A Foolproof Method to Convert Canadian Dollars into US Dollars

May 25, 2011


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

Scotia iTrade Review

July 29, 2009

[Scotia iTrade Logo]

When Scotiabank acquired the Canadian brokerage arm of E*Trade, the account I had opened with E*Trade to my participate in my employer’s Stock Purchase Plan was automatically converted into a Scotia iTrade account. The website remains much the same as it did under E*Trade except for some branding in the Scotia red colour and addition of research reports from Scotia Capital. As Scotia iTrade is severing links with E*Trade, I thought I’d write a review while I still have an account with them.

Administration Fees and Commissions
Scotia iTrade’s biggest attraction is the low fees, which are lower than that of the big bank brokers but higher than deep-discount brokers such as Questrade (See: Questrade Review) for accounts of modest size. There is no administration fee on registered accounts such as RRSP, RESP or TFSA but watch out for the rather steep low-activity fee of $50 per quarter charged to taxable accounts.

Investors looking for a competent discount broker would find iTrade’s commission structure to be middle of the pack. iTrade charges a commission of $19.99 for most trades but household accounts that total more than $50,000 qualify for trades costing $9.99.

Ease of Funding
Clients can take advantage of the free Electronic Fund Transfer (EFT) facility to move funds between their Canadian or US Dollar bank account and Scotia iTrade account. Note that there is no integration or direct link between Scotia iTrade and Scotia Bank accounts just yet.

Parking Cash
While the Cash Optimizer account pays a competitive rate and can be used to park cash temporarily from taxable accounts, there is no place to park the cash in registered accounts. Scotia iTrade does offer mutual funds but all funds held for less than 90 days are charged a 1% penalty.

Currency Conversion Fees
The currency fees at Scotia iTrade are rather steep. In a phone call today, I was quoted a US dollar buying rate of 1.0665 and a selling rate of 1.1055 for a spread of 3.6%, which is almost double the typical fees. Fortunately, iTrade has kept the wash trading capability introduced by E*Trade (See: E*Trade Quietly Offers Limited Wash Trades).

Guaranteed Income Certificates
While GICs are available, clients have to phone in to purchase or request quotes. The rates on GICs appear to be competitive.

A cursory check shows that iTrade has a decent inventory of bonds. The pricing seems to be slightly better than RBC Direct Investing, our main brokerage. For instance, a 5% Government of Canada bond maturing on 01-June-2014, yields 2.606% on iTrade and 2.512% on RBC Direct.

Mutual Funds
iTrade offers more than 3,200 mutual funds from all major vendors. There are no commissions to buy or sell.

Scotia iTrade is not my primary broker but I have used E*Trade for many years and found them to be a competent broker. Bank of Nova Scotia has so far kept E*Trade as is with only minor changes — a splash of red on the webpage and the addition of analyst reports from Scotia Capital come to mind. Investors who do not yet qualify for low commissions at the big bank brokerages will probably find iTrade at or near the top of their list. If you are an iTrade client, I would love to hear from you in the comments section.