It took decades for exchange-traded funds to become a force in investing.
Canadian Depositary Receipts seem to be on a faster track than ETFs. Introduced in 2021 by Canadian Imperial Bank of Commerce, the 35 CDR stocks listed on the NEO Exchange had a combined market capitalization of close to $1.4-billion as of late last week.
CDRs offer a convenient, cost-effective way to buy big U.S. tech stocks like Amazon AMZN-NE and Tesla TSLA-NE, financials like JPMorgan JPM-NE, drug companies like Pfizer PFE-NE, dividend stars like Procter & Gamble PG-NE and many others. A big reason to consider a CDR instead of buying shares on a U.S. exchange is that your Canadian dollars are converted into U.S. currency at a favourable wholesale rate that beats what your broker would use. Two other reasons to consider a CDR instead of buying shares on U.S. exchange: CDRs are priced at a fraction of the corresponding U.S. stock, and they’re currency hedged. That means you make what the U.S.-listed shares make, without distortions caused by currency fluctuations.
As with any new investing product, there’s a get-to-know-you period with CDRs. Reader questions have been piling up, so I referred them to the people at the NEO Exchange for answers.
Q: There is a cost to convert Canadian dollars and to do the hedging. How is that cost recouped? And by whom?
A: NEO said the hedging fee is capped at 0.5 of a percentage point annually; there is no other charge associated with the product itself. The CDR website adds: “While CDRs do not have any ongoing management fees, CIBC earns revenue for providing the notional currency hedge.” Think of the fee as being baked into the product, similar to ETFs. That means the returns you see are after fees.
Q: How do brokers handle currency exchange rates when clients are buying U.S. stocks, and how does that compare to CDRs?
A: NEO says the cost of converting Canadian dollars into U.S. dollars can be 1 to 2 per cent. Institutional rates fees are inherently less because you’re usually moving large amounts for a small group of clients. In the DIY investor channel, smaller amounts are typically moved across a much larger audience.
Q: How are CDR prices calculated, and what are risks/downside to holding them vs the underlying U.S. version?
A: NEO says CDRs are a fractionalization of the underlying stock. Example: UnitedHealth Group CDR UNH-NE traded in the $24.65 range in the middle of last week, while the NYSE-listed shares were around US$505. NEO points out that there are two issues to be concerned with when buying a U.S. stock – the performance of the company issuing the shares, and the Canada-U.S. exchange rate. Hedging eliminates the forex aspect.
Q: Are they best held in a specific account type, ie TFSA?
A: According to NEO, similar rules would apply for holding the underlying stock directly or the CDR in registered accounts. There is no differentiator between owning the U.S. stock directly and owning the CDR. Here’s a tax guide for dividend investors that includes U.S. stocks.
Q: Do CDRs pay dividends?
A: NEO says dividends are paid in Canadian dollars, passed through at the same time of distribution of the U.S.-dollar dividends for the underlying stock. You can track CDR dividend notifications here.
Q: Where can one find a complete list of CDRs traded on NEO?
A: There’s a complete roster on the NEO website.
– Rob Carrick, personal finance columnist
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Stocks to ponder
Algonquin Power and Utilities Corp. AQN-T The beleaguered stock will host an investor call this week, and shares have risen nearly 10 per cent over the last few days in hopes company management will have something encouraging to say. Could clarity on Algonquin’s dividend, which is surely coming, further boost shares? David Berman has some thoughts.
Constellation Software Inc. CSU-T The longest-running winning streak on the Toronto Stock Exchange – arguably the greatest run in the history of Canadian stocks – is dead. After 15 consecutive calendar years of positive returns, Constellation Software put up a negative year for the first time in its history. Chalk it up to the broader pullback in growth stocks and surging interest rates. But is a rebound coming given the company continues to snap up smaller software companies at a torrid pace – a strategy that has worked incredibly well for years? Tim Shufelt reports.
The Rundown
If you think 2022 was rough on investors, the new year may be worse
Gordon Pape thinks the year ahead will be a challenging one for investors, especially in the first half. Still, he predicts overall gains for the S&P 500 and Canadian benchmark index by year-end and sees dividend-rich interest-sensitive stocks rebounding. He also believes bonds will stabilize. Here’s a look at his predictions as well as a recap on how his 2022 forecasts worked out.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Trustee invests over $350,000 in this REIT with a nearly 30% upside forecast
What the charts say: Bullish on Restaurant Brands International
Rebounding emerging market stocks pass ‘bull market’ threshold
Globe Advisor
Which of the Big Three telecoms are a good bet as a ‘recession-resistant’ defensive investment?
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Ask Globe Investor
Question: I have a bit more than a million in retirement savings. I’m 64 years old. I’ve been watching Dividend 15 Split Corp. (DFN-T) with a 15-per-cent monthly dividend payout. Can you think of a reason why I shouldn’t just put everything into that and receive a monthly dividend in excess of $12,500? – Marc L., PEI
Answer: Sounds too good to be true, doesn’t it? So, let’s take a closer look. This is a split corporation based on the S&P/TSX 60 Index. It’s been around for many years and is well-managed. The shares pay a monthly distribution of 10 cents ($1.20 a year), which works out to a yield of 15.9 per cent at a recent price of $7.53. What could go wrong?
The share price, that’s what. Earlier this year, the stock hit a 12-month high of $8.83. If you’d had the misfortune to buy at that point, your million dollars would now be worth about $853,000. Yes, you’d have the dividends, but your capital would have taken a hit.
In short, it’s not risk free. Weigh the pros and cons carefully. The advice I always offer in these circumstances is don’t put all your money in one place.
-Gordon Pape (send questions to gordonpape@hotmail.com and write Globe Question in the subject line)
What’s up in the days ahead
Gordon Pape will tell us about three stocks that he thinks will outperform the market in 2023. And The Contra Guys have some thoughts on Bed Bath & Beyond.
Click here to see the Globe Investor earnings and economic news calendar.
Your chance to participate
In an upcoming interview, the Globe and Mail’s investment reporter, Jennifer Dowty, will be speaking with TD’s head of asset allocation and derivatives Michael Craig. If you have a question for Mr. Craig, email jdowty@globeandmail.com and indicate “interview question” in the subject line. We regret that not all questions may be fielded to our guest due to limited time.
Compiled by Globe Investor Staff