CDRs versus U.S. stocks: Which is better for Canadian investors?

Take Microsoft as an example. If you search the ticker MSFT, several options may appear. One is the actual Microsoft stock listed on the NASDAQ which, as of May 8, 2026, traded around US$416 per share. But you may also notice alternatives sitting right below it, such as the CIBC Microsoft CDR CAD Hedged under the same ticker, and the BMO Microsoft CDR CAD Hedged under ticker ZMSF.

These are Canadian depositary receipts, or CDRs. MoneySense previously covered the mechanics of CDRs in detail in a 2025 article, but the short version is that they allow Canadians to gain exposure to U.S. stocks (and now international stocks) in Canadian dollars with a built-in currency hedge. 

That currency hedge is designed to offset fluctuations between the Canadian and U.S. dollars. Investors still receive exposure to the underlying stock’s dividends, though those remain subject to the standard 15% U.S. withholding tax.

At first glance, they can look very appealing. One reason is accessibility. A single share of Microsoft costs more than US$400, while the CIBC Microsoft CDR traded around $29.35 Canadian and the BMO version around $8.32 CAD. For investors without access to fractional shares, or those who simply prefer not to transact in U.S. dollars, that lower entry price can make building a portfolio feel much easier. And if your brokerage charges a higher commission on U.S.-listed stocks than Canadian-listed issues, you could save on your transaction costs as well.

But CDRs are not a free lunch. The built-in currency hedge comes with a cost. Depending on the provider, that fee can range from roughly 0.6% to 0.8% annually. Over time, those costs can add up, particularly when compared to simply holding the underlying U.S. stock directly.

That raises an important question: historically, how would a Canadian investor have fared owning the CDR version of a U.S. stock instead of the stock itself? More specifically, after accounting for currency hedging costs and foreign withholding taxes, how different would the longer-term returns have been?

Answering that helps clarify when CDRs make sense, versus when owning the underlying U.S. stock directly may be the better option for Canadian investors.

Quantifying CDR tracking error versus U.S. stocks

To test this, I back-tested two widely traded and long-standing blue-chip CDRs against their underlying U.S. stocks. I specifically wanted to look at two different situations. 

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1. The first involved a dividend-paying company, where the CDR investor would face both currency hedging costs and the drag from the 15% U.S. withholding tax on dividends. 
2. The second involved a company that does not pay dividends, to isolate how much of the difference could simply be attributed to the currency hedge and other structural frictions.

All data was sourced from PortfolioVisualizer.com using the longest common return period available for both the stock and its corresponding CDR. Returns are presented net of management costs, but before taxes, brokerage commissions, or implicit trading frictions such as bid-ask spreads.

The first comparison was The Coca-Cola Company (KO) versus the CIBC Coca-Cola CDR (COLA). From January 2023 to April 2026, shares of Coca-Cola compounded at an annualized 9.76% with dividends reinvested. The CDR lagged behind at 8.14% annualized. That is a noticeable 1.62% difference.

Source: Portfolio Visualizer

To break down where some of that drag likely came from, we can start with the currency hedge. Assuming the higher end of the provider’s estimated currency hedging cost, around 0.6%, adding that back to the CDR’s return brings it to 8.74%. Then there is dividend withholding tax. 

As of May 8, 2026, Coca-Cola’s trailing five-year average dividend yield was 2.89%. Applying a 15% withholding tax to that yield results in another 0.43% drag. Even after accounting for both the hedge cost and dividend withholding (a total of 1.03%), the CDR still trails the underlying stock by a 0.59% variance.

Of course, these calculations are somewhat back-of-the-napkin in nature, but the broader point still stands: there appears to be some additional drag for CDRs beyond just the headline currency hedging spread and foreign withholding tax on dividends.

For my second example, I used a stock that historically paid little to no dividends (Amazon) and over a shorter period from January 2026 through April 2026. The results were still weaker for the CDR, though the gap narrowed to 0.99%. 

Source: Portfolio Visualizer

That is important because it helps isolate the effect of dividends. Without withholding tax eating into distributions, the tracking gap becomes smaller, suggesting that dividend drag is indeed a meaningful component of CDR underperformance, especially for higher-yielding U.S. stocks. 

At the same time, the 0.99% tracking error still exceeded the stated currency hedging spread upper limit of 0.60% on its own, which again points toward additional friction to the tune of 0.39%.

In short, CDRs will likely experience some degree of tracking error relative to the underlying U.S. stock. Part of that comes from the currency hedge and, where applicable, the 15% withholding tax on dividends. Additional drag likely stems from implementation frictions within the structure itself.

That does not make CDRs bad products. But investors should understand that convenience comes at a cost. Over long periods, returns will likely lag behind simply owning the U.S. shares directly.

When CDRs might still be worth it 

Personally, my preferred way to get exposure to U.S. equities is through low-cost index exchange-traded funds (ETFs). If you want currency hedging, there are also plenty of low-cost, hedged ETF options available. That said, for investors who specifically want to pick individual stocks, CDRs can still make sense depending on the brokerage platform they use. This is particularly true for newer investors using fintech platforms like Wealthsimple. 

While Wealthsimple offers commission-free trading, its foreign exchange fees are relatively expensive. Investors pay a 1.5% currency conversion fee on top of the platform’s corporate exchange rate when converting between Canadian and U.S. dollars. That creates meaningful friction. If they later sell the position, that process happens again. Dividends paid in U.S. dollars are also automatically converted back into Canadian dollars unless the investor has a U.S. dollar account enabled. This means investors can face multiple layers of drag holding U.S. stocks directly.

Wealthsimple does offer U.S.-dollar accounts, but only for Premium clients with at least $100,000 in assets or through a separate $10 monthly subscription. Once you have a U.S.-dollar account, the foreign exchange fees become less punitive. According to Wealthsimple’s pricing structure, conversions under $10,000 are charged 1.5%, balances between $10,000 and $34,999.99 are charged 1%, $35,000 to $99,999.99 are charged 0.5%, and accounts above $100,000 pay 0%.

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Therefore, for Wealthsimple investors who do not meet those requirements or simply do not want to pay another recurring monthly fee, CDRs can actually be a fairly reasonable workaround. In some cases, the drag from using a CDR may be comparable to, or even less than, repeatedly paying Wealthsimple’s FX spread directly for U.S. stock trades.

But compare that to Interactive Brokers, which takes a very different approach. According to IBKR’s pricing schedule, U.S. stock commissions are around US$0.0035 per share, while currency conversion costs are generally a minimum of US$2 per trade, or 0.002% times trade value.

Using a $10,000 CAD example, converting currency at Wealthsimple could cost about $150 in fees. At Interactive Brokers, even after commissions and conversion spreads, the total cost would likely be closer to a few dollars. Over a long holding period, that savings can outweigh the convenience of a CDR. 

Still, not everyone wants to use Interactive Brokers. Some investors value simplicity and ease of use more than squeezing out every last basis point of efficiency. In the right context, CDRs can be quite practical. For example, if you are using a Tax-Free Savings Account (TFSA), where the 15% U.S. dividend withholding tax applies whether you own the stock directly or through a CDR anyway, and you are on a brokerage platform with expensive FX fees, the convenience of buying and holding a CDR in Canadian dollars can make a lot of sense, especially over short holding periods.

By contrast, if you are investing through a registered retirement savings plan (RRSP), where direct ownership of U.S. stocks benefits from the withholding tax exemption under the Canada–U.S. tax treaty, and you are using a low-cost brokerage platform with cheap FX conversion, then there is a much stronger argument for owning the underlying U.S. stock directly instead of the CDR.

Read more about investing in stocks:

• How have single-stock yield ETFs performed so far?
• Hot stocks: Canada’s top performers in Q1 2026
• Defence stocks attract attention as spending climbs

• Is Wealthsimple’s new direct indexing worth it?

About Tony Dong, MSc, CETF

Tony Dong has been published on USA Today, U.S. News & World Report, TheStreet and more. He is also the lead ETF analyst for ETF Central, and he holds The ETF Institute’s Certified ETF Advisor designation.

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