Thanks for your question.

CIBC’s Canadian Depository Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each. CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia currently trades for $887.33 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want.

CDRs represent shares of U.S. or other foreign companies but are traded on a Canadian stock exchange in Canadian dollars.

CIBC currently offers 50 CDRs that trade on the NEO Exchange. Here’s just a few of them (including Pfizer):

Alphabet Canadian Depositary Receipts – GOOG

Amazon.com Canadian Depositary Receipts – AMZN

Apple Canadian Depositary Receipts – AAPL

Eli Lilly Canadian Depositary Receipts – LLY

Meta Platforms Canadian Depositary Receipts – META

Microsoft Canadian Depositary Receipts – MSFT

Netflix Canadian Depositary Receipts – NFLX

Nvidia Canadian Depositary Receipts – NVDA

PayPal Canadian Depositary Receipts – PYPL

Pfizer Canadian Depositary Receipts – PFE

Starbucks Canadian Depositary Receipts – SBUX

Tesla Canadian Depositary Receipts – TSLA

Visa Canadian Depositary Receipts – VISA

Walt Disney Canadian Depositary Receipts – DIS

The NEO exchange, which is recognized by the Ontario Securities Commission, is owned by Aequitas Innovations, a company now owned by Cboe Global Markets.

An individual CDR is not intended to equal the cost of a single share. Instead, each new CDR started out trading at around $20 Cdn., representing ownership of one or more shares and/or a fraction of one share of the underlying stock, depending on the stock’s price. As mentioned, shares of many of the largest companies in the world trade at significantly higher prices, although some trade much lower as well.

Dividends paid on the shares underlying CDRs will be passed through to CDR investors in Canadian dollars when received, based on the current foreign exchange rates.

The main negative about CDRs is the fees.

CIBC charges no direct management fees for CDRs. However, the CDRs are hedged against movements of the U.S. dollar relative to the Canadian dollar. That means the Canadian-dollar value of the CDRs rises and falls solely with the movements of the underlying stock.

Of course, hedging has costs—and hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, that reduces any gain you’d otherwise enjoy, or expands any loss.

CIBC makes money hedging the CDRs—and that costs investors 0.60% of the value of their CDR holdings per year. It’s revenue for the bank, but of minimal value for investors in our view. In addition, if you wind up holding the CDR for a lengthy period, the foreign-exchange differential may fluctuate widely during your ownership, but end up not far from where it was when you bought the CDR.

At the same time, CIBC earns currency-conversion commissions when investors buy and sell the CDRs, or on dividends paid to holders. But rather than the 1.5%, say, that most retail investors pay, CDR investors will pay “institutional rates,” which may be lower.

We see no need for hedging against U.S. dollar exposure. In fact, we see U.S. dollar exposure as a long-term plus—a valuable form of diversification.

We don’t recommend CDRs. The built-in foreign exchange hedge of CDRs is only a plus if you feel strongly that the U.S. dollar is headed downward in relation to the Canadian dollar. But if that’s the case, why buy a U.S. stock?