CDRs versus US stocks: Which is best for Canadian investors?

Take Microsoft for example. When you search the MSFT ticker, chances are you’ll see several options. One of them is the actual Microsoft stock listed on the NASDAQ, which was trading at around $416 per share on May 8, 2026. However, chances are you’ll also notice alternatives directly below, reminiscent of the CIBC Microsoft CDR CAD Hedged under the identical ticker and the BMO Microsoft CDR CAD Hedged under the ticker ZMSF.

These are Canadian Depositary Receipts or CDRs. MoneyDown previously covered the mechanics of CDRs intimately in a 2025 article, however the short version is that they permit Canadians to take a position in U.S. stocks (and now international stocks) in Canadian dollars with a built-in currency hedge.

This currency hedging is meant to compensate for fluctuations between the Canadian and US dollars. Investors will still have access to the underlying stock’s dividends, but these will still be subject to the usual US withholding tax of 15%.

At first glance they will look very appealing. One reason is accessibility. A single Microsoft share costs greater than $400, while the CIBC Microsoft CDR traded at about $29.35 Canadian and the BMO version traded at about $8.32 Canadian. For investors who wouldn’t have access to fractional shares or just prefer to not trade in U.S. dollars, this lower entry price could make constructing a portfolio much easier. And in case your broker charges a better commission for US-listed stocks than for Canadian-listed stocks, you may also save in your transaction costs.

But CDRs aren’t a free lunch. Integrated currency hedging involves costs. Depending on the provider, this fee can range from around 0.6% to 0.8% per 12 months. Over time, these costs can add up, especially in comparison to easily holding the underlying U.S. stock outright.

This raises a crucial query: How would a Canadian investor have fared prior to now owning the CDR version of a U.S. stock relatively than the stock itself? More specifically, how different would the longer-term returns have been if currency hedging costs and foreign withholding taxes were taken under consideration?

An answer that helps make clear when CDRs make sense, relatively than owning the underlying U.S. stock directly, could possibly be a greater option for Canadian investors.

Quantifying CDR tracking error in comparison with US stocks

To test this, I compared two widely used and long-standing blue chip CDRs to the underlying US stocks. I specifically wanted to have a look at two different situations.

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1. The first was a dividend paying company where the CDR investor needed to bear each currency hedging costs and the burden of the 15% US withholding tax on dividends.
2. The second case involved an organization that pays no dividends to learn the way much of the difference is just because of currency hedging and other structural frictions.

All data comes from PortfolioVisualizer.com using the longest common return period available for each the stock and the corresponding CDR. Returns are shown net of management costs but before taxes, brokerage commissions or implied trading conflicts reminiscent of bid-ask spreads.

The first comparison was between The Coca-Cola Company (KO) and CIBC Coca-Cola CDR (COLA). From January 2023 to April 2026, the worth of Coca-Cola shares was 9.76% on an annual basis, with dividends reinvested. The CDR lagged at 8.14% on an annual basis. That’s a noticeable difference of 1.62%.

Source: Portfolio Visualizer

To determine where a few of this strain likely got here from, we will start with currency hedging. Assuming the upper end of the provider’s estimated cost of currency hedging, around 0.6%, combined with the CDR yield involves a worth of 8.74%. Then there’s the withholding tax on dividends.

As of May 8, 2026, Coca-Cola’s average five-year dividend yield was 2.89%. Applying a 15% withholding tax to this return leads to an additional deduction of 0.43%. Even after accounting for each hedging costs and dividend retention (1.03% in total), CDR still underperforms the underlying stock by 0.59%.

Of course, these calculations are somewhat minor in nature, however the broader point stays: there appears to be an extra burden on CDRs beyond just the currency hedging exchange rate and foreign withholding tax on dividends.

For my second example, I used a stock that has historically paid little to no dividends over a shorter period from January 2026 to April 2026. Results were still weaker for the CDR, although the gap narrowed to 0.99%.

Source: Portfolio Visualizer