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
- 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 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.
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.
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.