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.

This article has 17 comments

  1. I’ve never been a big fan of currency speculation, which is what this basically is…

    I really only buy US currency when I’m about to: take a trip, make an asset purchase or make an investment south of the border. I don’t buy currency specifically for the purpose of currency speculation. It doesn’t pay a dividend and currency markets move on too many variables, making it impossible to predict and can lead to a lot of broken hearts and shattered dreams.


    • @Phil: I agree that holding US dollars is not an investment. It is speculation (unless there is a good reason such as living or visiting there). Having said that, I can see where an ETF such as this can be very useful for us retail investors to cheaply convert currency. CAD into USD or vice versa without incurring steep charges.

  2. “I can see where an ETF such as this can be very useful for us retail investors to cheaply convert currency. ”

    From the Backgrounder:
    “Ability to redeem DLR for USD proceeds in increments of $250,000”

    Pardon my lack of knowledge, but how would a home-gamer cheaply convert CAD to USD with a such a high limit?

    Wouldn’t a benefit be to use this ETF to short it, as a hedge to one’s USD holdings? But even that the MER would erode that over time.

    • @Jon D.: Right now this ETF cannot be used by retail investors to do currency conversion. If Horizons decides to introduce a US Dollar version of the same ETF (say DLR.U), then investors can use this ETF to convert loonies into greenbacks and vice-versa.

  3. @CC: I have the same question ad Jon D. It;s not clear to me how one would use this ETF to convert cash from CAD to USD. It’s bought and sold in Canadian dollars, so at some point you still need to incur a forex charge if you want to turn it it US cash.

  4. hmm 2 cents a share is a commission of about 0.2%. Pretty sweet deal to convert. Is this possible to pull off in questrade?

  5. It would be nice if Horizons cross-listed the ETF to make Norbert’s gambit easier, but what would be in it for them? I don’t really see a way that they could make money from that.

  6. That would be great if a US$ version came out.

    It’s kind of annoying that with all the hoopla over lower trading fees, that the biggest costs for a lot of investors is still swept under the rug. US$ RRSP accounts were a good step, but most of us still have to initially convert money saved from our CDN$ paycheques to US$.

  7. Gonna be hard to trade with the volume on this…..ouch! Had to tap my screen…550 yesterday?

  8. Just to clarify, you cannot use DLR today to exchange CAD into USD or vice-versa. But if HBP introduces a US$ version in the future, investors can exchange currency by buying DLR and selling DLR.U.

    @Rysto: If HBP lists DLR.U, it will result in higher volumes and more business for HBP. I think that’s motivation enough. At least, I’m hoping it is 🙂

    @Newfie Trader: Yes, volume is important. It is 0 today, so it’s kind of hard to trade, isn’t it? Anyway, I’m not interested in this ETF today but if HBP does introduce a US$ version, I would be. Volume will become important if that happens.

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  12. What if they just made the creation units smaller? Suppose it were in multiples of, say, $1000. Then people could convert currency at this granularity without a (rather ridiculous-sounding) cash ETF.

    • @Patrick: True. As it currently stands not too many can routinely afford to redeem at multiples of $250K. There is a mention of a 0.25% redemption fee charged at the discretion of the manager. It is moot anyway but I wonder under what conditions the fee is charged.

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