Let me introduce you to Canadian Depositary Receipts – CDRs. They provide an accessible alternative to paying hundreds of US dollars for shares of blue-chip American (and foreign) stocks, at an ongoing cost of currency hedging. They trade on either the Toronto Stock Exchange or the Cboe Canada Exchange, just like any stock.
CDRs were pioneered by CIBC five years ago, in July 2021. BMO entered the market in February 2025.
CDRs are similar in concept to the much older and much larger US universe of American Depositary Receipts (ADRs), which provide exposure to non-North American stocks around the world and trade in US dollars.
CDRs and ADRs are created by banks to provide exposure to an underlying stock, while effectively hedging currency exposure.
CIBC now offers more than 130 CDRs, mostly invested in US companies, with close to 20 based on European companies. Though much newer, BMO’s lineup already consists of more than 80 CDRs. Roughly half provide exposure to US companies, with the rest mostly tied to European stocks, along with nine Japan-based CDRs.
Each trading day, the fraction of shares of the underlying stock that a CDR represents – known as the CDR ratio — is adjusted to take account of exchange-rate fluctuations.
If the Canadian dollar appreciates on that day, the CDR will represent a larger fraction of the underlying stock. Conversely, a falling Canadian dollar will lower the fractional exposure.
Because of the fractional approach, it’s much cheaper for Canadian investors to buy a board lot or some other multiple of CDRs, since they generally trade at a much lower price than the underlying stock.
For example, Apple Inc. (NDQ: AAPL) recently traded at US$306 a share. At the same time CIBC’s Apple Inc. CDR (CAD Hedged) (TSX: AAPL) was trading at $43.20 in Canadian dollars.
The price of this greater accessibility is the cost of hedging, which makes CDRs a profitable business for CIBC and BMO.
Unlike single-stock ETFs, CDRs do not charge management fees. They make their money by charging a spread on their currency conversions. CIBC estimates that the cost to investors will be on average up to 0.6% a year.
For its part, BMO – whose lineup has a higher proportion of non-North American CDRs – estimates that the annual cost of currency hedging to be typically less than 0.6% to 0.8% a year.
To put that in context, investing in single-stock CDR is more expensive than holding a diversified index ETF. For instance, BMO MSCI EAFE Hedged to CAD Index ETF (TSX: ZDM) has exposure to nearly 700 stocks and has a management expense ratio of just 0.22%, much lower than the ownership cost of any of its CDRs.
CIBC notes that investors should expect some difference in the annualized return between the CDR and the underlying share, which may be greater than the 0.6% that CIBC typically earns for managing the currency hedge.
CDR returns may be influenced by currency and equity volatility, differences in short-term interest rates between Canada and the corresponding country in which the underlying stock is domiciled, and the frequency and timing of rebalancing the currency hedge.
In return for the currency-hedging costs, there are benefits to retail investors, since the currency transactions are carried out at institutional rates.
If Canadian currency is used to buy a US or overseas stock directly, investors must first convert their loonies into the foreign currency, whether it be US dollars, euros, or Japanese yen. That initial conversion will typically reduce the investor’s purchasing power by 100 basis points or more.
Similarly, when the foreign stock is sold, the investor will again need to convert the proceeds back to Canadian dollars, paying a similar fee of about 1% to 1.5%. The shorter the holding period, the greater the impact of the currency conversions will tend to be. Investing instead in a CDR eliminates these currency-conversion fees at the time of purchase and sale.
In the US, where there are more than 2,000 ADRs based on stocks in about 70 countries, ownership costs can vary significantly. On average, according to an analysis by Fidelity Investments, an international portfolio of ADRs tracking the MSCI EAFE index may incur just under 0.2% of the beginning balance in custodial bank fees each year.
Unlike CDRs, the conversion ratio of ADRs to shares of the underlying security is fixed. An ADR may represent multiple shares, a single share or, alternatively, a fraction of a share. To preserve the conversion ratio, the price of the ADR itself will be adjusted, depending on whether the US dollar is rising or falling in relation to the local currency of the foreign stock. This adjustment process also affects investor returns.
An important aspect for CDR and ADR investors to consider is trading liquidity. This refers to the difference between the bid and ask prices. If the underlying stock is highly liquid, the bid-ask spread for the ADR or CDR is also likely to be fairly narrow.
This was the case on a recent trading day when the bid-ask spread for Microsoft Corp. (NDQ: MSFT), whose shares were trading at about US$503, was seven cents. For Microsoft Corp. CDR (CAD Hedged) (TSX: MSFT), the bid-ask spread was an even narrower two cents, though that was for a CDR trading at C$35.
Dividends declared by the underlying stock are payable to CDR investors in Canadian dollars, with the amount depending on the fraction of a share that the CDR represents.
As with non-Canadian stocks, CDRs may be subject to withholding taxes on dividends, depending on the type of account. CDRs held in non-registered accounts and TFSAs are generally subject to US withholding tax on their dividends, while those held in RRSPs or RRIFs are not. However, as with direct stock holdings, CDRs that are based on US stocks and that are held in non-registered accounts are eligible for a reduced rate of withholding tax, provided a W-8BEN form is submitted to the US tax agency.
Action now: CDRs are suitable for investors who want exposure to specific US or overseas stocks and wish to do so with Canadian dollars. ADRs, which cannot be bought with Canadian currency, are best suited for those who have US dollars to invest and wish to maintain US dollar exposure.
Along with doing their due diligence on the investment merits of the underlying company, CDR investors must be mindful that the ongoing costs of currency hedging exceed that of a diversified equity index ETF investing in US or international stocks. Liquidity is another important consideration. Before deciding to invest, consider the bid-ask spread of the CDR, which in some instances may be wider than that of the underlying stock.
Rudy Luukko is a veteran fundwatcher and investment journalist who has covered ETFs and mutual funds since the early 1990s. A former editor of Morningstar Canada, he has written for numerous general interest, financial and institutional publications and is a current contributor to Investment Executive and Finance et Investissement. A past winner of the PMAC Award for Excellence in Investment Journalism, he now serves on the awards jury. He is a Bachelor of Journalism graduate of Carleton University and holds a Certified Investment Manager (CIM) designation.