Thursday, June 5, 2014

Currency Exchange using Royal Bank Stock

In the past I’ve used the exchange-traded fund DLR to make cheap currency exchanges at InvestorLine. I decided to try Royal Bank stock (ticker: RY in both Canada and the U.S.) because it has a smaller spread to save me more money and it’s easier to trade.

For those not familiar with the Norbert Gambit for saving money on currency exchanges, please take a look at Canadian Couch Potato’s excellent guide. The lowest risk method of doing the Norbert Gambit is to using the exchange-traded fund DLR which just holds U.S. dollars and can be bought and sold in either Canadian or U.S. dollars. Unfortunately, you can’t buy or sell the U.S. dollar version online at InvestorLine; you have to call an agent, which is a pain. So, I decided to try using Royal Bank stock instead.

With my new savings always in Canadian dollars, my portfolio allocation tends to get out of balance by having too much in Canadian ETFs. I needed to sell about $60,000 worth of Canadian ETFs, change currency to U.S. dollars, and buy U.S. ETFs. The problem is that the currency exchange rates offered by InvestorLine have a large built-in spread that can be expensive.

Here are the steps I took:

1. Sold Canadian ETFs (settled in Canadian dollars).
2. Bought 830 RY on a Canadian exchange (settled in Canadian dollars).
3. Sold 830 RY on a U.S. exchange (settled in U.S. dollars).
4. Bought U.S. ETFs (settled in U.S. dollars).

(I had to be careful to get the Canadian/U.S. exchange and the settlement in Canadian/U.S. dollars right in each case.)

I completed all steps in just a few minutes without having to call InvestorLine. If I had used DLR, I would have had to have called InvestorLine for step 3. Using RY stock is a little riskier because of the possibility that its price might change between steps 2 and 3. DLR doesn’t have this risk because the investments inside DLR are just U.S. dollars.

I did all this on a Tuesday. Immediately after making the trades, my account showed that I had 830 RY on the Canadian side of my account, and -830 RY on the U.S. side. In reality, it takes 3 days for trades to settle. In my case settlement was on Friday. It wasn’t until another two business days after Friday that the +830 RY and the -830 RY were wiped out. Fortunately, this cancellation of the offsetting shares of Royal Bank stock was automatic; I didn’t have to call an agent.

Update: See here for a description of an interest charge I was hit with weeks later that I discovered and got reversed.

This trick was well worth the small extra effort because I saved $491 compared to just using InvestorLine’s currency exchange. I’d be interested to hear readers’ experiences with the Norbert Gambit at InvestorLine or other discount brokers.

26 comments:

  1. This is exactly the way that I do Norbert's Gambit with Investorline. I've typically found that if the trade is executed on day `X` (e.g. a Tuesday), the account will be 'normal' with converted currency and zeroed RY positions on day `X + 7` (e.g. the following Tuesday).

    That presumably assumes a normal trading week with no holidays, etc.

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    1. @Dave: That matches my experience. One important tidbit I learned from Canadian Couch Potato's guide to Norbert's Gambit is that you need to avoid a week that contains a day that is a holiday in one country but not the other. This can lead to being short stock for a day and having to pay interest.

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    2. @Michael: thanks, that's good to know.

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    3. The reverse of this (sort of) happened to me. I just received dividends from doing this last month in a couple of accounts. In one case I completed the trade within minutes so there was no risk of price moves but I got a dividend a month later and paid out the amount of the dividend for the shares that I had sold. The account was set for automatic DRIPs so I also got one share of RY. Fortunately I'll be doing it again soon so I can get rid of the extra share then.

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    4. I do it the exact same way with RY and BMO.

      By always using the same stock it also means when Revenue Quebec came after me about all these trades I'd neglected to report, I could reply that it was a form of currency exchange. They must have accepted that answer since I haven't heard from them since.

      Good tip about holidays in both countries, didn't think of that one.

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    5. @Anonymous: It's a pain to have to declare a bunch of extra trades (for a taxable account), but it shouldn't cost you anything. In most cases you'd get a small capital loss out of the deal.

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  2. I have used basically the same procedure at HSBC InvestDirect. The only difference is a phone call is required some time on the same business day after the trades to have a wash rate applied. The phone call is as efficient as you could expect from a phone call -- the last time I did this, the 3 trades plus phone call took me 6 minutes. Of course, I'd prefer not to have to make a call, but it isn't too bad.

    Using the procedure, I converted a little over $3k for about $16, which is about 1/3 what I would expect to pay if I let HSBC convert the currency for me.

    Since HSBC does not have separate USD/CAD accounts (boo), I don't show a short/long position until at or near the settling date.

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    1. @Returns Reaper: I'm not sure why a wash rate is needed. Is it possible that you're doing something different from what I'm doing? I want to sell Canadian ETFs and buy U.S. ETFs. If you're selling on U.S. investment to buy another U.S. investment, then I see where wash trading is relevant.

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    2. @Michael: If no wash rate was applied, my the proceeds of my sale of TD on the US exchange would be converted into CAD (at an unfavourable rate). Then my purchase of whatever I'm trying to purchase in USD would be taken from CAD converted back into USD at another unfavourable rate. Without a wash rate applied, I would have paid for two trades, plus two forex conversions (one from USD->CAD, another from CAD->USD).

      With the wash rate applied, both of these conversions still occur, but at the same rate.

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    3. @Returns Reaper: I understand now. It's been a while since my RRSP couldn't hold U.S. dollars and I'd forgotten about what I used to have to go through. I guess each discount brokerage has its advantages and disadvantages.

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    4. @Michael: I'm getting slightly off topic, but the main benefit of HSBC for me was a an additional incentive they gave on my mortgage for bringing my RRSP over to them. This made things worthwhile for me. They also have some of the lowest costs per trade (without being an active trader). I'm relatively new to NG, and they had some of the best forex rates according to the Globe and Mail's annual survey. So that was a factor as well.

      In the last few years it seems brokerages have been making it easier to perform NG, and USD RRSP's are becomong more and more commonplace. Now my portfolio's grown enough such that the forex fees I'm paying on dividends is almost outweighing the mortgage incentives. After my next renewal, I will likely re-evaluate the brokerages.

      Great blog Michael, keep up the great work!

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  3. Can anyone advise whether this also works with TDI? (being able to do it all online versus having to phone in any of the steps) I would like to use Norbert's Gambit within my RRSP.
    Thanks for any help!

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    1. @Heather: I suggest checking out Canadian Couch Potato's guide:

      http://canadiancouchpotato.com/2013/12/03/norberts-gambit-the-complete-guide/

      One of the guides is specific to TDI.

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  4. How big was the cost benefit over using DLR?

    Last time I did this with DLR, the capital loss amounted to 0.48% of the converted amount. Would you mind indicating the overall cost rate from your RY transaction?

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    1. @Holger: I estimate that I saved about $100 over using DLR. It's hard to say exactly because it depends on whether I would have got the bid and ask prices advertised for DLR and DLR.U at the time.

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  5. I surveyed a few options for currency conversion back in September and recorded outcomes. Norbert, predictably, comes out far ahead: http://liggat.org/2013/09/06/efficient-currency-conversion/

    (That was using DLR on Investorline, and with a phone call to transfer. Now I use RY and don't bother calling).

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    1. @Dave: Nice write-up. The idea of the Norbert Gambit is simple enough in theory. There seem to be a number of catches in practice. I've had success at InvestorLine, but some others have complained that agents have refused to trade DLR.U for the online commission rate. I've heard many people complain of problems at other discount brokers.

      I've settled on what seems like a very easy method using RY, but I remain wary of any change of practice by InvestorLine. Currency exchange is a cash cow for them, and no doubt they debate whether they should make it harder to do a Norbert Gambit.

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    2. @Michael: thanks.

      I don't see Investorline or others making too many waves about it, to be honest. Their average customer likely converts with the bank happily (and may not be fully aware they are even being charged a spread), while more sophisticated clients like yourself use Norbert. Any attempt to erect obstacles will simply lose them business, as that sophisticated set shifts elsewhere rather than pay the posted forex rate. Tolerating Norbert's gambit, therefore, amounts to a form of price discrimination.

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    3. @Dave: You are probably correct, but I will continue to examine my transaction history a week after each gambit just to be sure. I was once charged interest accidentally (they claimed).

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    4. I wonder if the DLR.U trading issues are because it's a USD security on the Canadian market (while the RY shares are actually traded on the US market). I know a few Canadian companies pay dividends in USD but I haven't heard of any other shares that trade in USD on the Canadian market.

      Overall I'd think the banks see this a lot like "travel hacking" with credit cards. It might cost them a bit but there aren't many people doing it. I do appreciate that they made it so easy to buy and sell on different markets but I'm not sure what practical purpose it would have other than doing NG or something similar.

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    5. @Richard: I think you're right. InvestorLine just isn't set up to allow you to trade in U.S. dollars on a Canadian exchange.

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  6. I've done this a number of times with Questrade, but I only use DLR in my registered account.

    In my non-registered account, my go-to stock is TD, since it's usually got the lowest volatility.

    Although the positions are supposed to flatten on their own, I've gotten into the habit of requesting it the next day, since it never seems to happen without manual intervention.

    Two websites that I always use just before pulling the trigger:

    http://www.northernraven.ca/financial/NGcalculator.php
    - just a great all-around tool to estimate savings and check volatility

    http://www.xe.com/
    - to see how close I can get to the spot rate

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    1. @Erick: My account takes 5 business days to flatten, but I don't have to call. Thanks for the pointers for the calculator and spot rate. I've created my own spreadsheet.

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  7. Hello,

    I'm a bit confused about the gambit.

    So, suppose we take this one as a quasi-guide but still use your method:

    https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/PWL_Bender-Bortolotti_Norbert-s-Gambit_BMO-InvestorLINE-RRSP_v06_hyperlinked.pdf?ext=.pdf

    Now, using the screen shot in page 5 of their guide and your Step 2, do I select the Market to "Canadian" and the Settlement Funds to "Canadian Dollar" and then in your Step 3 I select Market to "US" and Settlement Funds to "US Dollar"? And the symbol will be RY in both cases?

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    1. @Rajh: The full sequence I used was

      1. Sell Canadian Equity on a Canadian exchange in Canadian dollars.
      2. Buy RY on a Canadian exchange with Canadian dollars.
      3. Sell RY on a U.S. exchange in U.S. dollars.
      4. Buy U.S. equity on a U.S.exchange with U.S. dollars.

      (So, yes, the Royal Bank symbol happens to be the same, RY, in each country.)

      I was able to do these steps at BMO Investorline is quick succession without having to call them. They do seem to incorrectly charge interest sometimes up to a month or so later. When that happens I have to call them to get it reversed. If the settlement date 3 business days later is different in the U.S. and Canada due to different holidays, you can get hit with interest that won't be reversed. I can't guarantee your experience will be the same as mine. Good luck.

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    2. Thank you, Michael. I'm going to try it out and see how it works for me. I won't have Step 1 though since this is my first time doing stocks. And I suppose I should make sure there are no holidays as mentioned in your other post. I appreciate the help, mate!

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