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 (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, 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). 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.