What are ADRs?
ADRs are a way to easily access global US dollar stocks traded on US exchanges. According to Seeking Alpha, the top 10 most actively traded ADRs are China’s Baidu (Bidu/Nasdaq), UK BP (BP/NYSE), Brazilian Vale (Vale/NYSE) and Swiss Novartis (NVS/NYSE). The first ADR was introduced in 1927 by JP Morgan for British retailer Selfridges.
Dividends paid by ADRs are in US dollars. Canadians can, of course, buy ADRs, just as they can buy stocks or exchange-traded funds (ETFs) traded on US exchanges. But for that they have to exchange their Canadian dollar for US dollars. And if they plan to retire in Canada, they will have to pay again to repatriate that money.
What are CDRs?
CDRs, on the other hand, offer Canadian investors a way to buy popular U.S. stocks — especially the FAANG technology stocks — in Canadian dollars, trading on the Canadian NEO exchange. (FAANG stands for Facebook, Amazon, Netflix and Alphabet, formerly Google.)
You can find more information at CIBC, which has developed CDRs. As you might expect, the Canadian bank has a positive spin on CDRs, saying it offers “same stocks, lower risk” with a “built-in currency hedge” while offering “fractional ownership, easier diversification.” His slogan: “Own the business, not the currency.”
A video from CIBC shows that while Canadian stocks represent only 3.1% of the world’s stock market capitalization, most Canadians have 59% of their investment in Canadian stocks. To the extent that foreign stocks, especially US ones, have generated stronger returns, Canadians are arguably missing something. It suggests one reason for this is foreign exchange.
When CDRs are good for a portfolio
CDRs may especially appeal to younger investors with limited assets. CDRs provide a way to access expensive stocks in cheaper Canadian dollar versions. For example, a single Amazon ordinary share (AMZN) currently costs a whopping US$3,200. Compare that to the CDR version AMZN.NE, which costs just $20 CAD per share. In general, the CDR version has the same ticker as the underlying US stock, so be careful when you buy to indicate which version you want to buy.
If the US company pays a dividend, so will the CDR. Since most Canadian retirees spend their golden years in Canada, they can diversify outside of Canada’s resource and financially concentrated market, and still have their assets and dividends in Canadian dollars.
Currency Value and Exchange Rates
“If you don’t want to worry about currency exchange and just want to keep your portfolio in Canadian dollars, then I believe CDRs are a good option,” Bob Lai wrote in his introductory CDR blog on Tawcan.
This post CDRs vs. US Blue Chip Stocks: Which Makes More Sense for Canadian Investors
was original published at “https://www.moneysense.ca/columns/retired-money/cdrs-vs-adrs-canadian-depositary-receipts/”