Wednesday, August 21, 2013

Currency Exchange at BMO Investorline

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.


  1. Using DLR/DLR.U for the Norbert Gambit seems convenient with no 3 day wait to settle transactions, but isn't it more expensive due to bid/ask spreads? I see the bid/ask on DRL is currently 10.40/10.41 but if you pick a liquid cross listed Canadian company with a higher price, BMO for instance, you can have a bid/ask spread of 64.43/64.44. The US spreads seem to be a little higher, 3 cents for BMO when I checked. But still, as the bid/ask spread is the majority of the cost for large currency exchanges, I'd say it is still better to use an inter-listed stock if you aren't in a hurry.

    1. @Greg: You're right that the spreads on DLR are quite a bit larger than they are on some inter-listed stocks. However, Investorline doesn't seem to want to allow me to buy and sell at the same time without charging me interest on the temporary short position. So the process seems to be to buy Canadian shares, wait 3 days to settle, call to get the shares journaled over the the U.S. side of my account, and finally sell the U.S. shares. The 3-day delay is annoying and adds a lot of volatility. Doing it this way will have lower costs, on average, but will sometimes produce sizeable wins or sizeable losses depending on what the stock and exchange rates do for 3 days. If you know of a way to use inter-listed stocks with low spreads but get all the transactions done the same day I'm very interested.

    2. What I do with iTrade (and should work with other brokers) is simultaneously buy long in one currency and sell short in the other currency. Then I call in three days after the transactions settle to "journal over" the long position to cover the short position and I'm done. It takes a margin account and you still have to wait 3 days and call a trader (who may be confused but most are familiar with this these days). But you don't have to worry about volatility over the three days and shouldn't be charged any margin interest before the transactions are settled.

    3. @Greg: The next time I'm talking to an Investorline agent I'll try to found out if they'll allow me to do this without any exciting charges.

  2. This process works even better with RBC Direct Investing. There is no need to call the bank. You simply buy it in Canadian Dollar Account and once it is filled, simply sell it in the US Dollar Account. The blanaces were weird on that day with some showing negative balances but it all got sorted out the next day. The downside is that it does takes 3 days to settle.
    I agree with the spreads on DLR and I normally do it on Royal Bank shares where the spread is much lower.

    1. @Scorpion: This sounds quite civilised. The 3 day wait for settlement you mention -- is this a delay before you can trade with the exchanged money? Or is it just 3 days before your account looks "normal" again?

    2. Three days before I could trade with the money.
      The Account sorted itself out the next day.

  3. Similar to Greg's experience with iTrade, I've bought long, then immediately sold short at Questrade (usually with TD stock).

    If the trading platform balances still look out of whack after 3 days, I fire up a chat session and ask to have the positions flattened.

    I've also used the DLR gambit in my RRSP account, since that's really the only option available for cheap(er) currency conversion.

  4. I am not familiar with the concepts of "buying long" and "selling short". What do these mean and do you have to do something different when buying and selling stocks online -- special instructions etc?

    1. Buying long is just plain buying really- money goes out of your account and the stock comes in. Selling short is basically the opposite- borrowing the stock and selling it- money comes into your account and the stock goes out. Since you borrow stock when you sell it short, the number of shares you own is negative- you owe the broker the stock. You need a special account called a margin account because you are borrowing when you sell short.

      Without a margin account you will probably only see two order types on your trading page- buy and sell. With a margin account you will also have something like "sell short" and "buy to cover", the latter buys the stock and uses it to pay back the shares you borrowed when you sold it short.

  5. Hello Michael,
    Very informative post. Question if I may. Are you performing the Norbert on a RRSP account or a regular unregistered account?

    1. @MG: I did it in an RRSP account. So, they obviously don't consider what I did to be shorting anything.

  6. I received the following email from reader E.D. who managed to save some money on currency exchange at TD:

    I followed with great interest the story on how to use DLR to move Cdn dollars to US dollars.

    In went through a dry run, then phoned TD Discount Broker, got a real person, who immediately knew what I was thinking of doing, and ran through all the steps thoroughly and clearly, including the trading fees.

    In my case, I did not want to keep the US dollars for US investing, but needed to spend it in the US (college tuition). So, once I sold the DLR, the funds would have transferred into my Borderless Account.

    The savings over the TD Bank posted exchange rate was over $200, and I will be doing similar transactions twice as year as tuition bills come due.

    I went to Accu-Rate exchange. For sums between 10K and 50K they have a considerably better than posted rate, their "commercial rate". It cost just a bit more than the DLR route, but the money would transfer instantly, whereas TD Brokerage had a three day lapse between the sale and being able to spend the money.

    So I went into my TD Branch, told them how much I wanted to move to the Borderless Acct, and that I wanted the Accu-Rate rate. A supervisor was called. She phoned somewhere, got an authorization number, and they matched the Accu-Rate. Money transferred instantly, no holding period.

    Lesson: I now know about the DLR route. Thank you.
    I now know TD will match Accu-Rate.
    Once again, bank charges ARE NEGOTIABLE.
    Just ask.