The U.S. dollar has weakened a bit from the peak of about US$1 to CA$1.38 in March. However, the current foreign exchange of US$1 to CAD$1.3367 isn’t exactly cheap either. Plus, our banks charge a fee for currency conversion. Doing a quick check at writing, I find that my bank charges about 0.86% to 1.68% for conversion amounts between CAD$1 and below CAD$100,000.
If you find it painful to convert your Canadian dollars to U.S. dollars to invest in U.S. stocks, I would like to introduce you to Canadian Depository Receipts (CDRs) as another option. CDRs have a currency hedge built in. It provides Canadian investors access to a basket of global companies listed on U.S. exchanges.
Researching for CDRs
You can invest in CDRs like you invest in the respective U.S. stocks. The idea is that CDRs will move in accordance with the respective U.S. stocks except for the foreign exchange rate fluctuations. So, it reduces the foreign exchange risk.
Researching for CDRs is the same as researching for the respective U.S. stocks. If you find a U.S. stock to be a wonderful business and is undervalued, it means the CDR could be a good buy, too.
Currently, there are 41 CDRs to choose from that trade on the Canadian NEO Exchange, including AbbVie, Advanced Micro Devices, Apple, Berkshire Hathaway, Citigroup (NYSE: C), Chevron, Coca-Cola, Home Depot, Honeywell, McDonald’s, Pfizer, etc.
For the full list of the CDRs and more information about the subject, search the internet for the “CDR Directory,” which can be found on the CIBC website. There are no ongoing management fees for investors of CDRs. However, we all know that there’s no free lunch. CIBC does provide the notional currency hedge based on a foreign exchange forward rate that will on average have a spread of less than 0.50% per year.
The liquidity, the ease of converting your stocks to cash, is important for many investors. The liquidity of a CDR is largely based on the trading volume of the underlying U.S. stock.
The CIBC website explains that “each CDR is economically equivalent to owning a number of shares of a global company’s stock. The specific number of shares that each CDR represents is called the ‘CDR ratio.’ The CDR ratio is published on the ‘CDR Directory.'”
Undervalued stocks
Within the CDRs, the banks, including Citigroup, appear to be particularly undervalued, as there has been increased uncertainty in the macro environment from higher inflation and interest rates compared to the recent history. In fact, both the United States and Canada are expected to experience a recession this year. However, Citigroup operates in almost 100 countries.
At US$48.45 per share, Citigroup stock trades at a discount of about 16%, as suggested by the analyst consensus price target. The large-cap stock also offers a dividend yield of approximately 4.2%.
Most CDRs have the same trading symbol as on the U.S. exchange. However, Citigroup’s symbol is notably “CITI” on the NEO exchange.
CDRs: Qualified investments that pay same dividends as U.S. counterparts
As the CIBC website indicates, Canadian Depository Receipts are qualified investments that can be held in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds, Registered Disability Savings Plans, Registered Education Savings Plans (RESPs), Deferred Profit Sharing Plans, and Tax-Free Savings Accounts (TFSAs). The CDR shares pay the same dividends as their U.S. counterparts and are subject to the same withholding taxes on the foreign dividends.
For instance, there’s a 15% withholding tax on qualified U.S. dividends received in the RESPs, TFSAs, and non-registered accounts. Holding CDRs that pay qualified U.S. dividends in RRSPs would result in the full dividend being received just like if you held the respective U.S. shares. As you probably know, U.S. dividends received in your non-registered accounts will ultimately be taxed at your marginal tax rate.
Canadian investor takeaway
Canadian Depository Receipts are an option for Canadians to invest in global businesses listed on the U.S. exchanges with no currency conversion needed. That is, you would use the Canadian currency to invest in U.S. stocks on the Canadian NEO Exchange. CDRs could particularly be a great option when the U.S. dollar is strong against the Canadian dollar.
