The traditional Norbert Gambit takes advantage of inter-listed Canadian stocks (RIM on the TSX and RIMM on NASDAQ, for example) but many investors find that discount brokers sometimes balk at journaling shares to the US account and selling shares right away. This would mean a wait of three trading days for the initial trade to settle and another two business days for the shares to be journaled over and taking on market and securities risk during the waiting period.
Recently, Horizons BetaPro introduced the US Dollar Currency ETF that trades on the TSX under the ticker symbol DLR. DLR is a currency ETF that simply holds US dollar cash equivalents and trades in Canadian dollars. Horizons BetaPro then followed it up with a US dollar denominated version of the same ETF that also trades on the TSX under the ticker symbol DLR.U. The combination of DLR and DLR.U allows investors to execute a Norbert Gambit and convert Canadian dollars into US dollars or USD into CAD at a very low cost without taking on any security risk.
Here’s how you can use DLR to convert Canadian dollars into US dollars.
1. Get a quote on DLR after logging in to your discount broker. Make sure that the bid-ask spread is 2 cents.
2. Since DLR has very low volume put in a limit order at the current ask price.
3. Wait for the trade to settle (T+3 days). Call your discount broker to journal DLR to your US investment account.
4. Wait 2 business days for the shares to get journaled over.
5. Get a quote on DLR.U. Make sure that the bid-ask spread is 2 cents.
6. Put in a limit order at the current bid price.
7. When the trade is executed, you’ll have converted CAD into US dollars.
To convert USD into CAD, investors would purchase DLR.U in their US investment account and sell DLR in their CAD investment account. The typical discount broker charges 1.5 to 2 percent on currency conversions. Norbert Gambit with DLR/DLR.U will cost an investor just two trading commissions plus 2 cents spread per share.
Here’s a concrete example from a recent currency conversion I did in my TD Waterhouse account.
Purchase 500 shares of DLR at $9.75.
Sell 500 shares of DLR.U at $9.99.
Result: $4,885 CAD converted into $4,985 USD.
TD Waterhouse retail exchange rate: $4,885 CAD converted into $4,943 USD.
Total Savings: $42
Update #1:
The low trading volume of DLR/DLR.U is not a concern because ETF vendors (Horizons BetaPro in this case) typically work closely with market makers to ensure tight bid-ask spreads.
Update #2:
When you journal DLR over to the US Dollar account, the ticker symbol may remain the same. However, you will be able to put in a sell order for DLR.U. Don’t forget to note down the bid price of DLR because the difference between your purchase price and sell price in Canadian dollars should be declared as capital gains or losses in your taxes.
Update #3:
Here’s another example of a currency conversion with DLR/DLR.U:
Buy 700 DLR at $9.75.
Sell 700 DLR.U at $9.99
Result: $6,835 CAD converted into $6,983 USD.
TD Waterhouse retail exchange rate: $6,835 CAD converted into $6,901 USD.
Total Savings: $82
