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Just over a year ago, CIBC Capital Markets launched Canadian depositary receipts (CDRs), which allow investors to buy fractional shares of big-name U.S. stocks in Canadian dollars on the NEO Exchange. It started with Inc. AMZN-Q (AMZN-NE). Now, there are 30 CDRs available for Canadian investors.

Elliot Scherer, managing director and global head of the wealth solutions group at CIBC Capital Markets, says it’s been a successful first year for the product and the adoption has been “impressive,” especially considering the trying times in the markets.

Globe Advisor spoke recently with Mr. Scherer about CDRs and the firm’s plans for their growth.

How has interest in the CDRs grown over the past year?

We have now more than $1.1-billion in assets, and we’ve seen close to $4.5-billion of value traded on the exchange in these securities. We’re very pleased with those metrics.

We’ve seen adoption from do-it-yourself investors and across all the full-service brokerages in the country.

How are investors and advisors using CDRs in portfolios?

The first way is to increase their U.S. equity exposure without having to take on additional U.S. dollar risk. We’ve heard from our clients that prior to CDRs coming to market, some investors had 100 per cent of their portfolios in Canadian equities … because they didn’t want to convert Canadian dollars to U.S. dollars. So, with CDRs they’re able to access the U.S. market without having … to convert [currency].

The second way is that CDRs have made it easier for investors to dollar-cost average [buying] into companies because of the lower price per share [of about $20 per share]. It’s been especially helpful during this recent market downturn.

The third way we’re hearing is that … some advisors are tactically allocating to CDRs when they believe the U.S. dollar is at a high level [and] might go lower. Then, that’s a good time to use a currency hedged product as opposed to just buying the stock in U.S. dollars.

Why are investors preferring CDRs over investing directly in those stocks?

The number one reason is the cost savings. By not having to convert currency, investors are saving more than 1 per cent when they buy a U.S. share and 1 per cent when they sell the U.S. share. That’s especially helpful for clients who are active in their portfolios.

The second reason is that having a currency hedge allows investors to diversify their portfolios more broadly. It’s letting people reduce their home-country bias and letting them do that with names that they’re comfortable with like Walt Disney Co. DIS-N (DIS-NE) or Starbucks Corp. SBUX-Q (SBUX-NE) or Nike Inc. NKE-N (NKE-NE).

The third reason is that it’s making their life easier. Not having to convert your Canadian dollars to U.S. dollars, simplifies the investing process. Now they only have to make one investment, and one transaction [which is] to buy the CDR.

CIBC Capital Markets added new stocks to the CDR list recently. Why were these stocks selected?

We continue to add names based on investor and client demand. Investors have asked us to broaden our lineup with recognizable blue-chip stocks that pay dividends.

As an example, we added health care stocks Pfizer Inc. PFE-N (PFE-NE) and UnitedHealth Group Inc. UNH-N (UNH-NE). We added a few stocks in the consumer staples section in Coca-Cola Co. KO-N (COLA-NE) and McDonald’s Corp. MCD-N (MCDS-NE). Before we had just had maybe Costco Wholesale COST-Q (COST-NE) or Walmart Inc. WMT-N (WMT-NE).

We’re just giving our investors more choice in sectors. The U.S. has way more choice than the Canadian market, [which] doesn’t have depth in consumer staples or health care. These additions are targeted at our portfolio manager clients who are looking to create portfolios comprised completely of CDRs.

What do you see in the future for the market for this product?

We’re going to continue to listen to our clients and add names based on their feedback. We already have plans for another subsequent follow-on launch that should take our lineup to somewhere in the mid-30s.

We think that by adding more portfolio managers, both discretionary advisors but also institutional money managers, it will add even more trading volume on the NEO Exchange, making this even more of a mainstay in the Canadian investing market.

Do you have a goal for how many CDRs you’d like to have available, or would you like to go international?

My hope is that we’ll continue to grow faster, and I could see maybe getting to 50 [CDRs] by this time next year.

International [stocks] are something that we have received interest on from clients [and] something that we are beginning our diligence on.

This interview had been edited and condensed.

– Gillian Livingston, special to The Globe and Mail

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- Globe Advisor Staff

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