

Scenario 1: The U.S. dollar increases in value relative to the Canadian dollar

              U.S. listed stock performance:                                       +10%

              U.S. dollar increase versus Canadian dollar:                 +5%

The formula for calculating the performance in Canadian dollar terms would be as follows:

(1 + 0.1) * (1 + 0.05) − 1 = 0.155 = +15.5%

The 0.1 represents the +10% return of the fund, and the 0.05 represents the +5% performance of the U.S. dollar.

Scenario 2: The Canadian dollar increases in value relative to the U.S. dollar

              U.S. listed stock performance:                                        +10%

              U.S. dollar decrease versus Canadian dollar:                  -5%

In this case we get:

(1 + 0.1) * (1 − 0.05) − 1 = 0.045 = +4.5%

However, if the investor bought a currency-hedged investment, such as a CDR, in both scenarios they would experience a +10% return, less the cost of the currency hedge. CDRs generally have a currency hedging fee of 0.50% per year or less, according to the issuer.

In effect, by buying a CDR you are isolating the performance of the company itself and stripping out the impact of currency fluctuations on performance.

Costs of CDRs

Currency hedging costs: The annual currency hedging fee is typically under 0.50% per year.

Bid-Ask spreads: The bid-ask spreads of CDRs tend to be larger than for the underlying stocks. You may want to consider using limit orders when trading CDRs.

Interested in trading CDRs? 

Buy and sell CDRs with BMO InvestorLine. To help with your research, access our CDR directory for key insights, details on underlying securities, symbols and their country of origin.

Important Note: It’s always wise to thoroughly research any investment, including CDRs, before committing funds. We recommend consulting with a qualified financial advisor to determine if CDRs align with your overall investment strategy.

Whether you’re beginner or an experienced investor, you can find more articles and investing guides at BMO’s Investment Learning Centre.