Depository receipts allow investors of a country to access shares of foreign-listed companies. Similarly, the Canadian Depository Receipts enable Canadian investors to purchase shares of some of the most popular, publicly listed American companies.
CDRs were introduced to the Canadian investment market in 2021 and are currently traded on the Cboe Canada exchange, previously NEO Exchange. A unique feature, sometimes the selling point of CDRs, is that they are traded in Canadian dollars, thus skipping the need for currency conversion when investing in US companies. It has since become a convenient method for investors looking to diversify beyond domestic markets.
CDRs are a viable investment for many Canadian investors for many reasons:
- Bypassing currency conversion: One of the most valued features of CDRs is the ability for investors to purchase American stocks in Canadian dollars, bypassing the need for currency conversion under conventional practices when trading in foreign stocks. By transacting in Canadian dollars, investors can reduce transaction costs and eliminate the complexities associated with managing multiple currency positions.
- Currency hedging: Investing in Canadian Depository Receipts (CDRs) presents an effective strategy for minimizing the impact of currency fluctuations on investment portfolios. CDRs expose Canadian investors to foreign companies' stocks denominated in Canadian dollars, thus shielding investors from direct currency exposure. When investors purchase CDRs, they effectively delegate the currency risk management to the issuing institution, which hedges against currency fluctuations.
- Diversification: CDRs offer Canadian investors the opportunity to diversify their portfolios by gaining exposure to the lucrative US market that currently represents over 60 % of the global stock market.
- Convenience: Investing in CDRs eliminates the need for Canadian investors to open international brokerage accounts or deal with foreign exchanges, making it a more accessible option for those seeking international exposure.
- Access to Global Brands: CDRs enable Canadian investors to invest in globally recognized companies that may not be listed on Canadian stock exchanges.
While Canadian Depository Receipts offer numerous benefits, investors should also be aware of certain considerations:
- Foreign Exchange Risk: CDRs are hedged against changes in the USD value in relation to the CAD. Thus, a rise in the valuation of the USD could eat into your profits.
- Regulatory Risks: Investors should familiarize themselves with the regulatory environment of the foreign country where the underlying company is based, as regulatory changes can affect the value of CDRs.
- Tax Implications: Investors should consult with tax professionals to understand the tax implications of investing in CDRs, including withholding taxes on dividends and capital gains taxes. Under the tax treaty between Canada and the US, Canadians get credit for the tax paid on dividends from US-listed companies withheld at source by the IRS. This ensures Canadian investors in US stocks are not double taxed on dividends.
Canadian Depository Receipts offer Canadian investors an efficient and accessible means to diversify their portfolios and gain exposure to international markets. With the convenience of trading on Canadian stock exchanges and the potential benefits of diversification and currency risk management, CDRs serve as a valuable tool for investors seeking to navigate the complexities of global investing.
?? Have you previously considered investing in Canadian Depository Receipts (CDRs) as a way to access foreign-listed companies? Why or why not?