Trading in Lululemon returns to Canadian markets, but not how you think

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After more than a decade abroad, Lululemon Athletica Inc. LULU-Q is coming home to Canada.

Vancouver’s most valuable clothier will not be relaunching the Canadian public listing it abandoned in 2013. Instead, Canadian investors will be able to buy Lululemon shares in Canadian dollars starting Thursday by purchasing Canadian Depositary Receipts.

Seven new CDRs from Canadian Imperial Bank of Commerce will start trading Thursday on the Cboe Canada exchange (formerly known as the Neo Exchange), bringing the total available to 54. In addition to Lululemon, other CDRs coming this week include BlackRock Inc., Constellation Brands Inc., Deere & Co., Palo Alto Networks Inc., ServiceNow Inc. and Thermo Fisher Scientific Inc.

Since they first became available in July, 2021, CDRs have become an increasingly popular option for Canadians looking to invest in major American companies while minimizing currency risk. Because CDRs are sold in Canadian dollars, buyers also gain a hedge against fluctuations in the Canada-U.S. exchange rate.

CIBC makes money on the CDRs it develops and manages by charging small fees from the foreign exchange transactions it makes in order to manage that currency hedge. However, those fees are capped at 60 basis points or 0.6 per cent on an annualized basis.

That is well below the conversion fees banks typically charge Canadian investors for buying U.S. dollar-denominated stocks, which are usually in excess of a full percentage point.

Canadian Depositary Receipts

The CDRs of major U.S. stocks are also more broadly accessible to investors than the stocks themselves because of how they are priced. Each CDR represents only a fraction of a full share. For example, Lululemon’s targeted CDR starting price will be $20, but the company’s Nasdaq-listed shares cost more than US$450 a piece.

Those features have led to rapidly growing demand for CDRs, particularly among Canadian do-it-yourself investors. Trading volumes went from about $5-million a day in the first couple of months after their launch in Canada, to $17-million per day by the end of 2021, while the number of individual client trades over that period grew from roughly 300 a day to more than 5,000.

Two years later, volumes have grown tenfold and individual client trades have more than tripled. Last month, Cboe Canada chief revenue officer Erik Sloane said CDRs averaged $120-million in daily trading volume and individual client trades routinely topped 18,000 a day.

“This is the real deal,” Mr. Sloane said. “And the bigger the shelf gets the more people find them.”

Of the 47 CDRs currently available, approximately 60 per cent of their overall assets under management reside in what has become known as “the magnificent seven,” referring to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Once the CDR lineup surpasses 50 – which it will when the latest batch starts trading on Thursday – CIBC expects to attract larger financial players and portfolio managers.

“Now that we have 50-plus CDRs available, interest from institutional investors has picked up,” said Elliot Scherer, managing director and global head of the wealth solutions group at CIBC World Markets. “That has helped keep the bid-ask spread very tight and will materially increase trading volumes.”

For Cboe Canada, CDRs represent the latest attempt at differentiation in its years-long quest to rival Canada’s dominant TMX Group Ltd. and its flagship Toronto Stock Exchange.

“From a trading perspective and a value-of-information perspective, CDRs are an incredible smash hit for us,” Mr. Sloane said.

As for TMX, “I have to imagine they want some of this business,” he said.

TMX, for its part, does not appear overtly interested. Asked whether TMX had any plans to bring CDRs to any of its platforms, spokesperson Catherine Kee said: “TMX’s main focus remains on serving our diverse and proven ecosystem: providing a fair, transparent and liquid growth platform for companies, funds and products listed on our markets.”

Should Cboe Canada ever face more competition in the CDR space, Mr. Sloane intends to be ready.

“We wanted the listing, we wanted the trading and we wanted the data,” he said. “We don’t want to give up anything and we are fighting toe-to-toe.”