Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Two Ways Canadian Investors Can Combine Etfs And Cdrs

Published 2024-03-01, 09:32 a/m
Updated 2022-12-07, 09:20 a/m

Incorporating both stocks and ETFs into an investment strategy doesn't require choosing one over the other; rather, employing a combination can significantly enhance a portfolio's diversification and potential for returns. For Canadian investors, the introduction of 54 Canadian Depositary Receipts (CDRs) on the Cboe Canada exchange has revolutionized the way they can access individual U.S. stocks.

CDRs offer a direct pathway to invest in leading blue-chip U.S. companies, but with the convenience of Canadian dollars and at a lower share price. Additionally, these instruments come with the benefit of currency hedging, effectively neutralizing the risk of fluctuation between USD and CAD.

Here's a glimpse into how investors can utilize the current lineup of CDRs alongside innovative ETFs to achieve a balanced and potentially more rewarding investment approach.

Core and explore strategy

The core and explore strategy effectively harness the complementary strengths of ETFs and CDRs to create a diversified and dynamic investment portfolio. This approach allows investors to benefit from the broad market exposure that ETFs provide while also leveraging the targeted access to specific U.S. stocks that CDRs offer.

Most ETFs, like the Fidelity All-in-One Equity ETF (NLB:FEQT) (FEQT), are highly diversified, encompassing exposure to hundreds or even thousands of underlying stocks across various sectors and geographies. This wide-ranging coverage makes ETFs an ideal 'core' for any investment strategy, ensuring a solid foundation of diversification and risk management.

However, while ETFs offer broad exposure, they may not always align perfectly with an investor's specific interests or convictions about certain sectors or companies. This is where CDRs come into play, offering a solution for 'explore' or satellite portions of a portfolio.

For example, an investor with a keen interest in the U.S. healthcare sector might find that a generalist ETF like FEQT, with its healthcare allocation of 7.5%, doesn't fully satisfy their desire to capitalize on this sector's potential. Instead of opting for a healthcare sector ETF, the investor could choose CDRs for leading healthcare companies such as Johnson & Johnson (NYSE:JNJ), UnitedHealth Group (NYSE:UNH), Pfizer (NYSE:PFE), AbbVie (NYSE:ABBV), or CVS Health (NYSE:CVS).

These CDRs provide targeted exposure to key players in the healthcare industry, allowing the investor to focus on companies they believe have the greatest potential for growth.

One of the significant advantages of using CDRs in this strategy is the ease of sizing positions. Thanks to their high liquidity and lower share prices compared to direct shares, CDRs make it straightforward for investors to tailor their investments to their specific risk tolerance and investment goals.

Adding exposure absent from ETFs

A common challenge faced by ETF investors is discovering what seems to be the ideal ETF for their portfolio needs, only to realize upon closer inspection that the ETF may be missing one or two key companies they were hoping to invest in.

Take, for example, the Vanguard U.S. Dividend Appreciation Index ETF (TSX:VGG) (VGG). This ETF is known for its robust portfolio of blue-chip stocks that have demonstrated a long history of increasing their dividends. While this focus on dividend growth is attractive to many investors, it inherently excludes companies that do not pay dividends but are otherwise strong performers in the market. A notable case is Berkshire Hathaway (NYSE:BRKa), a powerhouse in the investment world known for its policy of not paying dividends.

Investors who value the stability and growth potential of VGG's dividend-appreciating stocks but also want exposure to Berkshire Hathaway's unique investment approach face a dilemma. However, there is a strategic solution: investors can maintain their investment in VGG for its dividend-growing blue-chip stocks and supplement this by purchasing the Berkshire Hathaway CDR. Moreover, this can all be achieved without the hassle and expense of currency conversion,

This strategy of combining ETFs with CDRs offers a flexible solution to the limitations of some ETFs, providing investors with the best of both worlds. By purchasing CDRs for specific companies absent from their chosen ETFs, investors can create a more customized investment portfolio.

This content was originally published by our partners at the Canadian ETF Marketplace.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.