Currency Conversion

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.

Instant Norbert Gambit for All TD Waterhouse Investment Accounts

July 27, 2011

17 comments

The Norbert Gambit is an excellent method for converting currency cheaply at discount brokers but some clients of TD Waterhouse have found gambitting with stocks in an investment account involves delays. A friend of mine purchased RIM on the TSX and hoped to sell RIMM on NASDAQ only to be told be TDW that he has to wait for the initial buy to settle (3 days) and a further 2 days before the journaled shares showed up in the US Dollar side of the account. My friend turned out to be lucky – RIM gained 10 percent during the wait but seeing how often RIM trades down these days, the story could have turned out differently. Now, thanks to the efforts of a Canadian Money Forum member who wishes to remain anonymous, all TD Waterhouse clients can implement instant gambits in their investment accounts. The member was also kind enough to put together the following post on how TD Waterhouse clients can make gambitting work for them.

TD Waterhouse representatives say they are ready now to execute the sell sides of instant stock gambitting pairs for all clients with every size of non-registered account [Note: Gambits can be done in TD Waterhouse RRSP accounts without the assistance of a representative].

Gambit trades are more complicated for a TDW licensed representative to handle than other kinds of trades. It’s helpful, therefore, for a client to understand the steps that are involved, not only from the client’s side of things but also from the broker’s.

Here are some hints:

  • TD Waterhouse clients should expect to pay the full agent-handled commission for the gambit sell side. [Note: Trades placed over the phone are charged a minimum commission of $43. If you’d rather wait for the trades to settle and pay WebBroker commissions, you can still gambit with DLR/DLR.U.]
  • Gambitting clients should prepare but not send the opening buy order, which will be an online order.
  • Next, contact a licensed representative by phone & make sure he or she understands what you want to do. Because more general representatives than before are now handling gambit trades, some representatives are fairly new at this practice, so a gambit client should be prepared to wait patiently if a rep needs to check with his team manager.
  • Client should send the buy order only when the agent confirms that he’s ready to do the sell order in the opposite currency.
  • As soon as the buy is filled, the agent will enter the sell order out of the opposite currency account. Initially, his system will block this order, just as investor’s online TDW trading platform will block it. However, the representative will be able to override this block and force the order.
  • At the same time, the representative will be sending a special manual journal request to the credit department alerting them that this trade, unusual though it may look, is nevertheless bona fide because the stock has indeed been purchased and is awaiting journal.
  • Notice that *NO* trades are ever placed through a short account. The gambit sell is executed upon a margin or cash account, not a short account. The result will be a virtual “short,” but it is not a real short in the technical sense of the industry. It does not get entered into the broker’s short records.
  • If there is sufficient margin in the margin account where the stock has been sold, investor may carry on to immediately purchase other securities. However, if gambit stock has been sold out of a cash account, the proceeds may not be used or withdrawn until the journalling of the stock has been accomplished, which will not be until 3-5 days later.
  • My own approach has always been to prepare everything & then contact a licensed representative. If i observe that trouble might develop for one reason or another, then i am always prepared to cheerfully abort the attempt. This is the reason for having the buy order ready but not sending it in until the agent is lined up. A gambit halted early like this is harmless, because no positions have been initiated. Investor should try later on the same day or else on the next day, with a different agent.

It’s important to keep in mind that, for the first time, TD Waterhouse is offering gambit sell trades to all customers on a goodwill basis. Retaining that goodwill is important. As easily and quickly as it has opened the sluice gates, the big green could close down all gambitting permanently, if it finds that staff are having to spend too much time dealing with individual clients.

A Foolproof Method to Convert Canadian Dollars into US Dollars

May 25, 2011

136 comments

The traditional Norbert Gambit takes advantage of inter-listed Canadian stocks (RIM on the TSX and RIMM on NASDAQ, for example) but many investors find that discount brokers sometimes balk at journaling shares to the US account and selling shares right away. This would mean a wait of three trading days for the initial trade to settle and another two business days for the shares to be journaled over and taking on market and securities risk during the waiting period.

Recently, Horizons BetaPro introduced the US Dollar Currency ETF that trades on the TSX under the ticker symbol DLR. DLR is a currency ETF that simply holds US dollar cash equivalents and trades in Canadian dollars. Horizons BetaPro then followed it up with a US dollar denominated version of the same ETF that also trades on the TSX under the ticker symbol DLR.U. The combination of DLR and DLR.U allows investors to execute a Norbert Gambit and convert Canadian dollars into US dollars or USD into CAD at a very low cost without taking on any security risk.

Here’s how you can use DLR to convert Canadian dollars into US dollars.

1. Get a quote on DLR after logging in to your discount broker. Make sure that the bid-ask spread is 2 cents.
2. Since DLR has very low volume put in a limit order at the current ask price.
3. Wait for the trade to settle (T+3 days). Call your discount broker to journal DLR to your US investment account.
4. Wait 2 business days for the shares to get journaled over.
5. Get a quote on DLR.U. Make sure that the bid-ask spread is 2 cents.
6. Put in a limit order at the current bid price.
7. When the trade is executed, you’ll have converted CAD into US dollars.

To convert USD into CAD, investors would purchase DLR.U in their US investment account and sell DLR in their CAD investment account. The typical discount broker charges 1.5 to 2 percent on currency conversions. Norbert Gambit with DLR/DLR.U will cost an investor just two trading commissions plus 2 cents spread per share.

Here’s a concrete example from a recent currency conversion I did in my TD Waterhouse account.

Purchase 500 shares of DLR at $9.75.
Sell 500 shares of DLR.U at $9.99.
Result: $4,885 CAD converted into $4,985 USD.
TD Waterhouse retail exchange rate: $4,885 CAD converted into $4,943 USD.
Total Savings: $42

Update #1:
The low trading volume of DLR/DLR.U is not a concern because ETF vendors (Horizons BetaPro in this case) typically work closely with market makers to ensure tight bid-ask spreads.

Update #2:
When you journal DLR over to the US Dollar account, the ticker symbol may remain the same. However, you will be able to put in a sell order for DLR.U. Don’t forget to note down the bid price of DLR because the difference between your purchase price and sell price in Canadian dollars should be declared as capital gains or losses in your taxes.

Update #3:
Here’s another example of a currency conversion with DLR/DLR.U:

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