If you’re looking to save money on foreign exchange, you’re in luck. There is a simple and effective way to convert your CAD to USD so you can make US stock purchases. It’s called Norbert’s Gambit, and it can save you hundreds of dollars on trading fees.
Smart investors know that investing in US stocks is a great way to diversify your portfolio. The good news is, your favorite Canadian Online Brokerage will make it easy to do by conveniently converting CAD to USD for you when you want to buy US stocks with your Canadian brokerage account. The bad news is, you’ll end up paying a lot more this way, upwards of 2% or more.
Once you get the hang of it, you will see that Norbert’s Gambit is the best way to convert currency, so you can keep more of your money and make it work for you. If this appeals to you, read on to find out all about how to use Norbert’s Gambit using the brokerage account you already have.
How Can I Use Norbert’s Gambit to Convert CAD to USD?
You can utilize Norbert’s Gambit using the Horizons US Dollar Currency ETF, which consists of DLR that is bought and sold in Canadian dollars. You’ll also use the DLR.U ETF, which trades in US dollars. Trading these two ETFs, you’ll have a cheap way to convert CAD to USD. Basically you would:
- Buy the DLR ETF in CAD;
- 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,
- 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 Qtrade.
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 change 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 (Qtrade, Questrade 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.
Here is 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 your Qtrade 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 @ $88.06 USD (as of October 8, 2022).
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 October 8, this would have resulted in obtaining $121.01 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). I have listed the cheapest international money transfer options for Canada in a dedicated article.
With a bit of practice, using Norbert’s Gambit will become an easy part of your investment routine. It is one of the most cost-effective ways to avoid paying annoying hidden fees that you’ll be charged for purchasing US stocks from your CAD trading account.
There are some important things to keep in mind to make this strategy work for you. You’ll need to make sure your discount brokerage account offers automatic journaling of shares. This will definitely protect you against FX and stock market volatility. The other thing you’ll need to do is to do just a bit of research to ensure your inter-listed stock is not experiencing volatility, or announcing company earnings, on the day you trade.
Using this strategy with a Questrade or Qtrade brokerage account is an easy way to save you money on your CAD to USD currency exchange and vice versa. We’ve got a full Questrade Review and Qtrade Review where you can find out why we recommend them not only for Norbert’s Gambit, but as Canada’s top discount brokerages all around.
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