Real Life Example of Norbert’s Gambit and Foreign Exchange w/ BMO Investorline

The continued strength of U.S Dollars (USD) has made it more expensive for Canadians to purchase US goods.  As of this week, $1 CAD = 0.73856 USD, in other words, it would cost you $1.354 CAD to purchase $1 USD.

This is a great situation if you already own USD, and perhaps now is a good time to take advantage of the foreign exchange rate (FX). If you own some USD, converting to CAD to get a 35% premium is enticing – at least it is to me.

Financial institutions love it when you convert currency as they get a piece of the pie.  If you go to a teller  or even call your discount brokerage and ask to purchase a different currency, they will typically charge you up to 2.5% (possibly more) for the conversion.  So if you are converting $10k, that’s an extra $250 plus the FX spot rate at the time.

What is Norbert’s Gambit?

As someone who is always looking for a better deal, I’ve found a number of ways to save money on FX fees. If you have USD sitting around to convert, one way is to use your discount broker to perform Norbert’s Gambit.  I’ve written an article on Norbert’s efficient currency exchange gambit:

How do we use Norbert’s Gambit to cost effectively exchange USD to CAD with minimal risk?  This strategy will allow FX at around spot rate and involves;

• Buying and selling highly liquid “inter-listed” stocks (ie. stocks listed on both the TSX and NYSE); and,
• Using a discount brokerage account that automatically journals (ie. moves) shares between CAD and USD (RBC Direct Investing or BMO InvestorLine).  The automatic journaling of shares is an important feature as it reduces the risk and amount of FX movement while you are holding the shares.

The high level explanation is that you buy/sell stocks listed on both the Canadian and US exchanges. The pricing of the stock on each exchange should be close to equivalent after applying the exchange rate.

So as an example, using a non-registered account, you could buy a stock like TD on the US exchange (using US dollars), then immediately sell TD on the Canadian exchange (in Canadian dollars).  With most discount brokerages, there is an intermediate step of phoning the broker (or live chatting with Questrade) to journal the shares from US to CAD.  However, some brokers like BMO and RBC automatically journal the shares for you.

Real Life Norbert’s Gambit Trade with BMO InvestorLine

Having an account with BMO InvestorLine and USD cash on hand, I had the opportunity to play around with this strategy.

Step by step, this is what I did:

1. Purchased 220 shares of TD:US (using USD currency – this is important!) @ $45.32 USD.  The bid/ask was close to the real time quote on both TD:US and TD:CA.  So when I purchased, I just simply placed a limit order on the ask price.  The tight bid/ask spread and high volume (liquidity) was why I chose TD.
2. Immediately sold 220 shares of TD:CA (using CAD currency) @ $60.53 CAD.  Again the bid/ask spread was acceptable, so I placed a limit sell order at the bid price. In this case, speed of transaction is more important than waiting for a better price.
3. At this point, my work was done and the foreign exchange was just about completed.  My CAD is locked-in and cash already in my account.  The last step was to wait for journaling to happen to clean up my account.  My portfolio at this point showed 220 shares of TD:US and -220 shares of TD:CA (essentially a short position).  It turns out that it takes a little less than a week for the shares to clear out of the account.  Note that registered accounts will generally not allow for short positions.  In this case, you would need to wait for the discount broker to journal the shares over before you can sell and lock in your FX rate.  I’ve read that some investors phone the broker prior to making the trade and get the trading desk to journal and sell the shares while on the phone.

Result:

• This trade occurred on October 26, 2016 which had a noon spot rate of 1.336.  My trade resulted in $60.53/$45.32 = 1.3356.  In more concrete terms, converting $10k USD using spot rate would have been $13,360 CAD, using the results from my trade after the bid/ask spread: $13,356 CAD.  This represents a $4 difference or 0.04%.  Counting two trading commissions (buy and sell) of $20 and the $4 bid ask premium, the total cost of my trade was $24.  This sure beats the typical $150-$250 that banks would charge you.  I repeated this trade on November 7, 2016 and obtained the same 0.04% result (actually 0.037%).
• As you can see, the greater the amount that you exchange, the greater the dollar value in savings.

Final Thoughts

There you have it, I made two Norbert Gambit trades with BMO InvestorLine which had very good results.  Both trades resulted in an implied fee of 0.04% plus buy/sell commissions.  Compare that with a 1.5% – 2.5% fee charged by the brokerage to do the FX for you.  While the portfolio showed both the long and short positions initially, the trades automatically settled (removed from portfolio) within a week.

You can also read about my experience trading DLR/DLR.U for currency conversion using Questrade.