With each passing year I’ve been spending more time in the U.S. during Canada’s winter.  When I was young I embraced winter, but not so much now.  I guess I’m becoming a snowbird.  Over the years I’ve paid a lot in currency exchange fees, but I’ve finally done something to cut these fees. Until recently, I just used a Canadian credit card to pay amounts charged in U.S. dollars.  This has felt painless, because the credit card company automatically applies an exchange rate so I can pay my bill in Canadian dollars. Hidden in the exchange rate my credit card company uses is an extra 2.5% fee.  Most people, myself included, don’t know the exact fair exchange rate between Canadian and U.S. dollars at any given moment, so it’s easy to forget about this extra fee.  However, almost all Canadian credit cards charge this extra 2.5%. So, when I recently spent a little over US$6000 to rent a nice place and was charged nearly CDN$8000 on my credit card, roughly CDN$200 ...

Every so often I’m forced to change the way I convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The basic method I use stays the same, but some of the details change as InvestorLine responds differently. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. Banks and brokerages hide fees in their currency exchange rates. To see the extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars. Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively. Nor...

Index investors in Canada who own Exchange-Traded Funds (ETFs) have a choice to make with their U.S. and international stock holdings. They can either buy an ETF that holds U.S. and international stocks but trades in Canadian dollars (such as Vanguard Canada’s VXC), or they can buy U.S.-listed ETFs that trade in U.S. dollars. This choice is a trade-off between cost and complexity. It’s certainly a lot simpler to own VXC. With U.S.-listed ETFs, you need to find an inexpensive way to exchange Canadian for U.S. dollars, such as Norbert’s Gambit . But, as Justin Bender explained, the cost of VXC is higher than the cost of owning U.S.-listed ETFs . This higher cost comes from a higher Management Expense Ratio (MER) and U.S. dividend withholding taxes. For the mix of U.S.-listed ETFs that I own (VTI, VBR, and VXUS), the blended MER is 0.09%, which is 0.18% lower than VXC’s MER. Less obvious, as Justin calculated, is the fact that U.S. withholding taxes of 0.35% cannot be recovered ...

There is now a more recent update of the method I use for exchanging currency at BMO OnvestorLine . I recently changed the procedure I use to convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. The latest change I made eliminated an annoying interest charge that I had to ask to be reversed. Most people don’t realize how expensive it can be to exchange currency. The extra charge banks and brokerages add gets hidden in the exchange rate. To see this extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars. Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per excha...

There is now a more recent update of the method I use for exchanging currency at BMO OnvestorLine .  Hidden costs in currency exchange are bigger than most people realize. To exchange large amounts of Canadian and U.S. dollars, I use a version of the “Norbert Gambit” by buying and selling Royal Bank stock in different currencies. The exact procedure is different at every discount broker. I use BMO InvestorLine and recently had to change my procedure slightly. You may ask why I don’t just use my broker’s currency exchange system. The answer is cost. The last I checked , if I started with C$10,000, converted to U.S. dollars, and then converted back again, I’d have been left with about C$9700 or about C$300 less. For C$100,000, the round trip cost was about C$1150. By doing the currency exchange myself using Royal Bank stock, I can bring these costs down to an average of about C$50 on C$10,000 and about C$100 on C$100,000. These are average costs because Royal Bank stock p...

I recently revealed my portfolio’s asset allocation and the reasoning behind it . It consists of just 4 Exchange Traded Funds (ETFs). This might make some think that I’m not sufficiently diversified. To explain why this isn’t true, I’ll take a deeper look at these ETFs. I’ll also go over many of portfolio costs that investors face. The following chart gives some basic information about the ETFs in my portfolio: ETF Allocation Asset Class # Stocks MER Purchase Currency VCN 30% Canadian 248 0.05% C$ VTI 25% U.S. 3772 0.05% US$ VBR 20% U.S. Small Cap Value 812 0.09% US$ VXUS 25% World ex. U.S. 5783 0.14% US$ Diversification If we focus initially on the “# Stocks” column, we see that each ETF contains within it a large number of individual stocks....

My most recent currency exchange using the Norbert Gambit seemed to go off without a hitch. I bought Royal Bank shares in Canada with Canadian dollars and then sold Royal Bank shares in the U.S. to get U.S. dollars. Two weeks later, all looked fine. But I was eventually hit with an interest charge. Here is the sequence of events. I made the trades one day, and the trades settled three business days later. But it wasn’t until one business day (3 calendar days) after settling that InvestorLine’s systems wiped out the positive number of shares on the Canadian side of my account and the negative number of shares on the U.S. side. So far, so good. However, InvestorLine’s system decided that I was short the U.S. shares for the three calendar days it took to flatten the positive and negative numbers of shares. At 21% interest, shorting for three days produced a charge of over US$90. The worst part, though, is that interest charges don’t show up in my account until about the 21st ...

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 use 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. do...

A thoughtful reader asked me about how Canadians can protect themselves against our dropping Canadian Dollar. I won’t name this reader because I intend to answer this question more forcefully and bluntly than usual. This may come across as wrath against this particular reader but that isn’t my intention. I want to shake up people’s thinking. Here is the beginning of the (lightly edited) question: Predictions abound that the Canadian dollar will drop in value relative to the U.S. dollar. This might be due to the overall economic forces, or maybe the election of PQ and the Neverendum issue. First of all, “Neverendum” is clever; kudos to whoever thought of it first. Next I have a message for the people of Québec: Don’t listen to the vocal minority in the rest of Canada. We love you. Please don’t go. Predictions about the Canadian dollar are worthless. Do you seriously believe that Canada’s current economic and political issues have somehow escaped the attention of the peop...

When Canadians own U.S. assets, they usually think they are exposed to U.S. dollar fluctuations. This is only partly true. Our tendency to think of dollars as an absolute measure of value muddies the water. Let’s choose a very simple fictitious example to help illustrate these ideas. Sandy bought 100 shares of a U.S. stock ETF trading at US$100 per share at the start of a year when the Canadian and U.S. dollars were at parity. So, her investment started out with a value of C$10,000. By the end of the year, the ETF shares rose in value to US$120, and the U.S. dollar finished the year worth C$1.10. Sandy’s 100 shares are now worth US$12,000, or C$13,200. We would normally say that the ETF rose 20%, and Sandy made an extra 10% on the U.S. dollar for a total (compounded) return of 32% when measured in Canadian dollars. Based on this example, it appears that Sandy’s investment had full exposure to the relative value of U.S. and Canadian dollars, but this isn’t the case. Her rea...

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 Invest...