To start with, you can think of the Canadian depositary receipts launched this week as the little guy’s way of buying shares of Amazon.com Inc.
AMZN-NE – it’s listed on the NEO Exchange – traded around $23 at mid-week. If you’re a tech stock enthusiast, you probably know that Amazon shares listed on Nasdaq have been trading around US$3,620 lately.
Owning a share of AMZN-NE is like having a small, currency-hedged slice of Amazon in your portfolio. These CDRs were launched at $20 and will rise or fall in price proportionately on an intra-day basis to what AMZN-Q is doing.
“This is like buying any stock – you can put a limit order in, you can have any special instructions that you want,” said Elliot Scherer, CIBC’s managing director and head of sales in the wealth solutions group.
You can read about the launch of CDRs in a story by my colleague James Bradshaw.
Canadian Imperial Bank of Commerce, originator of CDRs, plans to add Alphabet Inc., Apple Inc., Netflix Inc. and Tesla Inc. Of course, you can always buy these stocks on Nasdaq directly through any broker or trading app. But buying the CDR version allows you to skip the expensive process of having your broker convert your Canadian dollars to U.S. currency at retail foreign exchange rates to buy shares. Instead, your Canadian dollars will be converted at a more favourable institutional rate by the managers of the CDR.
Amazon doesn’t pay a dividend, but Apple does. Mr. Scherer said taxation of CDR dividends will be handled the same way as dividends paid from U.S.-listed stocks. Consult this dividend investor’s tax guide for details on that.
The use of currency hedging in CDRs means investors get the return of the underlying U.S. stock, with no distortions caused by changes in the Canada-U.S. exchange rate. Hedging is advantageous at times, like most of the past year, where the Canadian dollar rises against its U.S. counterpart. A rising dollar erodes returns from U.S. holdings, while a weak dollar adds to returns in U.S. stocks and funds.
The use of hedging opens the door to tracking error, which in this case would mean AMZN-NE not delivering returns that are 100 per cent proportional to those of AMZN-Q. Mr. Scherer said the hedging particulars of the CDR will help keep the risk of tracking error at minimal levels.
CIBC has a list of 50 stocks it would like to provide in CDR form and will deliver new offerings in batches of 15, Mr. Scherer said. If there’s investor demand, it’s possible that CDRs for international stocks could be issued at some point.
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