To continue with our series on Canadian Depositary Receipts (CDRs), this blog discusses a specific situation: what factors investors should consider before deciding whether to buy CDRs or U.S. shares. This article is part of our series on everything investors should know about Canadian Depositary Receipts (CDRs). Investors can visit our previous blogs here.

“Should I buy the Google CDR or just buy Google shares directly in U.S. dollars?”. We think this is an interesting question that many Canadian investors have started asking themselves in recent years with the growing availability and adoption of Canadian Depositary Receipts (CDRs).

Of course, the answer depends on individual circumstances. In general, we prefer owning U.S. shares directly if investors have the capital available and are comfortable with currency exposure. That said, we view CDRs as a decent alternative for investors looking to gain exposure to U.S. companies. When facing this decision, investors can ask themselves the following questions:

1. Are investors comfortable with converting to U.S. dollars to own shares directly, which may need to be converted back to Canadian dollars down the road?

If investors are willing to convert to U.S. dollars for their U.S. investments, then they may not need to pay much attention to CDRs.

That said, not every investor is comfortable investing in foreign markets due to currency risks, despite potentially better prospects for total returns. The reason CDRs were introduced and became popular in recent years is largely because some investors are hesitant to invest in the U.S. market. They may not want to deal with converting investments back and forth between currencies, since any fluctuation in the exchange rate could become a tailwind or headwind for the final investment outcome.

As a result, if investors identify themselves as someone who prefers to stay invested in the Canadian market, but still want exposure to U.S. stocks, then CDRs may be a suitable product.

2. Are those securities available as Canadian Depositary Receipts (CDRs)?
Not all companies are available as CDRs. Investors should start by doing some homework -visiting the CIBC website, which provides a list of all companies currently covered by CIBC, the main sponsor of CDRs. The list continues to expand over time, adding new names that are often the most sought-after by Canadian investors.

3. Are those shares liquid enough to acquire a position?
Not all CDRs are created equal. Popular household names like Tesla, Google, and Meta may have healthy liquidity, but other names can have very limited trading volume — sometimes only a few trades per day. Consequently, the bid-ask spread could be a significant cost, which investors should consider carefully before investing in CDRs.

4. Do investors have enough resources to buy shares in U.S. dollars?
Though most U.S. companies tend to do share splits to keep their share prices at reasonable levels, there are some companies that are not fans of share splits. For example, AutoZone (AZO) trades at more than US$3,800 per share, while its CDR trades at around CA$23. These are economically similar securities, but the investment required to buy CDRs is substantially lower than buying U.S. shares directly.

CDRs offer fractional ownership, which is a huge advantage for smaller investors who want to participate in a company’s upside potential without committing too much capital.

Conclusion
Again, we still prefer owning U.S. shares directly if investors have the capital available and are comfortable with currency exposure. That said, we view CDRs as a good alternative for gaining exposure to U.S. companies in a low-cost, highly efficient way. The list of questions above is an example investors should ask themselves before buying CDRs.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.