Canada represents approximately 2% of the world's gross domestic product (GDP), so broadening portfolios globally is essential for diversification. CDRs help achieve this by providing access to publicly traded international companies. And their fractional ownership structure allows investors to gain global exposure with smaller dollar amounts.

The CDR structure of owning a percentage of the underlying shares of a company allows for accounts with smaller investor capital to build diversified portfolios with additional control compared to investing in a mutual fund or Exchange Traded Fund (ETF).

CDRs are bought and sold in Canadian dollars (CDN) and include a built-in currency hedge. As a result, there is no requirement to exchange funds to U.S. Dollars (USD) or another foreign currency, or to open a USD investment account.

Why it matters: If you own a U.S. stock directly and the USD weakens, your overall return drops in CDN dollar terms even if the stock price stays flat. CDRs eliminate this risk.

How a currency hedge works: To understand the mechanics of the currency hedge, a CDR is the equivalent of owning a percentage of the underlying stock (fractional share), often referred to as the "CDR ratio". The currency hedge works by adjusting the CDR ratio based on the underlying currency exchange rate. For example, if the CDR is valued at $20 and the value of the USD decreases compared to the CDN dollar (while the underlying share price remains the same), the CDR ratio would increase the fractional shares of the underlying stock you own while keeping the price of the CDR constant. In this example, as the USD decreases in value, the hedge works to increase the portion of underlying shares to compensate for the foreign exchange. Conversely, if the USD increased in value (CDN dollar weakens) the CDR ratio would decrease the fractional shares you own. Assuming no change in the value of the underlying shares, the decrease in fractional shares compensates for the increase in foreign exchange, thus keeping the value of the CDR constant. By adjusting the CDR ratio to account for changes in the exchange rate, the investor's return is based solely on the performance of the underlying shares without foreign exchange affecting the return or the unit price.

Like owning the underlying company shares directly, CDR holders are entitled to receive the proportional dividends less applicable withholding taxes. These dividends are passed through to CDR holders in Canadian dollars.

Investors in CDRs are entitled to vote the underlying security shares. The portion of shares the investor can vote will depend on how many CDRs they hold.

There is currently no specific direction from Canada Revenue Agency regarding the taxation of CDRs. However, it is anticipated that CDRs will be treated with the same capital gains taxation as owning their underlying shares. CDRs, like holding the U.S. stock directly, are not eligible for the dividend tax credit, and are subject to withholding tax which is applicable on non-registered accounts as well as TFSAs and RESPs (this withholding tax is not applicable when CDRs are held in an RRSP or RRIF). A W-8BEN should be filed with the Internal Revenue Service (IRS) to claim a reduced withholding tax rate of 15% under the Canada- U.S. tax treaty. CDRs are considered foreign property and as such are included in the T1135 Foreign Income Verification Statement if the total cost of foreign property exceeds $100,000 at any point during the year. For specific tax considerations with any investments, your tax professional should be consulted.

U.S investors are not able to hold CDRs as per the issuing prospectus of the underlying financial institutions that offer CDRs.

Speak with an Edward Jones financial advisor regarding costs associated with owning and trading CDRs.