Save Money with USD to CAD Foreign Exchange using Norbert’s Gambit

With the U.S Dollar (USD) gaining strength in the global currency game, it has resulted in the Canadian Dollar (CAD) losing some ground.  While this means that shopping in USD is more expensive for Canadians, it’s great news for those who have some of their nest egg or generate income in USD.

While it’s a great time to own USD, how does someone convert USD to CAD without getting gouged by the bank?  The answer – Norbert’s Gambit.

I wrote an article about Norbert’s Gambit using the DLR and DLR.U ETFs as a cheap way to convert CAD to USD.  Basically you would

  1. Buy the DLR ETF in CAD;
  2. Ask the discount brokerage to journal your CAD DLR position to USD DLR.U (usually by phone and free of charge, others are automatic); and,
  3. Sell DLR.U in the US market. 

Voila, you now have USD without the big FX fees (up to 2% of total conversion).  While the process may take up to 5 days to complete, there is very little currency risk as your foreign exchange rate (FX) is locked in as soon as you buy DLR.  Here’s an article providing a little more detail on the DLR/DLR.U conversion with Questrade.

Using DLR/DLR.U is a cost effective and low risk way to convert CAD to USD, but not as great when converting from USD back to CAD.  The reason is that going in reverse order, buying DLR.U and selling DLR, exposes you to FX volatility.  In other words, while waiting for your shares to journal over (up to 5 days), the FX rate (ie. the value of DLR) can changed dramatically.

So back to the question, 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.

Inter-listed Stocks

Here are a list of potential high volume, low bid-ask spread stocks that are inter-listed on the TSX and NYSE(generated from TMX.COM).  Personally, I like using the big banks, the higher the share price, the better.

TSX/US Symbol Issue Name

AGU/AGU Agrium Inc.
BMO/BMO Bank of Montreal
BNS/BNS Bank of Nova Scotia (The)
BCE/BCE BCE Inc.
CM/CM Canadian Imperial Bank of Commerce
CNR/CNI Canadian National Railway Co.
CNQ/CNQ Canadian Natural Resources Limited
CP/CP Canadian Pacific Railway Ltd.
CVE/CVE Cenovus Energy Inc.
ENB/ENB Enbridge Inc.
ECA/ECA Encana Corporation
IMO/IMO Imperial Oil Limited
MFC/MFC Manulife Financial Corporation
POT/POT Potash Corp of Saskatchewan Inc.
RCI.B/RCI Rogers Communications Inc. Cl B NV
RY/RY Royal Bank of Canada
SLF/SLF Sun Life Financial Inc.
SU/SU Suncor Energy Inc.
TCK.B/TCK Teck Resources Ltd. Cl B SV
TRI/TRI Thomson Reuters Corporation
TD/TD Toronto-Dominion Bank (The)
TRP/TRP TransCanada Corporation

Instructions on Converting USD to CAD

1.  Using a BMO (BMO Investorline review) or RBC discount brokerage account, buy an inter-listed stock (listed above) with high volume/liquidity and with a low bid/ask spread.  Since we are converting from USD to CAD, buy the USD version of the stock at the “ask” price.  You can also use this trick for converting CAD to USD but you would do the opposite and buy the CAD version of the stock.  Lets use an example of buying RY on the NYSE @ $72.83 USD (Nov 14, 2014).

2. After executing the BUY trade, immediately initiate a SELL in the opposite currency.  In this example, if you bought RY on a US exchange, immediately sell RY at the “bid” price on the TSX (ie. in CAD).  On Nov 14, this would have resulted in obtaining $82.21 CAD, this works out to be about spot rate (ie. no extra FX fees) depending on the bid/ask spread.

3. You may notice that the balances in your brokerage account may seem a bit “off”.  Effectively, you have shorted a stock thus sometimes showing a negative balance, but the system will sort itself out within a week or so.

Alternatives to Low-Cost USD to CAD Transactions

There is an additional alternative to paying less on FX fees, which is simply transferring funds between your CAD and USD bank accounts. You can circumvent the bank’s FX fees by moving your funds through a third party provider. Foreign currency providers will receive your CAD or USD through a domestic transfer, exchange them, and transfer the funds back to your account (or another recipient, if you are making a payment). WorldFirst, a FINTRAC regulated provider, offers the best margins currently, with a fixed fee of 0.5% on each transaction, and as low as 0.1% if you are transferring large volumes. Please note the company does not accept U.S based customers, so you must have a Canadian address to sign up with.

Final Thoughts

While using this strategy is a cost-effective method of eliminating the hidden fees that discount brokerages charge for FX conversion, there are some caveats.  First, you need to have an account with a discount brokerage that offers automatic journaling of shares.  Without this, you are exposing yourself to FX and share price volatility.  In addition, you need to pick an inter-listed stock with low volatility.  To help reduce volatility, do a quick “news” search of the company for that day and avoid this strategy during company earnings.

I’ve used this strategy a number of times with my BMO Investorline account and it has saved me money every time.  Check out my full review here.

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
Subscribe
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

41 Comments
Inline Feedbacks
View all comments
brian
3 years ago

going from us to cdn seems risky with NG. I recently exchanged 500k us to cdn using fidelity at a fee of 30bps (0.30%), in other words it cost me $1500 off the rate. the interbank rate is 0.10% , that’s what the banks charge each other, impossible for the average guy to get that rate. money was converted instantly with no other fees or hassles. knightbridge offers close to the same, just a few bucks more.

Grant
3 years ago
Reply to  brian

Brian, there is no risk at all doing Norbert’s Gambit with DLR/DLR.U and less expensive than 0.3%. On $500k, the cost would be 0.2% (two spreads of 0.1% when buying and selling the ETFs) plus the two commissions – $1000 plus $20.

GG
4 years ago

If your broker doesn’t do automatic journalling, then you can convert USD to CAD like this and avoid FX risk:
1. Buy DLR.U with half your portfolio and FXC with the other half. Wait for DLR.U to journal over to DLR. During this time, you will have a net 1x USD exposure (2x with DLR.U and zero with FXC).
2. Sell DLR on CAD side. Buy DLR.U on remaining USD side and journal it over to DLR. Again, you’ll have net 1x USD exposure during this time

J-P
4 years ago

Tried to it with National Bank and they told me (2 different CSRs) this cannot be done and will have to wait until settlement date first then the transfer can be made.

Anybody had any luck with them?

J-P
4 years ago

In order to do this with RBC or TD, do you need a margin account or regular one?

Non-frugal trader
5 years ago

You can use this calculator to find out how much Norbert’s Gambit will save you vs using a regular retail FX rate:
http://norbertsgambit.com

It picks up live prices for DLR (you can adjust these if you want), and gives you your effective exchange rate.

Jerry
5 years ago

not sure why my comment went missing

RFD and my recent call to TDDI confirms that they want full agent commission if one does same-day journal & sell
e.g. $10K USD in TD USD buy and sell TD.ca will costs about $10 to buy, $43 to sell

I think I’ll just buy DLR.U in USD ($10 commission), call to journal, wait 3 days to see it appear as DLR in CAD Margin, and sell whenever I like

USD is 1.37x CAD, crazy!!!! 11 year high