Currency exchange is typically a lot more expensive than many people realize. Paying somewhere close to 1% for each exchange may not sound like much, but if you switch back and forth between Canadian and U.S. stocks over the years, you’re paying this cost on the same capital multiple times. Your total cost over decades could easily grow to over 10% of your savings.
One method of saving on exchanging Canadian and U.S. dollars, called the Norbert Gambit, involves using an equity that trades in both Canadian and U.S. dollars. You simply buy the equity in one currency and sell it in the other currency. Instead of paying hidden fees baked into your broker’s exchange rates, you pay two trading commissions and bid-ask spreads.
Because my employer pays me in Canadian dollars, my new savings are in Canadian dollars, and I occasionally need to exchange some of them for U.S. dollars to maintain my desired asset allocation in my overall portfolio. I recently did this again at BMO Investorline, and the process is becoming (somewhat) smooth.
I began by selling ETFs denominated in Canadian dollars. A minute later I used the resulting Canadian cash to buy DLR, which is an ETF that trades in Toronto in both Canadian dollars (as DLR) and in U.S. dollars (as DLR.U). The next step is to sell DLR.U. Unfortunately, you can’t do this online with Investorline. However, you can call up an Investorline representative to sell the DLR as DLR.U.
When I called Investorline, I had to explain what I was doing to the representative, but after she put me on hold for a minute, she came back with a full understanding of what I wanted. She cheerfully sold the DLR.U for me (charging only the US$9.95 commission that applies to online trades). A minute later I went back to my online account to buy a U.S. ETF with the U.S. dollar proceeds.
The whole process was wrapped up in about 15 minutes with no need to wait the 3 days for trades to settle. The slowest part of the process is calling up the broker.
One amusing part of the call was when the Investorline representative started to explain that since I was exchanging more than $75,000, I could have called them to do the exchange for me at a special rate. She then did the calculation to see how many U.S. dollars I could have got using this method. I laughed when it turned out that I saved about $200 compared to their special rate. My savings were even larger compared to the rate I would have got doing the exchange through my online account.
Whenever you exchange currency and want to know what it will cost, take half the losses on a round-trip exchange (i.e., Canadian dollars to U.S. dollars and back again). This works whether you do the exchange yourself online, ask for a special rate, or use the Norbert gambit.
For the online cost, go to the foreign exchange page, type in the starting amount (with the action “sell”) and see how much you would get in the other currency (without executing the exchange). Then type in this new amount (in the new currency) and see how much you’d get back in the first currency. The difference between the starting and ending amounts is the “round-trip” cost. Divide this by 2 to get the one-way cost.
Using my online account, I found the following currency conversion costs:
On C$100,000: one-way cost is C$575 (0.57%)
On C$10,000: one-way cost is C$152 (1.52%)
For the Norbert gambit, the calculation takes a little longer but works roughly the same way. Start with the Canadian dollar amount, deduct the trading commission, calculate how many DLR units you can buy at the ask price, see how many U.S dollars you can get by selling at the DLR.U bid price, and deduct the trading commission. Then do the whole thing in reverse. Finally, divide the round-trip loss by 2 to get the one-way cost.
For the Norbert gambit (based on $9.95 trading commissions and DLR price quotes as I write this):
On C$100,000: one-way cost is C$217 (0.22%)
On C$10,000: one-way cost is C$40 (0.40%)
So the savings are $358 on $100,000, and $112 on $10,000. This is enough to justify an awkward phone call to your broker.
The reaction I get from some people is disbelief that it should be so hard to get a fair exchange rate. I have two reactions to this: 1) the Norbert gambit is still unreasonably expensive, and 2) you can always go the easy route by letting your broker do the exchange and pay hundreds of dollars more.