For years I freely bought and sold U.S. stocks without giving too much thought to the cost of converting between U.S. and Canadian dollars. I tended to worry much more about the visible trading commissions. After combing through some old trading information I’ve found that my currency conversion costs were much higher than the commissions I paid.
I looked over all my trades since I began investing on my own about 13 or so years ago. I identified all the trades of U.S. stocks where I settled the trade in Canadian dollars. My discount broker, BMO Investorline, conveniently handled the currency conversion as part of the trade. I eliminated cases where the trade value was less than US$2500 and where I used wash trading. (Wash trading is a way to eliminate currency exchange costs on round-trip currency conversions). This left 49 trades.
For each trade I looked up the fair U.S./Canadian dollar exchange rate on the day in question to calculate how much extra I paid above this fair exchange rate. Of course there were differences between the noon exchange rate quoted in historical data and the actual exchange rate at the time of day I did each trade. However, averaged out over 49 trades, these small differences tend to balance out.
This process gave me the following totals (in Canadian dollars):
$7374 – total extra currency exchange costs
$1813 – total commissions paid (I made many trades before commissions dropped to the now typical $10 or less)
For all the attention I focused on commissions, I was paying about 4 times more for the partially hidden currency exchange costs. This looks even worse with today’s trading commissions: If I had paid US$10 per trade, the total commissions would only have been about $600, which is only about one-twelfth of the actual currency exchange costs I paid.
If the currency exchange method described by Canadian Capitalist had existed (with $10 commissions) when I made these trades I could have reduced my currency exchange costs to $3011 (saving $4363 compared to what Investorline charged me).
The bottom line is that currency conversions are more expensive than they seem. Investors should pay attention to these costs.