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Your questions have been piling up in recent weeks, so let’s get right to them.


I was wondering if you could provide your opinion regarding Canadian Depositary Receipts (CDRs) issued by CIBC for fractional ownership of expensive U.S. stocks such as Microsoft, Google, Amazon, etc.? Are they appropriate for small investors looking to participate in some of these companies?

Give credit to Canadian Imperial Bank of Commerce for some clever financial engineering here. The bank has created a product that makes U.S. stocks that trade at hundreds or even thousands of dollars available to Canadian investors at a fraction of the cost of the underlying security.

Plus, the CDRs are currency hedged. The bank explains it this way: “The CDR Ratio is automatically adjusted on a daily basis to account for the notional currency hedge. If the Canadian dollar increases in value compared to the U.S. dollar (or other relevant foreign currency), the CDR Ratio for each CDR is adjusted to represent a larger number of underlying shares. Conversely, if the Canadian dollar decreases in value compared to the U.S. dollar, the CDR Ratio for each CDR is adjusted to represent a smaller number of underlying shares.”

The units had an initial price of about $20. They all trade on the NEO Exchange, often under the trading symbol of the parent company. So, for example, if you want to own fractional shares in Amazon you would buy AMZN CDRs on the NEO Exchange. They closed on Oct. 22 at $20.93. Full Amazon shares finished that day in New York at US$3,335.55.

CDRs are available for a wide range of companies. They include Apple Inc., Disney Inc., Alphabet Corp., Facebook Inc., Microsoft Corp., Netflix Inc., PayPal Holdings Inc., Tesla Inc. and Visa Inc.

Dividends from the parent companies are passed through to CDR investors in Canadian dollars. CIBC says there are no ongoing management fees.

You can find more information here.

As for my opinion, I would prefer to own the basic shares. But these CDRs are a worthwhile option for investors with limited resources and who like the currency hedge.

Opinion on ZWT

What do you think of ZWT, issued by Bank of Montreal?

Should we understand that they use cover calls to generate income and finance their interesting distribution of 4.5 per cent? How does the use of covered call options help in mitigating downside risk (as they say in the documentation)?

I understand that when you sell covered calls, you will be obligated to sell the stock at a certain price if it goes up. But when the value decreases, nobody will buy. To protect against a market decrease, don’t we need a put option?

ZWT is the trading symbol for the BMO Covered Call Technology ETF. It invests in securities of technology and technology-related companies in addition to writing covered call options to generate cash flow. The premiums received from the option writing provide the downside protection BMO refers to, but it’s very limited.

If the price of an optioned stock goes down, the option expires worthless and a new one can be written.

This is a new fund, launched in late January, so we don’t have any historical data to compare it with similar ETFs. It’s also expensive, with a management expense ratio of 0.73 per cent.

The Harvest Tech Achievers Growth and Income Fund (HTA-T) has a similar mandate. It posted a one-year gain of 39 per cent to the end of September. It’s also expensive, with a management fee of 0.85 per cent.

You can also look at the CI Tech Giants Covered Call ETF (TXF-T). It has a lower management fee than the Harvest fund at 0.65 per cent but its recent returns are not as strong.

Canadian General Investments

I was wondering if it would be possible for you to comment on Canadian General Investments Ltd. This company appears to trade at a discount to its net asset value. Can you please explain why? Is this a potential value trap? Also, this company has a history of consistently increasing its dividends.

This is a closed-end fund that trades on the TSX under the symbol CGI. To my knowledge, it’s the oldest fund of its kind in Canada, having been launched in 1930. Since 1956, it has been managed by Morgan Meighen & Associates.

Closed-end funds have a limited number of shares. There is no new supply unless the company implements a secondary issue, which is rare.

You would think that, logically, units of closed-end funds would be worth more because of the limited supply. But that’s not the case. Many closed-end funds trade at a discount (sometimes a deep one) to their underlying net asset value. For example, CGI closed on Oct. 22 at $39.26. The NAV on that day was $62.47. That’s a discount of more than $23!

This fund has historically traded at a discount to net asset value, but this is close to the extreme end of the range. What’s behind it?

It’s not the portfolio. The top 10 holdings are solid, growing companies like Shopify Inc., Nvidia Corp., Lightspeed Commerce Inc., Canadian Pacific Railway Ltd., TFI International Inc., Descartes Systems Group Inc. and Inc.

But income investors won’t be excited by the quarterly dividend of 22 cents a share (88 cents a year). That translates into a yield of 2.2 per cent. However, as our reader points out, the fund does have a history of raising its payout annually, usually by a penny a quarter.

The law of supply and demand plays a role in the pricing as well. Average trading volume for CGI is only 3,784 units a day. If more people are looking to sell than to buy, it drives down the trading price.

Some investors track the discount ranges of closed-end funds, buying when they are at their peak and selling when they approach their lows. But finding the information can sometimes be difficult. Many of these funds are not known for their transparency,

CGI shows a 10-year average annual compound rate of return of 14.25 per cent on its share price. That makes it worth considering, especially if buying stocks at a deep discount appeals to you. But be warned: the units are trading at close to their highest price in 25 years. If the market hits a correction, they’re going to drop in value.

TFSA quandary

I have a tax-free savings account, just because I heard it’s the thing to do with our money. I am 72, husband 73. I really don’t understand how the TFSA works. Do I get a bonus of some kind? Do I pay when I take money out?

At our age, do I cash out our RRIF and put it in there? I’m sorry but I just don’t get it. Thank you for any advice you can give us.

First, let me say that opening a TFSA was the right thing to do, even though you’re not sure why. With all the savings options we have in this country (registered retirement savings plans, registered retirement income funds, TFSAs, life income funds) it’s very easy to get confused about which choice is best.

At your age, the TFSA is the only plan to which you can make contributions. RRSPs have to be collapsed by the end of the year you turn 71 and new contributions to RRIFs and LIFs aren’t allowed.

There are two major differences between an RRSP and a TFSA. A contribution to an RRSP generates a tax deduction, but any money withdrawn is taxed. There is no deduction for a TFSA contribution, but the money can be taken out at any time tax-free.

This makes a TFSA a good choice for seniors who qualify for the guaranteed income supplement (GIS). Most income, including RRSP/RRIF withdrawals, reduces the amount you receive from a GIS payment. A TFSA withdrawal doesn’t do that.

Unless you are in a low tax bracket, I would not advise taking capital from a RRIF to put into a TFSA because you’ll be taxed on any RRIF withdrawal. Rather, use the TFSA for any savings you have. If you don’t need all the money from your required RRIF withdrawals, put it there (up to the legal contribution limit).

Don’t keep the TFSA money in a low-interest savings account. The whole idea of the plan is to invest in securities that pay a decent return, which will be tax-free to you. You’ll find lots of ideas in my Income Investor newsletter. Details at

If you want to know more, I’ve written two books on TFSAs. They should be available on the Amazon and Indigo websites.

If you have a financial question you’d like answered, send it to me at and write Globe Question in the subject line. I can’t guarantee a personal reply, but I’ll choose the most interesting questions for response here.

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