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.

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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.
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brian
4 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
5 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
5 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

Heather
5 years ago

This is all so very interesting! I would like to transfer some of my Canadian stocks to sell in order to buy US stocks BUT I am concerned about the tax implications… My questions:

1. How does Rev Canada get paid on taxable gains when an inter-listed stock is transferred from a Canadian to a US account – i.e. at what point is a gain (or loss) crystallized for reporting?

2. Presumably transferring stocks that qualify for tax credits under tax loss selling rules, would negate your ability to claim the loss. Is that the case?

3. Given perceived complexities with the taxman, would it reduce the tax hassle factor if we confine the Norbert Gambit, to stocks transferred between CAD & USD REGISTERED accounts only?
(TFSAs are not recognized in the US as being tax free so investors need to be aware of any tax implications there.)

4. Are there any other tax snakes in the grass waiting to ensnare the unsuspecting?

PS Who the heck is Norbert?

Joshuatennis
5 years ago

If all shares were not sold within the same day, we will be charge additional $10 on commission fees for share sold the following day. Here is a scenario:
1.We put a Sell on 5000 shares at 3:45pm. Only 3000 shares were partially sold by market closing at 4pm. Remaining 2000 shares will be sold the following day. We have to pay two commission fees, a total fee of $20. Some advantage at times for unsold partial shares could be, ……….. If we speculate that the DLR Canadian exchange rate will get better the following day, we can change the limit price of the remaining unsold shares, before the next day trading session. If the rate seem to get worse, we can cancel the unsold partial share order and wait for a better time to sell them. We can speculate the volatility of Canadian currency by watching a Real time USD/CAD currency exchange rate graph, where currency exchange trading continue to happen even after Canadian stock exchange trading hours closes.

joshuatennis
5 years ago

Since I got ticked off having to pay an unsuspecting ECN Fees, and have to wait up to 10 days to get funds settled using Questrade. I have decided to write my concern. I joined Questrade because they promote no ETF commission fees to buy, and free 100 commission for account with $10,000 or more. However, when trading big volume of share on DLR, they have hidden ECN fees which could be higher then a flat $10 commission.

Questrade charges ECN FEES OF .0035 to buy an ETF fund is the catch to unsuspecting Client, though they claim they do not charge a commission for buying the Horizon ETF. I had to pay non-rebateable ECN fees of US$35 to buy 10,000 share of DLR.U. I was DISAPPOINTED with the hidden fees. Then have to wait three days for the funds to settle , not knowing what the exchange rate would be. Call and wait for up to 10 minutes to get someone to journal the share, finally pay the $10 commission to sell it. If the exchange rate is not good after the third day of settlement, we will regret with the Nobert’s Gambit process, and if better, we are glad for the wait. To access the fund again, we have to wait another 4 days for the funds to settle before one can buy again. A Total of almost 10 days , just too complicated for regular serious trader who might want immediate result. To withdraw money out of Questrade, via e-transfer, will take another 3-5 days, and maximum of $25,000 per day will be release.

Horizon do not charge the ECN fees that Questrade collects. I am not sure who eventually pockets the ECN fees.

When trading with Royal bank and TD with on line trading account, anyone can trade, get the spot price after the share gets journal-led. No need to wait for three days to settle. Royal bank automatically journal the shares, while we need to call TD waterhouse to get the DLR share journaled first then sell. If one is part of Royal bank premier margin account, we could use the fund right away to buy and sell, no need to wait for three days to get settled. The $10 Commission to buy or sell is small amount to pay for the peace of mind of getting the spot rate that we wanted, and avoiding higher bank commission.

Why would anyone use Questrade? We do not know how much the exchange rate we will get three days later, then higher ECN fees for trading big volume. It could be better or worse exchange rate we might get based on the recent Canadian dollar volatility. While with Royal bank or TD, (though we just have to pay $10 commission to buy) we can get the exchange rate as soon we buy and sell Horizon DLR right away if we want to, no need to wait for three days to settle, and no need to pay higher 0.0035 ECN fees if one is trading at a big volume shares.

For new account with TD or Royal bank , they offer free 20-100 commission up to 60-90 days for first time client. Refund of commission only happen after the 60-90 days term. Questrade also offers the same promotion, but hidden ECN fees might exist on certain funds. Unless one call and ask first before trading, and have to wait on the phone for slow customer service, why bother?

One good way of maximizing your potential return is to watch/use this site for USD/CAD real time currency exchange. the system work even on weekends or middle of the night, since currency exchange never goes to sleep. http://www.dailyfx.com/forex/technical/home/analysis/us_dollar_index/2015/03/26/dailyclassics_us_dollar_index.html

Whenever I watch the currency volatility for the moment, I could kind of speculate when I will be ready to trade the DLR shares, either trade now or wait till next day.

Marc
5 years ago

Hi
Thanks for the help….I was reluctant to call TD as I read on a few different blogs that
TD frowned on this behavior, and I didn’t want them to tell me I couldn’t do it without paying full commission and have record of the conversation(they record all calls)
I finally called them without identifying myself and they were fully supportive and gave me the instructions on how to do it…. They did stipulate that if I wanted to sell it right away, I would have to pay full commission on the sell side (which was about $100). I just have to call them after making the buy…and they will journal the purchase over to my CAD side, but I cannot sell it for 3 days(until its settled) to get the 9.99 commission.
Thanks again.