In his weekend column, Rob Carrick pointed out that TD Waterhouse now allows clients with a self-directed RRSP account to automatically wash the sale of US-listed stocks or ETFs into the TD US$ Money Market Fund (TDB166). Earlier if clients wanted to sweep the proceeds of a US-listed stock sale into TDB166 or sell TDB166 to purchase a US-listed stock, they had to phone in their order.

Here’s how it would work for clients who sign up. Let’s say that an investor sells 1,000 shares of GE at $20 and purchases 250 shares of VEA at $40 in a self-directed RRSP account on the same trading day. Earlier TD Waterhouse will have set the exchange rate on the buy and sell to the same value automatically and if the investor did not call in to wash the trade, converted the portion of the trades that do not offset each other ($10,000 in this example) into Canadian dollars. The conversion would have cost the investor $150 to $200 due to currency conversion charges. Now, for investors who signed up for automatic wash trading, the net proceeds of $10,000 (difference between the proceeds from selling GE of $20,000 and buying VEA of $10,000) will be parked in the TD US$ Money Market Fund. For another example of how automatic wash trading will work, check out this Canadian Money Forum post. When the trades are settled, the investor will have 250 shares of VEA and 1,000 units of TDB166 in her account.

Now let’s say that a few weeks later, the client wants to purchase an additional 100 shares of VEA that is now trading at $30. She would put in a buy order for 100 shares of VEA and the order will get filled. TD Waterhouse will automatically put in an order to sell 300 units of TDB166 and wash the trades by setting the buy and sell rate on the transactions to the same value. When the trades are settled, the investor will have 350 shares of VEA and 700 units of TDB166 in her account.

If you are a TD Waterhouse client, here’s what you need to do:

- Call the TD Waterhouse trading desk at 1-800-465-5463 and sign up for automatic wash trading. You cannot sign up online and have to call in your request.
- Since there are no downsides to wash trading, you might as well sign up for all your RRSP and TFSA accounts.
- TD Waterhouse will not wash dividend payments. I wish they did because it would alleviate the demands for a US Dollar RRSP account.

This article has 15 comments

  1. This is very good. I don’t understand why you have to sign up for it however. It should be automatic.

    As you say, if they did this for dividends and interest payments as well – no need for US$ account.

    Now they need to work on lowering their high currency exchange fee.

  2. I guess we should be grateful for any improvement. This sounds similar in principle to iTrade’s US Friendly RRSP, but iTrade charges $40 per quarter for the privilege of not being gouged on the currency exchange.

  3. It’s definitely an important move in the right direction, though automatic washing of dividends is important and proper USD subaccounts would be better. (I suspect TD’s software is just too antiquated to change though.) It’s amazing what a little competition from RBC (and QTrade and Questrade) can do.

  4. I have a completely separate US brokerage account aside from my Canadian one.
    But Mr. Carrick also published an article promoting global diversification on the weekend. The currency implications of global diversification adds another level of complication in everything and of course results in more fees to be earned by the “industry”… In my humble opinion.

  5. @Mike: It’s not a deal breaker yet but washing US dividends is one the things I wish TDW will do.

    @Canadian Couch Potato: I actually like iTrade’s US-Friendly RRSP because they also provide a break on the converting currency from CAD to USD or vice-versa. I do wish all brokers would move to a flat fee model for currency conversions.

    http://www.canadiancapitalist.com/scotia-itrade-offers-a-us-friendly-rrsp/

    @Viscount: Agreed. Competition is good for us. After all, when TDW first cut commissions for household assets exceeding $100K and then $50K many other brokers immediately followed suit. I do hope there is enough pressure on TDW to wash dividends as well.

    @Phil S: Currency does add one more level of complication to globally diversified portfolios. But past experience has clearly shown that direct holdings reduce portfolio volatility. And yes, currency conversions are pretty expensive, so investors should try and keep conversions to a minimum. Features such as wash trading and US dollar RRSPs really help in this regard.

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  7. Good news! It’s a start with TDW…

    I try not to worry too much about currency issues…direct U.S. holdings help. I might have 15% of my overall portfolio in U.S. stocks or ETFs.

    BTW – got my new site up and running Ram:
    http://www.myownadvisor.ca/

    Lastly, good interview with Rob @ the G&M – I thought you did well!

    Cheers,
    Mark

  8. Is there any way to avoid the initial currency conversion from CAD to USD in RRSP accounts when wanting to purchase ETFs traded on US exchanges? Of course my question assumes the investor has both CAD and USD cash and ETFs in non registered accounts.

    Can some swaps or in kind USD contributions be made? Never really looked into this since it isn’t relevent to my accounts but it is likely to come up for a few people I’m helping out. I just hate the idea of getting fleeced on currency conversion when the investor already holds the currencies required outside the RRSP.

  9. @gsp: If the investor already holds US currency outside the RRSP, they can (a) contribute in-kind or (b) buy TDB166 in the taxable account, contribute it in-kind to the RRSP and then purchase an US ETF. I’ve done the former at a couple of brokers and the latter at TDW.

    http://www.canadiancapitalist.com/contribute-us-stocks-in-kind-to-your-rrsp/

    Investors can save on initial foreign currency conversions with the Norbert Gambit. I’m hearing reports that TDW doesn’t always allow investors to journal shares and sell right away in taxable accounts. Apparently, the gambit is automatic in RRSP accounts but I haven’t done this personally myself.

    http://www.canadiancapitalist.com/easy-norbert-gambit-in-td-waterhouse-rrsp-accounts/

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  11. @CC
    Thanks, as a TD client with US stocks in my RRSP this is very useful information :) Nice that wash trades can be setup automatically now. I would not be for a flat-fee model, since I don’t trade US stocks frequently. However it probably comes out ahead if you are making significant US stock trades – but not for the majority of traders I would suspect.

    • @The Dividend Ninja: The flat-fee model will help investors who are adding to their US stock holdings. Recall that typical currency conversions cost you 1.5% to 2.0%. If a flat-fee model costs $30 per quarter, someone exchanging $2000 into USD will break even. Anything over that is savings and a substantial one at that. If you are exchanging $5,000, a 1.5% fee works out to $75.

      I agree that I wouldn’t pay a flat-fee just to wash trades either however heavily you trade US stocks. You can get that at many brokers for free with wash trading or separate USD RRSP accounts.

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