Key Takeaways
- Canadian depositary receipts (CDRs) offer a convenient way to invest in U.S. companies, but they have drawbacks such as high costs and tracking errors.
- CDRs may not be the best option for investors seeking to diversify their portfolios, as they require buying multiple receipts to achieve adequate diversification.
- Low-cost ETFs that track the S&P 500 Index are a better way to invest in U.S. equities, as they offer broader diversification and lower costs.
- U.S. withholding tax on dividend distributions is a concern for investors holding U.S. stocks or ETFs in tax-free savings accounts (TFSAs), but it can be avoided by holding U.S.-listed securities in retirement accounts.
Introduction to Canadian Depositary Receipts
Canadian depositary receipts (CDRs) have been gaining popularity in recent years, particularly among investors looking to diversify their portfolios by investing in U.S. companies. CDRs are offered by banks such as CIBC and BMO, and they allow investors to buy shares of U.S. companies, such as Nvidia, Amazon, and Alphabet, on Canadian exchanges. One of the main advantages of CDRs is that they trade in Canadian dollars, eliminating the need for currency conversion and reducing volatility caused by fluctuations in foreign exchange rates. Additionally, CDRs have built-in currency hedging, which is intended to reduce the impact of currency fluctuations on investment returns.
Advantages and Drawbacks of CDRs
While CDRs have some advantages, they also have several drawbacks. One of the main concerns is that investors would need to buy a large number of CDRs to achieve adequate diversification for the U.S. portion of their portfolio. This can be costly and time-consuming, especially for investors who are paying commissions. In contrast, purchasing a single exchange-traded fund (ETF) that tracks the S&P 500 Index can provide broader diversification and lower costs. Another drawback of CDRs is that they do not always track their U.S.-listed counterparts perfectly. For example, Nvidia’s CDRs rose by 34.8% in 2025, while the U.S.-listed shares gained 38.9%. This tracking error can be attributed to the spread charged by CIBC to provide the currency hedge, as well as other factors such as differences in U.S. and Canadian interest rates.
Comparison with ETFs
In comparison, low-cost ETFs that track the S&P 500 Index are a better way to invest in U.S. equities. These ETFs offer broader diversification, lower costs, and more flexibility than CDRs. They also provide exposure to a wide range of U.S. companies, including the big tech players, household names, and smaller businesses. Additionally, ETFs are often more transparent and easier to understand than CDRs, making them a more attractive option for investors. While CDRs may be a good fit for investors who want to buy a handful of U.S. or foreign stocks to supplement a well-diversified portfolio, they are not the best option for investors seeking to introduce U.S. or foreign exposure to their portfolio.
U.S. Withholding Tax on Dividend Distributions
Another concern for investors is the U.S. withholding tax on dividend distributions. This tax can be a significant drag on investment returns, particularly for investors holding U.S. stocks or ETFs in TFSAs. Unfortunately, there is no way to avoid this tax in a TFSA, as it is withheld at the source. However, investors can avoid the withholding tax by holding U.S.-listed securities in retirement accounts, such as registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). The Canada-U.S. tax treaty exempts these accounts from withholding tax on U.S.-listed securities, making them a more attractive option for investors seeking to minimize taxes.
Conclusion
In conclusion, while CDRs offer a convenient way to invest in U.S. companies, they have several drawbacks that make them less attractive than other options. Low-cost ETFs that track the S&P 500 Index are a better way to invest in U.S. equities, offering broader diversification, lower costs, and more flexibility. Investors should carefully consider their options and choose the investment vehicle that best meets their needs and goals. Additionally, investors should be aware of the U.S. withholding tax on dividend distributions and take steps to minimize its impact on their investment returns. By doing so, investors can make more informed decisions and achieve their long-term financial goals.
