Currency Conversion

Horizons BetaPro Introduces USD version of US Dollar Currency ETF (TSX: DLR.U)

May 11, 2011

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A few weeks back, Horizons BetaPro introduced a new exchange-traded fund called the US Dollar Currency ETF, ticker symbol DLR, that holds US Dollar cash and cash equivalents. In my post following its introduction, I hoped that Horizons BetaPro will introduce a US-Dollar version of the ETF because it would offer a cheap and fail-safe method for investors wanting to convert Canadian dollars into US dollars or vice-versa.

Horizons BetaPro will be launching a US dollar denominated version of the US Dollar Currency ETF tomorrow. It will trade on the TSX under the ticker symbol DLR.U. Investors who have CAD and USD accounts with a broker and want to convert their loonies into greenbacks will buy units of DLR using Canadian dollars. They will then sell DLR.U and when the trade is settled, they will receive the proceeds in US dollars.

Investors who want to convert their US dollars into Canadian dollars will do the opposite. They will buy units of DLR.U using US dollars, sell DLR and when the trade is settled, they will receive the proceeds in Canadian dollars.

Discount brokers typically charge 1.5 to 2.0 percent every time an investor converts currency. With this method, the total cost for an investor is the broker commission on the two trades, the bid-ask spread and any change in the discount/premium over NAV. Note that unlike the Norbert Gambit with inter-listed stocks, investors are taking zero market risk when trading DLR/DLR.U.

While I think this is an exciting development, I would wait for volume to pick up before using DLR/DLR.U to convert currency. Volume on the U.S. Dollar Currency ETF (DLR) is currently very thin. The volume of shares that changed hands was zero yesterday and 1,000 today. Such low volumes may result in steep bid-ask costs if investors are not careful. Note that a bid-ask spread of 20 cents (DLR.U is targeted to trade at $10) will wipe out any savings on foreign exchange conversions at a typical discount broker.

Update (May 12, 2011): The Horizons BetaPro announcement of DLR.U can be found here.

TD Waterhouse shows a bid-ask on DLR of $9.65-$9.68. The bid-ask on DLR.U is $9.99-$10.01. Assuming you can execute trades at these prices, the exchange rate will be 1 CAD = 1.0320 USD. TD Waterhouse’s exchange rate on $1,000 works out to 1 CAD = 1.0169.

Automatic Wash Trading at TD Waterhouse

May 8, 2011

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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.

Horizons BetaPro US Dollar Currency ETF (TSX: DLR)

April 11, 2011

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Horizons BetaPro has introduced a new Exchange-Traded Fund that holds US Dollar Cash and Cash Equivalents and trades on the TSX under the ticker symbol DLR. The Management Fee for the ETF is 0.45%. The ETF is priced to reflect the value in Canadian Dollars of $10 US less fees and expenses. For instance, DLR closing price as of 11/04/2011 is $9.57. At the same time, 1 US Dollar fetched approx. $0.9561 (Canadian).

The backgrounder explains how the ETF provides Canadian retail investors a lower-cost method for speculating in the fluctuation of the US Dollar. Compared to exchanging currency at a local branch or a discount broker that might charge anywhere between 1.5% to 2.5% for each conversion, buying and selling the ETF would cost two trading commissions plus bid-ask spreads plus ETF fees. BetaPro estimated that a retail investor could save as much as $255 on converting $10,000 from CAD to USD and back again.

I have little interest in speculating in currency markets but I do wish Horizons BetaPro introduces a US$ version of the US Dollar Currency ETF. Such a move would provide a perfect method for long-term, buy-and-hold Canadian investors who want to convert Canadian Dollars into US Dollars prior to investing in a low-cost ETF trading on an US Exchange. Currently, investors who want to save on the steep currency conversion charges turn to the Norbert Gambit. But implementing the Gambit involves taking on security risk because the discount broker might balk on journalling shares and selling it immediately or an investor might even be on hold while the markets move sharply. A US Dollar Currency ETF will eliminate this risk. A Canadian investor wanting to convert her loonies into greenbacks will buy DLR, journal it over to the US Dollar account and sell DLR.U. Even if the entire process took a week, the conversion rate would have been locked in at the initial purchase. The conversion would cost just two trading commissions and 20 basis points or so in bid-ask spreads (2 cents per share). Recently, BetaPro introduced a US Dollar denominated S&P/TSX 60 ETF (HXT.U) on the TSX. I hope that they will do the same for the US Dollar Currency ETF.

You can read Larry MacDonald’s take on the US Dollar Currency ETF here.