Canadian Imperial Bank of Commerce is launching Canada’s first depositary receipts linked to U.S. stocks, creating a new way for retail investors to trade in large American companies without the foreign currency risk inherent in buying those shares directly.
CIBC’s first batch of Canadian depositary receipts (CDRs) will be tied to Amazon.com Inc.’s stock and is expected to start trading on Tuesday on the Neo Exchange. The CDRs are modelled after U.S. depositary receipts (ADRs), a trillion-dollar market that has existed for decades south of the border as an alternative way to access foreign companies’ stocks, but which had no direct equivalent in Canada.
Depositary receipts are a financial instrument issued by banks that represent a certain number of shares in a company that is listed and traded abroad, allowing domestic investors to have exposure to foreign stocks without buying them directly on a foreign stock exchange. With the popularity of do-it-yourself investing surging in the pandemic and broad-based interest in prominent U.S. stocks, especially in the technology sector, CDRs can give Canadian investors a low-cost way to trade in U.S. stocks that sidesteps potential drawbacks from fluctuating currencies.
The key feature of the new CDRs is that they have a built-in hedge against changing foreign exchange rates, eliminating the risk that a Canadian investor’s return on a U.S. stock will be eaten away by moves in the relative value of the two countries’ dollars.
Many Canadian investment portfolios are loaded with domestic equities, and CDRs offer an option to diversify those holdings, but to “own the company, not the currency,” Elliot Scherer, managing director in the wealth solutions group at CIBC World Markets Inc., said in an interview.
As one recent example, the Canadian dollar strengthened by more than 10 per cent relative to the U.S. dollar between July, 2020, and May this year, weakening the returns some investors earned on U.S. stocks.
“If you’re a Canadian and you’re investing in U.S. shares during that period, you would have been pretty disappointed. You’d see the S&P 500 hitting new highs all the time, and yet you’re not seeing that full gain in the Canadian-dollar return in your portfolio,” Mr. Scherer said. “Investment advisers would often vent about this issue to my team.”
It took CIBC three years to develop and launch CDRs, with a team that included traders, engineers and a lawyer. The bank also had to get approval from the Ontario Securities Commission. And it chose the relatively young Neo Exchange as its listing partner for its experience in the exchange-traded fund market and its reputation as fast-moving and open to new ideas, Mr. Scherer said.
The CDRs also tap into another growing trend: trading in fractional shares, which makes companies with high share prices more accessible to everyday investors. The CDRs will initially be priced at $20 each, which would allow a customer to effectively own a small slice of a share in Amazon.com, which cost US$3,656.64 as of the market close on Friday.
Before long, CIBC plans to introduce CDRs tied to Alphabet Inc. , the parent company of Google, as well as Apple Inc. , Netflix Inc. and Tesla Inc. . Over the coming months, the bank is set to expand its CDR listings to include other prominent S&P 500 companies.
“It’s the right moment,” Jos Schmitt, president and chief executive officer of Neo Group, said in an interview. “CIBC found a great gap and opportunity in the market.”
The CDRs trade in Canadian dollars, and CIBC adjusts the ratio of depositary receipts to company shares daily to account for changes in currency values. The bank charges no management fees for CDRs, but earns small fees from the foreign exchange transactions it makes in the background to manage the currency hedge for investors. The maximum spread between rates that CIBC can collect from those transactions is capped at 60 basis points on an annualized basis. CIBC Mellon will act as the custodian bank.
Mr. Scherer and Mr. Schmitt expect early interest in CDRs to come mostly from do-it-yourself investors and investment advisers. But they also anticipate there could be demand from high net worth investors, small and medium-sized institutional investors and family offices.
If CIBC’s CDRs are popular, the bank anticipates that competitors will respond. Now that CIBC has laid the regulatory groundwork, other banks could offer their own CDRs. And online rival Wealthsimple recently started allowing clients of its trading product to buy fractional shares in certain Canadian and U.S. companies, including the same five stocks included in CIBC’s launch of CDRs.
“I think you have to be realistic. When someone comes with a good and unique idea, competition is going to follow,” Mr. Schmitt said.
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