Archive for November, 2011

Interesting anomaly in the Horizons U.S. Dollar Currency ETF

November 3, 2011

9 comments

I’ve written multiple times in the past (for example, see A Foolproof method to convert Canadian dollars into US dollars) about using the Horizons U.S. Dollar Currency ETF (DLR) and its US$ denominated sibling to convert Canadian dollars into US dollars or vice-versa. Reader Northern Raven noticed a curious anomaly in the exchange rate implied by DLR/DLR.U compared to other inter-listed stocks such as Research in Motion (TSX: RIM, NASDAQ: RIMM), Potash Corp. (TSX: POT, NYSE: POT) etc. For some reason converting Canadian dollars into US dollars using DLR/DLR.U is about 15 to 18 basis points cheaper than the alternatives:

Horizons US Dollar Currency ETF (TSX: DLR, DLR.U): $0.9946
Barrick Gold (TSX: ABX, NYSE: ABX): $0.9928
Potash Corp. (TSX: POT, NYSE: POT): $0.9929
Research in Motion (TSX: RIM, NASDAQ: RIMM): $0.9927
TD Bank (TSX: TD, NYSE: TD): $0.9929

Of course, this also means that converting US dollars into Canadian dollars using DLR.U and DLR is more expensive. In fact, the penalty is much higher than the advantage and averages about 50 basis points:

Horizons US Dollar Currency ETF (TSX: DLR, DLR.U): $1.0021
Barrick Gold (TSX: ABX, NYSE: ABX): $0.9968
Potash Corp. (TSX: POT, NYSE: POT): $0.9970
Research in Motion (TSX: RIM, NASDAQ: RIMM): $0.9973
TD Bank (TSX: TD, NYSE: TD): $0.9971

I don’t know why DLR/DLR.U is cheaper and DLR.U/DLR is much more expensive than inter-listed stocks. But it does suggest that investors converting Canadian dollars into US dollars should likely prefer to use DLR/DLR.U and investors converting US dollars into Canadian dollars should likely prefer inter-listed stocks. I also don’t know if this anomaly will continue to persist in the future.