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.

This article has 14 comments

  1. Awesome! So how would this work step by step for TD Waterhouse customers?

    I buy DLR, journal it to my US account and sell it?

    How would this work in a RRSP account?

    I buy DLR, sell DLR.U? and call one day before settlement date to have it settled in a US$ MM fund?

  2. @Michael: That’s how it should work. I haven’t done it myself but apparently Norbert Gambit in TDW RRSP accounts is already straightforward. With automatic washing they should now automatically (provided the client has signed up for it, of course) put the proceeds in TDB166.

    I’ve heard TDW sometimes balks at buying, journaling and selling right away in taxable accounts. DLR should eliminate that possibility though investors would have currency risk (which they take on anyway if they convert currencies).

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

    http://www.canadiancapitalist.com/automatic-wash-trading-at-td-waterhouse/

    I’m going to monitor DLR’s volume and when it is high enough to use it for converting currency, I’ll publish a step-by-step method.

  3. I would be interested in hearing others experience at TDW using DLR. I have attempted doing this with other securities and they made me wait until after settlement before I could journal the shares, which somewhat defeats the purpose.

  4. FWIW, Horizons BetaPro seems keen on maintaining tight spreads. In a Globe and Mail live interview: “Why is the bid ask spread so big wide when HBP introduces products?” “Generally it is not. For example yesterday we launched HXT, it traded 3,5 million shares and was quoted a penny-wide all day. We actively work with market makers to post competitive bid/ask spreads, if you notice bid/ask spreads that seem out of line, please contact our firm directly.”

    http://mobile.coveritlive.com/mobile.php/option=com_mobile/task=viewaltcast/altcast_code=7e022d0bcf/start=2

    As a tangentially related question, if I keep US cash in a non-registered account, do I have to track exchange rate profit and loss (for capital gains tax)?

    • @Dan: ETF vendors do try and keep bid/ask spreads competitive. But it doesn’t always work. For an illiquid ETF, a market order could turn out to be disastrous. I suppose a limit order should be okay. I’m going to try out this trade and I will post what I find out.

      It’s an interesting question on foreign currency holdings. I’ve never kept foreign currency as cash, so I haven’t faced this issue in the past. I’ll try and find out what the tax implications are.

  5. To make sure that I understand it correctly, if I want to bet on the fall in USD with USD cash then I would short DLR.U? Are there any other simpler/cheaper and liquid alternatives to do the same? I have a large USD cash position and would like to hedge that. As for the conversion cost, counter-parties (i.e. people) transacting at spot price would have no cost but would have to overcome the transaction cost (i.e. find, trust, wait).

  6. Pingback: A Foolproof Method to Convert Canadian Dollars into US Dollars | Canadian Capitalist

  7. Spread is looking pretty bad. Looks like 2% (9.65 bid, 9.85 ask). Is it usually that bad? Assuming a non-volatile day, you’ll save move money by trading a RY than DLR.

    • @Slacker: Are you seeing these wide spreads after hours or during trading hours? In my experience, even though volumes are light, the spreads are kept tight – typically, just 2 cents. Still, one should never put a market order on this ETF. Best to put in a limit order at the bid/ask for the sell/buy only when the spread is tight. The market makers usually fill such an order immediately.

      HBP asked investors to let them know if spreads are not kept tight. They say they’ll work with market makers to ensure tight spreads.

      When spreads are so wide, you are right. DLR/DLR.U is a losing proposition for converting currency.

  8. @cc: yeah i was just browsing after hours, so the last bid/ask of the day (and what a day) may be suspect. Just thing to watch out for. The cap is only 5 million, so it’s kind of a niche ETF so far, so bid/ask is definitely a concern.

  9. Nobody mentions MER (Management expense ratios) in these articles. This fund has a MER of .45%. Do you have to hold a fund for a certain amount of time before the MER is charged?

    • I did mention the MER when I first wrote about this ETF. This post is about using the USD version to do currency conversion. The holding period will be one week, which translates to a cost of approx. 0.01 percent, which is an amount small enough not to worry about.

  10. The bid/ask right now on DLR.Y is very high – I am doing a norbert gambit but I have to wonder about using this security. On Itrade I see (9:04 am):

    Bid 10.10 size 3
    Ask 10.29 size 24

    huge spread

    • Canadian Capitalist

      @Gord: You are looking at the spread *before* market open. That’s why the spread is so high. I’m looking at it now (10:49 AM on July 26, 2013) and I have the following bid/ask on DLR.U:

      Bid $10.24
      Ask $10.25

      That’s very good, better than the 2 cent spread I was expecting.

      It is important to never submit a market order on these securities. Always use limit orders with a limit price.