Weighing the pros and cons of Canadian depositary receipts

What is your opinion of buying shares of U.S. companies such as Nvidia Corp., Amazon.com Inc. and Alphabet Inc. on the Canadian exchanges? It seems like a convenient option considering there is no currency exchange required, and the shares are priced at lower levels, which permits easier access for investors.

I assume you’re referring to Canadian depositary receipts (CDRs) offered by CIBC Capital Markets and BMO Global Asset Management. My take is that CDRs are a great idea, in theory, but don’t work perfectly in practice. I also believe there are better ways to get exposure to U.S. equities.

CIBC pioneered CDRs in 2021 and now offers more than 100 companies. Most are U.S.-based firms, from the big tech players to household names such as Walmart Inc., McDonald’s Corp. and Procter & Gamble Co. More than a dozen European companies are also available. Bank of Montreal got into the game early in 2025 and now offers more than 80 U.S., European and Japanese CDRs, including Toyota Motor Corp., Honda Motor Co. Ltd., Sony Group Corp. and Nintendo Co. Ltd.

These low-cost ETFs are the best way to invest in the U.S.

CDRs have some advantages. Because they trade in Canadian dollars, you won’t face currency-conversion costs to buy them, as you would if you were investing directly in U.S.-listed or overseas stocks. CDRs also have built-in currency hedging, which is intended to reduce volatility caused by fluctuations in foreign exchange rates.

But CDRs have a couple of drawbacks, in my opinion.

First, you’d need to buy a whole bunch of CDRs to achieve adequate diversification for the U.S. portion of your portfolio. It’s much easier – and cheaper if you’re paying commissions – to purchase a single exchange-traded fund that tracks the S&P 500 Index, which includes virtually all the U.S. companies available as CDRs, plus hundreds more.

As I discussed in a recent column, there are several S&P 500 ETFs that trade in Canadian dollars, and they are available in currency-hedged and non-hedged versions.

The second drawback of CDRs is that they don’t do a great job tracking their U.S.-listed counterparts. For instance, shares of Nvidia gained 38.9 per cent in 2025, but Nvidia’s CDRs rose just 34.8 per cent. I compared the rest of the Magnificent Seven tech stocks with their respective CIBC-issued CDRs and, in every case, the CDRs lagged the U.S.-listed shares last year, by an average of 3.3 percentage points.

CDRs underperform for a few reasons. One is that CIBC charges a spread of about 0.6 per cent annually to provide the currency hedge. Another reason is that hedging is not perfect. Factors such as the volatility of the underlying stocks and differences between U.S. and Canadian interest rates can affect the returns of CDRs.

“As a result of the variables above, the annual tracking difference may be larger than the annualized spread that CIBC earns for managing the notional currency hedge,” the bank says in its marketing materials.

These aren’t necessarily deal-breakers. If your goal is to buy a handful of U.S. or foreign stocks to supplement a portfolio that is already well-diversified geographically, then CDRs may be a good fit. But if you’re looking to introduce some U.S. or foreign exposure, a broad U.S. or foreign index ETF is a better place to start.

About one-third of my tax-free savings account consists of the iShares Core S&P 500 ETF (IVV), which trades in U.S. dollars on a U.S. exchange. It has done very well, but my concern is that there appears to be no way around the U.S. tax held back on the dividend distributions. Would buying any of the three Canadian-listed S&P 500 exchange-traded funds that you recently wrote about get around this problem?

Unfortunately, in a TFSA you can’t dodge the 15-per-cent withholding tax on U.S. dividends. Whether you own U.S. stocks directly, or indirectly through a Canadian- or U.S.-listed ETF, your U.S. dividends will always take a haircut inside a TFSA. What’s more, with a TFSA or other registered account, you can’t claim a foreign tax credit for the amount withheld.

To avoid U.S. withholding tax, you would need to hold a U.S.-listed stock or U.S.-listed ETF in an account specifically set up for retirement purposes. Under the Canada-U.S. tax treaty, retirement accounts – such as a registered retirement savings plan, registered retirement income fund or locked-in retirement account – are exempt from withholding tax on U.S.-listed securities.

However, the exemption does not apply to Canadian-listed ETFs that hold U.S. stocks. The three ETFs discussed in my column are subject to U.S. withholding tax regardless of the type of account in which you hold them.

I realize it’s complicated, but here’s the good news: The amount of withholding tax on an S&P 500 ETF is very small.

Currently, the S&P 500 yields about 1.15 per cent. If you apply the U.S. withholding rate of 15 per cent, you’re talking about an annual withholding tax drag of about 0.17 percentage points – on an index that posted a total return of nearly 18 per cent in 2025. I wouldn’t lose any sleep over such an inconsequential amount.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.