What are the key features?
Notional currency hedge
Lower investment price
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.
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