A new investing innovation called the Canadian depositary receipt is going well enough to double the size of the franchise.
CDRs, offered by Canadian Imperial Bank of Commerce, represent a fractional piece of an underlying U.S. stock. The newest round of CDRs, listed in the NEO Exchange, are Microsoft Corp. (MSFT-NE), Walt Disney Co. (DIS-NE), Visa Inc. (VISA-NE), Facebook Inc. (FACE-NE) and PayPal Holdings Inc. (PYPL-NE).
These five CDRs build on an initial lineup of Alphabet Inc. (GOOG-NE), Amazon.com Inc. (AMZN-NE), Apple Inc. (APPL-NE), Netflix Inc. (NFLX-NE) and Tesla Inc. (TSLA-NE). All 10 are designed as a cheap, currency-hedged way for small Canadian investors to buy into some of the biggest heavyweights in the U.S. market. The initial price for these shares has been about $20, whereas the U.S.-listed versions can trade in the thousands of U.S. dollars.
CIBC says it has seen a strong response to its depositary receipts, notably among do-it-yourself investors, and total CDR assets were $70-million as of midweek. A total of about 4.5 million shares have traded since launch and the per-day average number of trades has grown from an average of 310 per day in August to more than 670 in September. Bid-ask spreads – the difference between what investors are willing to pay as buyers and willing to accept as sellers – are a little larger than with the U.S. shares. For example, AMZN-NEO had a bid-ask of four to five cents at one point this week, while the U.S. shares had a predictably tight spread of one cent.
The true test of CDRs is how well they replicate the performance of the underlying U.S. shares, and early indications are positive on this count. Over 63 days of trading, AMZN-NEO fell 8.68 per cent and AMZN-N fell 8.63 per cent. The currency-hedging feature of CDRs ensures you get virtually the same returns as the underlying shares, with no distortions caused by volatility in the Canada-U.S. exchange rate.
There’s one more CDR feature of note to small investors who want to keep it simple. Usually when you buy U.S. shares, your broker will expensively convert your Canadian dollars into U.S. currency. CDRs do the exchange using institutional rates, which are a better deal.
-- Rob Carrick, personal finance columnist
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Compiled by Globe Investor Staff