What is a Canadian Depositary Receipt (CDR)?

Each CDR represents a portion of a share of the underlying global company’s stock; the specific number of shares that each CDR represents is called the CDR Ratio. For example, if the CDR Ratio is 0.20, this means that an investor would have to purchase 5 CDRs to obtain the proportionate exposure to 1 underlying share. The CDR Ratio is determined after market close each trading day, and becomes the CDR Ratio for the next trading day.

When CDRs are initially listed on an exchange, they are priced at a fraction of the underlying share price. For example, when the first CDR was launched in 2021 for Amazon stock (AMZN), it was priced at approximately C$20, while the share price at that time was US$3560. Shares of many of the largest companies in the world trade at high prices, and CDRs make investing in these companies more accessible to many investors.

There are two key benefits of CDRs trading in Canadian dollars.

1. You can avoid currency conversion fees when accessing global companies.
2. You can minimize the impact of foreign currency risk on your returns.

Here’s how. 

First, since CDRs trade in Canadian dollars, there’s no need to convert Canadian dollars to a foreign currency to make the purchase, which allows you to avoid paying currency conversion fees. In addition, you might also avoid the time and effort necessary to analyze currency trends if you’re an investor who’s focused on getting the most favourable exchange rate.

Second, if you invest in a foreign company using foreign currency to buy the stock, your total return on that investment will be impacted by the volatility in both the share price and the foreign currency exchange rate. Because CDRs have an embedded notional currency hedge, your CDR return depends on the performance of the underlying foreign company, regardless of fluctuations in the foreign currency exchange rate. This means the currency risk associated with foreign investing is minimized.

That said, while the built-in currency hedge is designed to reduce the impact of exchange-rate movements, it also means investors generally won’t benefit from favourable currency movements to the same extent. In addition, maintaining the notional currency hedge has a cost that will slightly reduce returns over time.

To explain how the built-in currency hedge minimizes foreign currency risk and the effects on your return, we’ll refer to hypothetically priced shares of:

Apple Inc. stock in U.S. dollars — Ticker: AAPL

versus 

Apple Inc. CDRs in Canadian dollars — CDR Ticker: AAPL 

If the price of AAPL stock increased by 40% on a C$1,000 investment, that 40% return will be impacted by the USD-CAD exchange because AAPL is not currency hedged. A 10% decrease in USD-CAD exchange will negatively impact the 40% return and bring the investment’s total value to C$1,260. Conversely, a 10% increase in the USD-CAD exchange rate will boost the 40% return, bringing the investment’s total value to C$1,540.

Since CDRs are currency hedged, they are designed to minimize the impact from changes in the USD/CAD exchange rate. Therefore, as this diagram shows, if AAPL stock hypothetically increased by 40%, the $1,000 would become approximately C$1,400 with a CDR.

Now that we understand how the notional currency hedge works, let's explain how it impacts the CDR Ratio on a daily basis. Let’s illustrate by referring to CDRs that represent shares of a U.S. company. If the Canadian dollar increases in value compared to U.S. dollars, then the notional hedge protects the CDR investor, and the CDR Ratio is adjusted to represent a larger number of underlying shares for each CDR. Conversely, if the Canadian dollar decreases in value compared to the U.S. dollar, the CDR Ratio is adjusted to represent a smaller number of underlying shares for each CDR.

If the underlying shares split or consolidate, the CDR ratio will be adjusted accordingly to reflect that split or consolidation.

Yes! Any dividends paid on the shares of the underlying company will be paid to CDR investors in Canadian dollars. Dividends are subject to withholding tax in the same manner as if the underlying shares were directly held by the investor.

Yes! Investors in CIBC CDRs may submit voting instructions through CIBC’s Corporate Actions page on the CDR website at cdr.cibc.com. CIBC, as the Depositary, will then use its commercially reasonable best efforts to vote the underlying shares in accordance with the investors’ instructions. The number of shares each investor can vote will depend on how many CDRs they hold and how many shares each CDR reflects, based on the CDR Ratio. Other issuers of CDRs may have different voting arrangements, so be sure to check their websites.

CDR liquidity is linked to the trading volume of the underlying global shares, not the trading volume of the CDR itself. Similar to the trading mechanics for exchange-traded funds (ETFs), it’s important to consider the volume traded on the underlying company’s shares to gauge the potential liquidity of the CDR. When created, CDRs typically reference only highly liquid global shares that trade on major exchanges around the world.

For CDRs that track companies outside of the U.S., liquidity is expected to be highest if and when the foreign market hours overlap with Canadian market hours. For example, bid/ask spreads for CDRs tracking European companies will generally be the tightest between 9:30 am and 11:30 am ET.

Best practices when buying or selling CDRs are similar to those for ETFs. You might consider placing a limit order, which specifies the price you’ll be willing to buy or sell the CDR. You also have the option to place a market order to buy or sell a CDR. Market orders are filled as soon as possible at the currently available price quoted on the Canadian stock exchange.

Finally, as with any stock investment, remember that the value of a CDR can rise or fall based on the performance of the underlying company.

While CDRs don’t have any ongoing management fees, CDR issuers typically earn revenue for providing the notional currency hedge.

CDRs trade just like stocks and ETFs on a Canadian exchange. Simply log onto your Investor’s Edge account and go to Trade Stocks and ETFs. You can invest in CDRs in some of the world's biggest companies, like Nvidia, Meta Platforms, Amazon and more.

If you found this article helpful, check out Your guide to trading options on CDRs.