I held 150 shares of iShares MSCI EAFE Index Fund (EFA) in my RRSP account and wanted to switch to the Vanguard Europe Pacific Fund (VEA), which is 20 basis points cheaper. Before the recent cut in trading fees by TD Waterhouse, I was hesitant to pay $58 ($29 to sell EFA and $29 to buy VEA) to save $24 per year (0.20% of 150 shares of EFA at $79) and planned on switching sometime in the future when I am adding new money or rebalancing. At $10 per trade, it was much easier to justify spending $20 to save at least that amount every year over the long term.

I sold 150 shares of EFA and bought 250 shares of VEA with the proceeds and it is illuminating to see how much money could be saved by washing the trades. TD Waterhouse converted Canadian dollars into US dollars at a 2.5% premium one way and 4.39% the other way. The difference: $224. Even if I had paid a higher trading commission, the savings obtained from a wash trade would more than make up for any difference in commissions. If you trade US-listed stocks even occasionally in your RRSP account, it’s possible that you could save more money by choosing to wash your trades than paying a lower commission.

This article has 24 comments

  1. I don’t understand what you mean by “TD converted at a premium of 2.5% one way and 4.39% the other way”?

    I thought a wash trade meant the money just stayed in US$ between the sell and the buy?

    Mike

  2. Canadian Capitalist

    Mike: TDW handles wash trades automatically if you sell one US listed stock and buy another on the same day. They first record the transaction as if they converted the US dollars into CAD for the sell and vice versa for the buy. The next day they correct the sell transaction such that it has the same exchange rate as the buy.

    For the investor, it appears as if no conversions were made but in reality, the conversion has been made at the same rate.

  3. 1. When you are doing this do you enter the “sell” and “buy” transactions at the same time with TDW? I would be worried that there might be a problems with there not being enough cash to do the “buy” transaction as the trades usually take over a day to show up in my account.

    2. Are you now paying $10 a trade with TDW? Maybe its time I switched from RBC to TDW.

    Thanks, Doug

  4. How you hedge Vanguard ETFs against currency fluctuation?

  5. Canadian Capitalist

    Doug: My understanding is you sell the US-listed stock and buy another on the same day. I waited for the sell order to be filled before putting in the buy order. Since I knew exactly how much the proceeds of the sell order were, I knew how much to buy.

    If you have a total of $100,000 across all household assets with TDW, you can trade stocks for $9.99.

  6. Canadian Capitalist

    Alex: In my opinion, you don’t need a hedge for VEA because though it is denominated in USD, it holds stocks denominated in euros, yen and pound, so it is really only affected by the gyrations of the C$ against this basket of currencies.

    It is a lot harder in the case of VTI which holds US stocks and is denominated in USD. As a long term investor, I am betting that I would be better off without incurring the costs of hedging but only time will tell.

  7. This was a question I was asking myself in an earlier post on canadiancapitalist.com If you incur that currency conversion hit, that’s a one time 2% hit you’re taking on the switch (assuming a one point spread)

    So is a loss of (Principle x 2%) worth the savings of 0.20% MER?
    I guess in the long run it would be if you had only made this one time purchase. But if you buy frequently, this seems more like a load fee from your typical mutual fund. Any thoughts?

  8. Canadian Capitalist

    Earl: You’re right. If no wash trades were allowed, I wouldn’t have switched EFA to VEA. The 2% hit doesn’t justify the 0.20% savings in MER. Also, like I mentioned in the post, I was hesitant to incur even a $58 hit (2 commissions of $29) to take advantage of the lower MER. Since I spent only $20 in commissions, I took an one time hit to 0.2% (approx.) to save 0.20% annually in future years.

  9. It’s a shame Zecco isn’t in Canada. Hell, even Bank of America gives clients 30 free trades a month if they have $25K in combined assets.

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  12. Buy holding VTI and VTA are you not disadvantaged in currency conversion when it comes to distributions?

    Are you not getting hit for the currency exchange on the distributions that the funds pay?

    I have a TD account and own XIN in My RRSP. Last year we received a $ 0.50 cash distribution per unit.

    In the same RRSP account when I hold US stocks or funds the distributions are converted to Canadian. (I.e. you pay a hidden “currency conversion commission” on the distributions)

  13. Good point John. I own VTI &VEA in a rrsp at Questrade and they told me I can set up a drip for those securities and there will be no currency conversion.

    Mike

  14. Thank you

    It never occurred to me

    Your approach is the best of all worlds and kills the reason I was considering the TD e funds over Vanguard

    Now if there was just a neat way to avoid the 2% currency conversion “tax” TD puts on you when you first convert Canadian $ to US in the RRSP)))

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  16. I was under the impression that the wash trades at TD were not automatic. I thought the investor had to call in and request that the trades be washed. Has this changed? I had a comical chat with an inept customer service rep at TD Waterhouse before switching from E*Trade Canada to TDW about what wash trades were and how to do them (the guy was clueless), so I’m wary about talking to them again. I suppose I would have to talk to a certified trader there to get the straight goods.

  17. Canadian Capitalist

    Gene: If the buy and sell is on the same date, TDW automatically washes your trades by setting both trades at the same exchange rate. No action is needed from the investor.

    If you sell a stock and want to “wash” the trade into the TD Money Market fund, you need to call in to make the wash.

  18. Thanks for the response, CC. Great to hear they do it automatically. Also, like you say, getting the remainder, if any, put in the MM fund is a good idea too.

  19. Gene, I had to ask TDW to apply the wash rule to my account. After that it will automatically be applied. I found out about it after a charge for a 12.05% exchange to USD. On a small trade it amouted to a few dollars per share!!!
    When I called and questioned that the rep mentioned using the wash rule, so I set it up so this doesn’t happen again.

  20. I actually recommend that you seriously look into Virtual Brokers (www.virtualbrokers.com). These guys allow you to hold a US$ account within your RRSP and RESP so that you can keep your physical US dollars segregated from your Canadian dollars. This way you can avoid this nonsense of potentially getting dinged by TD on the conversion from US$ to C$.

    Personally, I find the wash trade at TD such a nuisance as you have to call in the trade and speak to a representative. Furthermore, I find there is a ton of slippage on US$ dividend paying stocks. Not only do you lose the witholding tax within a registered account, but you also get dinged when TD converts the US dividend into C$.

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