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moneysense.ca, 25/05/11
A Foolproof Method to Convert Canadian Dollars into US Dollars
Buy 700 DLR at $9.75.
Sell 700 DLR.U at $9.99
Result: $6,835 CAD converted into $6,983 USD.
TD Waterhouse retail exchange rate: $6,835 CAD converted into $6,901 USD.
Total Savings: $82
moneysense.ca, 25/05/11
This is really good!
I wonder if TD has lowered their exchange rate fee – I would have thought you’d have saved more than 0.8%.
I’ll have to try this with Questrade and see how it goes.
@Mike: The cost of exchanging currency with DLR/DLR.U is more or less fixed. In this example, my expenses were $20 for the trading commission and $10 for the bid-ask spread or 0.6%. TD Waterhouse typically charges 1.5% for the exchange which agrees with the 0.85% estimate here.
If we exchange more dollars, the savings would be more. Example. Cost to exchange $10K with DLR/DLR.U would be $40 ($20 for the bid-ask spread and $20 for the trading commissions). At TDW, it would be $150. The total savings would be $110 or 1.1% of the exchange value.
Wow. That is a significant savings. I assume you can do it backwards to buy Canadian Dollars with the US currency? Could this be a good method to make gains on arbitrage?
@JP: Yes you can buy DLR.U first and later sell DLR to exchange US dollars into Canadian dollars. I’m not sure I understand your comment about arbitrage. The exchange rate would be pretty close to the spot rate (actually ETF NAV in this case), so there won’t be any opportunity for retail investors to make arbitrage profits.
Yes but will this work in an RSP, where most of us have our savings? I’m with Scotia iTrade and I don’t have a USD RSP
[...] I wrote in this post, the Horizons BetaPro US Dollar Currency ETF (DLR, DLR.U) offers a foolproof way to implement the Nor…. Post a [...]
So… how does this work with RBCDI and other brokers where you can hold US and CAN in the same account?
I guess I don’t even need to do this – buy DLR using CAD, then immediately sell it choosing to receive the results in USD? Am I missing something?
@DM: I’ll find out about iTrade but the Norbert Gambit in a RRSP account at TD Waterhouse is supposed to not involve any journalling. i.e. one would buy an inter-listed stock and sell it right away. Example. Buy POT on the TSX and sell POT on the NYSE.
http://www.canadiancapitalist.com/easy-norbert-gambit-in-td-waterhouse-rrsp-accounts/
@Sean: The method should be exactly the same in taxable (non-registered) accounts at any other broker. For RRSP accounts at RBC DI, it should also be exactly the same because you can separate CAD and USD RRSP accounts at RBC DI.
@CC, I wasn’t very clear. Would this be a good option to make money by currency trading? ie buying USD when the CAD is high and selling USD when CAD is low?
@Canadian Capitalist, I guess that’s my confusion, as I only have one RSP account, but when I purchase I can choose to purchase using US or CAN funds, and when I sell a security I can choose what currency to settle it in. I can hold both US and CAN funds within the same account.
I guess because I don’t trade US securities in that account (I use OptionsXpress for that) I have not tried any of these transactions yet. I’ll have to call them and confirm, and maybe test one out to make sure I know how it works.
Very useful post (as always!). Just a minor point, but TD Waterhouse Canada actually charges 1.4% over spot for USD exchange. It’s been this way for a while.
[...] Canadian Capitalist: A foolproof way to convert Canadian dollars to greenbacks? [...]
We investors shouldn’t be content paying high currency exchange fees.
This method is definitely the way to go when performing currency exchanges.
Another great post, CC!
Just spoke to my broker BMOIL about doing this in an RRSP (where the broker does not allow USD cash to be held) – sell a USD holding, say SPY and buy a CAD holding, say XIU using this method.
Was told this is how they would do it:
Day 1 – sell SPY, buy DLR.U for same USD net amount, then phone BMOIL and ask to sell it as DLR = CAD settlement, then buy XIU for the same net CAD amount with new CAD
Day 4 (T+3) – the dust all settles automatically
The big difference is that the phone call trade of DLR goes at the much higher broker-handled rate of $43 (yikes) so obviously the economics work starting at amounts over $5k.
Hi CC–
Thanks for another helpful article. I tried using this product in my RBC DI Practice Account– RBC doesn’t seem to be trading it yet. I received the following message when I tried to sell DLR.U:
“We are unable to accept an electronic order for this symbol at this time. To place an order for this symbol, please contact your RBC Direct Investing Inc. Investment Centre.”
A question for you: does this instrument offer any benefits over the “traditional Norbert’s Gambit” where one might use a stock like RIM or Potash? Is the benefit that the spot rate is better?
Any disadvantages? Perhaps the 2 cent spread versus a penny spread? I imagine the MER is a non-issue if you’re buying and selling DLR right away?
Thanks again!
@JP: Technically, the answer is yes. An investor who believes CAD is overvalued could buy and hold DLR. However, trading currencies is a tough way to make profits.
@Sean: The following post suggests that gambitting with any stock should already be automatic at RBC DI:
http://www.christinanorman.com/2010/10/using-rbc-direct-investing-for-norberts_20.html
Just buy RY on TSX, sell RY on NYSE and after settlement, you should have USD in your USD side of the account. I can’t test this out because I don’t have an account myself.
@Viscount: Here are the numbers that TDW quotes for a $5K conversion right now:
Sell rate: 1 USD = 0.9924 CAD
Buy rate: 1 USD = 0.9608 CAD
The spread at this time seems to be around 1.6%. I’ve seen this fluctuate around 1.5%. I’ve even seen as high as 1.9%.
@avrex: Yes, currency conversion is a huge profit center. We should try and avoid it as much as possible, especially the most usurious ones that force the conversions in RRSP accounts.
@CanadianInvestor: BMOIL should really be offering wash trading. It is ridiculous to gambit just to avoid the forced conversion.
@BC_Doc: It appears you can automatically do a regular gambit with any inter-listed stock at RBC DI. i.e. Buy POT in TSX, immediately sell POT on NYSE. When the trade settles, CAD will be converted into USD. If I can do that at TDW, that’s what I’d do.
The only advantage of using DLR/DLR.U is completely avoiding market risk even the minimal one of selling the shares right away. I don’t think the spot rate will be better. In fact, the spread might be much lower on a very liquid stock such as RIM which typically has a spread of just 1 cent. A 1 cent spread on a $45 share is much lower than a 2 cent spread on a $10 share. Still, the bid-ask cost with DLR is rather modest.
@CC: Keep in mind that spot rates for bid and ask are different; the currency conversion rate is not calculated based on the midpoint rate.
Thanks for your reply CC. I think I’ve pieced together the differences between Norbert’s Gambit and the Horizons BetaPro product. Unlike NG where I take my shares of RY that I just bought and immediately sell them on the NYSE, with this new product I would buy DLR in Canadian dollars on the TSX and then immediately sell DLR.U on the TSX with settlement in USD. There is no US stock exchange involved in the conversion.
It looks like the cost of converting funds using this product is approximately 0.4% plus two trade fees) (2 cents per share in bid-ask spread when you buy DLR at approximately $10/share plus another 2 cents per share in bid-ask spread when you sell DLR.U). So, it’s not as cost-efficient as Norbert’s Gambit but it’s still better than the 1.25-1.50% that the currency desk charges to convert dollars.
Thanks again for another fine column!
@ CC
&
@ Sean
RBC DI works exactly as described in Christina’s blog. I already did it, earlier this year. It settles after 2 days.
[...] A Foolproof Method to Convert Canadian Dollars into US Dollars @ Canadian Capitalist [...]
[...] 5. A Foolproof Method to Convert Canadian Dollars into US Dollars from the Canadian Capitalist [...]
Has anyone tried this with TD Waterhouse recently? I spoke to a TDW rep today and was told that they will not journal shares between your CAD and USD accounts if it is a ‘regular’ occurrence. Since this was my first time, the rep went ahead with my journal request (DLR from my CAD to USD acct). But now I don’t know if I’ll be able to do this again anytime soon. Looks like this has already gotten too popular and TDW is looking to clamp down.
@FirstTimer: That’s not good news though I journalled some shares just the other day and did not encounter any problems. If TDW tried to pull that trick, I’ll tell them to expect a Transfer Request from a competing broker shortly. It is only at TDW that one has to jump through hoops to do a Norbert Gambit. At brokers such as RBC DI and BMO, the gambit is supposed to be automatic. I’d be extremely displeased if TDW tried to pull that trick on me.
How do I properly convert the US currency to Canadian currency using my TD Waterhouse non-rrsp account?
Should I:
1) Log into WebBroker, and select my US Brokerage Account
2) From the US Brokerage Account, Purchase the DLR.U from the “CA – Canadian market” using my US dollars?
3) Call TD and ask them to journal the DLR.U entry over to the Canadian Account
4) Wait for the DLR.U/DLR, (whatever the entry ends up changing to) to migrate and settle over to the Canadian Brokerage account.
5) Sell the DLR.U/DLR from the Canadian Brokerage Account, cross fingers and hope the funds settle in Canadian dollars?
Thanks!
Matt
Thanks CC, this is a great post on gambit
Has anyone successfully implemented this gambit in a Questrade account?
I tried to get confirmation that they’d journal DLR to DLR.UN, but the “official” response was:
> Unfortunately this cannot be done.
> DLR and DLR.U are two different stock.
> Only interlisted stock can be journaled.
@Erick: Is Questrade able to journal DLR to the US side of the account? If they can, then you should be able to do a journal and sell DLR.U on the US side of the account. I’m talking theory here because I don’t have a Questrade account. Here’s what happens at TDW:
I journal *DLR* over to the US side. I wait for the journal to be completed (typically 2 business days). In my US account, my holding still shows DLR. I sell DLR.U on the US side of the account in the Canadian market. DLR.U settles in US dollars, so after the stock settles, I have USD in my US account. As I mentioned in this post, I’ve done this a couple of times already and it works as advertised. I see no reason why it shouldn’t work at other discount brokers.
@CC: I see no reason why it shouldn’t work either.
The question I asked Questrade was…is the following set of transactions permitted?
1. Buy DLR.TO today
2. Contact Questrade tomorrow to journal DLR.TO over to DLR.U.TO
3. Wait 1-2 days for the shares to be journaled over
4. Sell DLR.U.TO
Without independent confirmation from another Questrade client, it’s difficult to determine if the response I received is accurate or just a case of “when in doubt, say no” from a junior support agent.
@Eric: Is Questrade able to *transfer out* *DLR* to the USD account? It doesn’t even have to appear as DLR.U in the US side. You can then try selling *DLR.U* once the transfer is completed and DLR is available to sell in the US account. I’m guessing this should work but it’s only a guess. I don’t *know* that it will.
Journal DRL to US account as DRL, not DLR.U. but put sell order in as DLR.U and it should go through. it worked for me @ TDW.
Cheaper just to open an Interactive Brokers account and convert currencies there.
CC, I’d appreciate it if you can add a step-by-step USD->CAD in the main post as well
I know you have a paragraph there saying to buy DLR.U and sell DLR… but I think it’ll be awesome if it can be broken down into steps and clarify for your readers (like me)
I assume we also buy on the “ASK” price, and sell on the “BID” price
@Jerry: Will do. Thanks for the suggestion. I’ll update and post this sometime next week.
Sorry CC, I just want to clarify, because now I got myself a bit confused
Is DLR/DLR.U same-day transaction? or T+3+ journal (so 5 days at least)?
e.g. if I need $10K converted right away, DLR won’t work?
I originally thought we can buy DLR.U in US Margin, and sell DLR in CAD margin, and call in to journal over, on the same day..
or is DLR always delayed, and therefore taking currency risk in these 5 days?
@Jerry: No. DLR/DLR.U process outlined here takes at least five business days (T+3 plus another 2 days for journalling). If an investor is willing to pay a bit more, TDW is supposed to execute a traditional Norbert Gambit for the price of one WebBroker and one phone commission. In the traditional NG you would have access to the funds for immediate trading but if you want cash, you’ll have to wait for the trade to settle.
If you have a margin account, I suppose you could buy DLR and also buy US stock for equivalent USD in the US side of the account. You could then wait for the trade to settle another couple of days to journal over and sell DLR.U and use the proceeds to pay back the loan. You would be charged interest on the margin loan though. Of course, this is theory and I haven’t done this myself.
http://www.canadiancapitalist.com/instant-norbert-gambit-for-all-td-waterhouse-investment-accounts/
So I decided to throw caution to the wind and try this gambit in my Questrade account:
1. I received confirmation from Questrade’s risk department that this was a valid set of transactions
2. I placed the order to buy DLR on Aug 9th
3. I requested it be journaled over to DLR.U on Aug 10th
4. Questrade said that it wasn’t possible because the stock was not interlisted, at which point I reminded them about Step #1
5. On Aug 12th, Questrade indicated that they needed to make changes to their backend system because DLR.U was not showing up as an alternative symbol for DLR
6. On Aug 16th, Questrade journaled the stock and I placed a sell order at $10.01
7. The sell order wasn’t filled and overnight DLR.U flipped back to DLR
8. I requested it be journaled back on Aug 17th and placed a sell order at $9.99
9. Success!
The end result is that if you’re thinking about doing this with less than $25K, don’t bother. I saved about $110 after subtracting the trading costs and bid/ask spread from the 75 pips Questrade would have charged to convert it for me.
I tried this with Scotia iTrade. It works, but because DLR and DLR.U share the same CUSIP, the final step of selling DLR.U can only be done on the phone with a trader; the iTrade website can’t handle it. They will only charge the web commission though.
The journaling process can be completed online. In iTrade, go to Accounts -> Account Services -> Securities -> Transfer Securities Between Scotia iTRADE Accounts. It still takes three days for this part to be completed.
[...] written multiple times in the past (for example, see A Foolproof method to convert Canadian dollars into US dollars) about using the Horizons U.S. Dollar Currency ETF (DLR) and its US$ denominated sibling to convert [...]
Yesterday, I tried to sell the DLR.U but I noticed that the bid ask was 9.96 to 9.98. Why would this not be 9.99 bid to 10.01 ask (which I saw in the past and used in all the above examples)? It’s a US dollar ETF trading in US dollars!
@YTrader: I’m going to let Horizons know about this. I see that the bid-ask spread currently on DLR.U is 9.96 to 9.98 as well.
According to the Horizon website, the management expense for DLR is 0.45%.
The total management expense ratio is probably slightly higher than this.
How does this MER (%) affect this strategy to convert currencies?
Can anyone comment on this essential question – how are the ETF management expenses charged?
On purchase of the ETF? Monthly? Daily? I haven’t been able to get a straight answer on this, but this is
important to understand, to see if this strategy really makes sense. Presumably the MER (%) is pro-rated, so that if it is charged daily, that it would be 0.45%/365?
@Brian: You are correct in your guess on how MER is calculated. It is calculated as Assets under management*MER / 365 and charged daily. So, if you hold 100 shares of DLR valued at $10 for 10 days, it will cost you 12 cents. ($10*0.0045*100/365*10)
Is using DLR.U a safe bet when looking to trade a higher amount?
I need to trade about $20K am worried about the volume of DLR.
I have US funds that I need to convert back to Canadian in my TDWH RRSP. Since it’s within my RRSP I can buy DLR on the NYSE and then immediately sell on the CDN side.
Do I need to do anything else after I’ve done the sell?
I recall when doing Norbert’s Gambit to get the USD, I had to call in and do a wash after the purchase of U.S. securities so I could avoid the exchange fees. (This step may have been required since I was doing it in my RRSP and the journal over step was not required)
when I talked to TDW rep, I was told that DLR/DLR.U gambit is possible only in no-registered accounts and I cannot perform it in RRSP. Is it true?
If yes and If I want to buy into TDW RRSP US stock, in order to get US cash and not to pay FX fees, can I first buy for example BMO.TO, sell the same day BMO.N -> as I have US$ wash set , money from sell should go automatically to US MM, and than buy with this US MM US stock?
@gibor: Traditional gambits work in RRSP accounts without any manual intervention. Please see this post:
http://www.canadiancapitalist.com/easy-norbert-gambit-in-td-waterhouse-rrsp-accounts/
I just did my first NG today through RBC Direct Investing using Christina Normans blog post listed above. I spoke with a representative to get what the conversion rate would be if I did it through him which was 1.0272. I don’t know exactly what the institutional rate was but it would have been around 1.0114. I also asked the rep if I was able to buy POT:TSX and sell POT:NYSE on the same day right after each other just to make sure and he said “yes”. I was really happy with how it all went even though I was super nervous about it. I just have to wait for it to settle now as my accounts look all messed up. But I was able to convert $19,435.50 CAD into $19,280.46 USD (1.0080). It would have been $18,920.85 @ 1.0272. A savings of $339.71 (including 2 commissions) or a difference of 1.75%!!! Thank you CanadianCapitalist, CanadianCouchPotato, and Christina Norman for all the info.
TL;DR – I saved 1.75% on a Norbert’s Gambit using RBC Direct Investing and POT.
CORRECTION: I should have said $19,516.00 CAD to $19,280.46 USD (1.0122). Savings of $261 after commissions not $339. Also, the percentage is wrong. Next time I’ll try and not be so excited and double-check my work.
TL;DR – Actual NG savings was $261 (or 1.34%) and I need to work on my math.
FYI: At ScotiaITrade there is now no trading fee on the DLR part of the process apparently.
So that should half the commission portion of the cost.
I converted C$ to US$ with DLR/DLR.U at Scotia iTrade. While I bought DLR on my own and wasn’t charged for the trade (since DLR is on iTrade’s list of free-trade ETFs), iTrade’s platform didn’t allow me to sell DLR.U on my own. I had to sell DLR.U with a trader (that clearly hadn’t done it before) on the phone and I was charged $9.99. I thought DLR.U was also a trade-free ETF, but it doesn’t seem to be the case.
@Steve: I’m surprised Scotia iTrade wouldn’t allow you to trade DLR.U. I don’t have a problem at TD Waterhouse (I’m assuming that you tried to sell DLR.U in the USD account on the Canadian market).
IMO, Scotia iTrade should allow you to trade DLR.U commission-free. DLR and DLR.U are the same security, so it is bizarre that DLR is commission-free and DLR.U is not. Thanks for bringing this to my attention. I will check with Horizons and ask them why DLR.U trades are charged a commission.
I attempted this unsuccessfully with BMO Investorline on Mar 22 2012. Starting with $C, I purchased DLR at the ask price without any issues, and then called them to journal DLR over to the US side of the account as DLR.U. They told me it was no problem to do that. After a day, it appeared as though they had journaled it over the US side of the account but it still appeared as DLR, not DLR.U. I tried selling DLR.U but their online trading system did not recognize the symbol, and when I called the representative told me that their system was not set up to handle DLR.U, regardless of whether I did it myself or called in. He checked with his supervisor and confirmed that it was not possible, at least at that time. Disappointing. I’d be interested to hear if anybody else has had recent successful or unsuccessful experiences doing this with BMO InvestorLine.
@Peter ZQ: You are right that BMOIL is not able to transact DLR.U online. However, the BMOIL rep is incorrect in saying that DLR.U cannot be traded by phone. Michael James reported that he was able to implement the series of trades outlined here on BMO InvestorLine. With BMOIL, he did not even have to wait for the journal.
http://michaeljamesmoney.blogspot.com/2012/03/trying-norbert-gambit-at-bmo.html