In this column, which appears every second Saturday, we give you specific ideas on how to invest your money in the stock market.
A reader recently asked me a good question: Canadian Foreign Depository Receipts (CCAE), what to eat in winter?
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When CIBC launched this product in July 2021, it called it a “breakthrough innovation.” Well, it may have taken the Toronto institution three years to develop the CCAE, but they didn’t invent anything: American Depository Receipts (ADR) have been around on Wall Street since… 1927.
Already $2.5 billion
The CCAEs have made remarkable achievements: in less than two years, they have managed to amass more than $2.5 billion in wealth
So what is it? This is a way to buy shares of large American companies in Canadian dollars. CIBC currently offers 41 different CCAEs. Several well-known giants are based there, including Apple, Alphabet (Google), Amazon, Microsoft, Tesla, Coca-Cola, McDonald’s, Walmart, Pfizer, Exxon Mobil, Berkshire Hathaway, and Visa.
AFP
CCAEs trade on the Cboe Canada Exchange, formerly known as Neo, for around $20 each. Each certificate represents a fraction of the underlying stock. For example, each Apple CCAE currently includes approximately 0.11 shares of the company’s Apple.
Advantages
But why buy an Apple CCAE in Canada instead of buying the company’s stock directly on Nasdaq? First, it’s easier to get into Apple because it’s priced lower ($26.66 as of yesterday) than the original stock ($178.54).
The real advantage of CCAE, however, is the integrated currency hedging, i.e. protection against fluctuations in the value of the Canadian dollar against the greenback.
How does it work? CIBC adjusts the number of underlying stocks in each EACC each day. So, as the value of the loonie increases, so does the number of underlying stocks. And when the value of the loonie goes down, so does the number of underlying stocks.
This mechanism ensures that the CCAE’s stock market price closely follows that of the underlying stocks. This virtually eliminates the currency effect on returns.
To illustrate this, the CIBC cites this example. A Canadian invested CAD 1,000 in Apple stock (listed on Nasdaq in US dollars). Let’s say the stock gains 40% in a year. If the Canadian dollar has fallen 10% over the year, the investment is worth $1540 instead of $1400. On the other hand, if the loonie has increased in value by 10%, the investment is not worth CA$1,400, but CA$1,260. With a CCAE from Apple, the investment would be worth around 1400 Canadian dollars.
The inconveniences
It is still necessary to want to counteract the effect of the exchange. Some investors buy US stocks to bet on the dollar, among other things.
Then the FX hedging of the CCAE is not free. It costs about 0.5% per year. It’s cheaper than the cost of converting CA dollars to US dollars at most brokers (by 1 to 2%), but it’s an expense that occurs every year.
Finally, there’s the more fundamental question: Is stock picking really for you? It should never be forgotten that the vast majority of investors, whether professional or amateur, can’t beat index funds, which can charge as little as 0.05% per year.
Do you have any suggestions for topics for this column? Write to me: [email protected]