With foreign exchange fees as high as 2.5% for discount online brokers, low-cost currency conversion methods are a great way to keep a little extra money in your portfolio. If you’re dealing with larger trades, those FX fees can really add up!
For example, say I wanted to purchase $10,000 worth of Walmart stock with Canadian dollars. If I did a straight purchase with CAD in my brokerage account the fee (on top of the spot rate and commission) would be up to 2.5%, or $250 in order to first change the CAD into USD, and then buy the American securities. The shares would need to increase by 2.5% just to break even on the trade.
To look at it another way, the $250
$199 is almost enough to purchase two additional shares. There has got to be a better way, right? Luckily, there is!
Norbert’s Gambit tops our list of the best low-cost ways to convert CAD to USD and vice versa. And in this article, I’m going to show you one simple way to do it, using an interlisted, currency-based ETF.
This tactic has been my go-to since I stumbled across a post on Canadian Money Forum (and Canadian Capitalist) back in 2012. The response thread discussed how to save money on currency conversions using Horizons DLR and DLR.U ETFs.
Basically, you buy DLR through your Canadian account and then sell DLR.U on the US side. DLR will track the CAD/USD exchange, so once you purchase the ETF, you have locked in your exchange rate. But let’s dig into exactly how to do it.
The Step by Step Procedure
I used this strategy with my Qtrade account, which was pretty straightforward. DLR/DLR.U isn’t currently on their list of free ETFs, which means I pay commission for buying as well as selling, but the savings still make the nominal fee worth it (their list can change occasionally, so it’s worth keeping an eye on it).
To Perform Norbert’s Gambit with Qtrade:
- Buy DLR. Purchase DLR using a limit order with your Canadian trading account. As of October 6, 2022, DLR costs $13.90. So if you want to exchange $10,000 CAD, purchase approximately 719 shares (total $9994.10)
- Journal the Shares. While some brokerages require you to contact customer support in order to journal shares, Qtrade lets you do it yourself. Select “Transfer Funds” from the “My Accounts” menu and then “Move Securities.” There should be no fees to journal the shares over to your US account. You may have to wait 3-4 business days for your trade to settle before they can journal the shares.
- Sell DLR.U. Once the shares are in your US account, sell DLR.U using a limit order. As of October 6, 2022, DLR.U costs $10.11, and selling 719 shares will net you $7269.09. With xe.com (spot rate) quoting 0.728107, this strategy gives you 0.72792. You have now exchanged your Canadian dollars into US dollars at a relatively low cost.
So now that you have some CAD exchanged to USD, how much did you save? Using this strategy results in paying a fee of approximately 0.20% – 0.25% (plus spot rate and commissions) compared to a maximum FX fee of 2.5%. On $10,000 CAD, that’s a savings to the tune of $212. Do this a few times throughout the year, and the savings become significant.
Using DLR/DLR.U ETF combination for CAD-to-USD foreign currency exchange is one example of Norbert’s Gambit that has served me well for years. My instructions above are for Qtrade, but it’s been done with a range of other Canadian brokers as well.
Have you had success with Norbert’s Gambit? Let us know in the comments!
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