The Growth of Canadian Depositary Receipts

April 22, 2024

Since Cboe Canada’s industry-leading launch of Canadian Depositary Receipts (CDRs) in July 2021, CDRs have become one of the fastest growing investment products in Canada, and they continue to see growing investor demand. CDRs are designed to make it easier for Canadian investors to access the most popular publicly listed U.S. companies, in Canadian dollars, with a built-in currency hedge.

The Value Proposition

Canadian investors looking to geographically diversify their investments face both foreign exchange costs to purchase the stocks in a foreign currency, and exchange rate risk from holding stocks traded in a foreign currency. CDRs address these issues by reducing the barriers and costs associated with global investing, making it easier for Canadian investors to gain exposure to the world’s largest companies.

Investing directly in U.S. issuers and other companies listed outside of Canada can be expensive. The built-in currency hedge of CDRs enables investors to own the stock, not the currency. As such, the return is dependent on the performance of the company – not the performance of the currency – mitigating an additional risk associated with cross-border investing.

Each CDR is equivalent to owning a variable number of the underlying shares, known as the CDR ratio. The CDR ratio is adjusted daily to provide a notional currency hedge. As the CDR ratio increases or decreases, the number of underlying shares represented by one CDR increases or decreases. Therefore, if the Canadian dollar strengthens, each CDR will represent a larger number of underlying shares. Conversely, if the Canadian dollar weakens, each CDR will represent a smaller number of underlying shares.

For more details on the benefits and mechanisms of CDRs, please see our CDR website.

Growing Demand

CDRs have seen tremendous growth in both the number of CDRs listed and the volume traded since launching in 2021. The distinct count of CDRs listed on Cboe Canada continues to rise, reaching a total of 55 popular U.S. listed stocks. The launch on February 15 expanded our existing CDR lineup with seven new tickers. Figure 1 below shows the incredible growth in CDR listings by quarter since the introduction of the product. Since Q1 2024, one additional CDR, SMCI, was listed on April 17.

^{Figure 1: Number of CDRs listed by Sector}

The notional value traded in these stocks has skyrocketed in 2024. In Q1 2024, CDRs had an average daily notional traded volume of over $140 million CAD, an increase of 75% quarter-over-quarter. And as the number of listings grows, so too does the notional value traded, with a notable upward trend every quarter since Q3 2022, highlighting the increasing adoption and demand for this innovative product. The pool of CDR listings available on Cboe Canada today provides solid representation across all economic sectors in the U.S.; but the growth of trading in a few specific sectors has been particularly noteworthy, with Consumer Discretionary and Information Technology stocks—such as Nvidia (NVDA), Apple (AAPL), Tesla (TSLA), and Amazon (AMZN)^[1]—among the most popular CDRs in 2024.

Figure 2 below shows average daily notional volume growth by sector, as well as the percentage each sector makes up of the total CDR notional value traded. Combined, Consumer Discretionary and Information Technology stocks comprise over 70% of all CDR notional volume, followed by Communication Services, which accounts for 12% of value, and Financials, at 6%.

^{Figure 2: CDR Notional Volume Traded by Sector}

In addition to the growth in notional value traded, assets under management (AUM) have also grown, as shown in the chart below. At the end of Q1 2024, CDR AUM had grown to a total of $4.6 billion—an increase of 42% quarter-over-quarter—highlighting the increasing demand for this innovative product.

^{Figure 3: CDR Growth in AUM}

Trading Activity

All 54 CDRs that are listed on Cboe Canada are traded across all of Cboe Canada’s venues: NEO-L, NEO-N, NEO-D, and MATCHNow. Cboe Canada is the clear leader in overall traded value market share in CDRs. Figure 4 below shows that Cboe Canada represents more than 83% of traded value. While Nasdaq Canada began trading Cboe Canada-listed securities during Q2 2023, Cboe Canada’s market share still has a stronghold in this space.

^{Figure 4: CDR Notional Market Share by Exchange Group}

Based on publicly available trade data, the notional value traded has been attributed primarily to two brokers, CIBC and TD—which, combined, represented an average of 65% of notional value for the first two quarters post launch, as shown in the chart below. But, two years later, the broker composition in CDRs has evolved. CIBC’s and TD’s combined market share in CDRs decreased to 47% in Q1 2024, as new entrants join the space. In Q1 2024, Virtu represented 9% of the notional value traded, and anonymous trading activity grew significantly—to over 16% of market share. The continued adoption and healthy mix of brokers trading CDRs speaks volumes about the benefits that the product provides to investors.

^{Figure 5: CDR Broker Notional Market Share}

Retail Interest

CDRs make it easier for Canadians to invest in the world’s largest companies. The product is useful for a variety of investors, including retail investors, institutional investors, and latency sensitive traders. Cboe Canada’s trading venues classify Trader IDs into the following categories: (1) Latency Sensitive Traders (LSTs)^[2], of which Designated Market Makers (DMMs) are a subset; and (2) NEO Traders^[3], which encompass all other trader types, with Retail Clients as a subset. As Cboe Canada represents over 83% of the notional volume in CDRs, looking at the breakdown of trader types on Cboe Canada provides an informative perspective on the types of firms and individuals who are trading CDRs.

Interestingly, Retail Client accounts represent about 29% of all notional volume of CDR trades on Cboe Canada, while DMMs account for 35%, followed by NEO Traders at 19%, and LSTs at 18%. As the products became more popular in 2022, LSTs started to become more active in CDRs. The composition of investors trading the product highlight the benefit that CDRs bring to the entire market, and the interest that Canadian investors have in trading U.S. stocks.

^{Figure 6: NEO CDR Notional Volume by Flow Type}

It is important to consider the average notional trade size among the different flow types when comparing retail investor activity in CDRs to other trader types. Figure 7 below highlights the difference in the average notional trade size in CDRs. The institutional NEO Traders and LSTs have the highest average notional trade size, growing to about $14,000 and $12,000, respectively, over the last two years. In contrast, the retail average notional trade size is 38% lower than that of NEO Traders and LSTs, at $8,000, though it has been increasing over time.

^{Figure 7: CDR Average Notional Trade Size by Flow}

CDR Interest Peaks with Earnings Announcements

The increase in liquidity around the earnings dates for these U.S. companies is another interesting CDR phenomenon. Figure 8 below details the average daily notional volume in all CDRs for companies reporting earnings on the days leading up to and following the companies’ earnings releases. One week prior to earnings, we see a small uptick in notional volume traded; then on the actual reporting date ,there is a significant increase in activity. Following earnings dates, notional volume remains elevated, relative to pre-earnings volume, one week and one month later. This highlights that CDRs gain significant popularity from Canadian investors when these companies report earnings, and these investors remain active in the securities beyond the earnings release.

^{Figure 8: CDR Average Notional Value Relative to U.S. Earnings Date}

CDRs listed on Cboe Canada are an innovative and effective way for Canadian investors to gain exposure to international blue-chip public companies. Available to trade on all four Cboe Canada venues, the performance benefits and demand from retail and institutional investors are evident. There is a healthy mix of investors trading CDRs; and though retail investors continue to make up about one-third of all CDR volume, LSTs have become increasingly active in this space. With the success and continued growth in popularity they have experienced over the past few years, CDRs are definitely worth a look. And Cboe Canada plans to continue to innovate and expand our existing CDR listings to provide even more utility to Canadian investors in the months and years ahead.

Please reach out to your Cboe North American Equities representative for questions or to learn more about optimizing your trading strategies.

^[1] Top 4 stocks based on notional traded in Q1 2024

^[2]As defined in section 1.01 of Cboe Canada’s Trading Policies, “Latency Sensitive Trader” or “LST” means either: (1) a proprietary trader of a Member, trading for its own account, using automated, co-located trading strategies; or (2) a DEA Client using automated, co-located trading strategies and making its own routing decisions, where “using automated, co-located trading strategies” means using a server installed in the same data center as, or in close proximity to, any Canadian exchange or alternative trading system located in the Greater Toronto Area.

^[3] Pursuant to section 1.01 of the Trading Policies, "NEO Trader^TM” means an account type or an investor that trades through an account type, other than LST.

^{The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.}

^{Cboe®, Cboe Global Markets®, Bats®, BIDS Trading®, BYX®, BZX®, Cboe Options Institute®, Cboe Vest®, Cboe Volatility Index®, CFE®, EDGA®, EDGX®, Hybrid®, LiveVol®, Silexx® and VIX® are registered trademarks, and Cboe Futures ExchangeSM, C2SM, f(t)optionsSM, HanweckSM, and Trade AlertSM are service marks of Cboe Global Markets, Inc. and its subsidiaries.}

^{Past performance of an index or financial product is not indicative of future results.}

Equities