A few weeks back, Horizons BetaPro introduced a new exchange-traded fund called the US Dollar Currency ETF, ticker symbol DLR, that holds US Dollar cash and cash equivalents. In my post following its introduction, I hoped that Horizons BetaPro will introduce a US-Dollar version of the ETF because it would offer a cheap and fail-safe method for investors wanting to convert Canadian dollars into US dollars or vice-versa.
Horizons BetaPro will be launching a US dollar denominated version of the US Dollar Currency ETF tomorrow. It will trade on the TSX under the ticker symbol DLR.U. Investors who have CAD and USD accounts with a broker and want to convert their loonies into greenbacks will buy units of DLR using Canadian dollars. They will then sell DLR.U and when the trade is settled, they will receive the proceeds in US dollars.
Investors who want to convert their US dollars into Canadian dollars will do the opposite. They will buy units of DLR.U using US dollars, sell DLR and when the trade is settled, they will receive the proceeds in Canadian dollars.
Discount brokers typically charge 1.5 to 2.0 percent every time an investor converts currency. With this method, the total cost for an investor is the broker commission on the two trades, the bid-ask spread and any change in the discount/premium over NAV. Note that unlike the Norbert Gambit with inter-listed stocks, investors are taking zero market risk when trading DLR/DLR.U.
While I think this is an exciting development, I would wait for volume to pick up before using DLR/DLR.U to convert currency. Volume on the U.S. Dollar Currency ETF (DLR) is currently very thin. The volume of shares that changed hands was zero yesterday and 1,000 today. Such low volumes may result in steep bid-ask costs if investors are not careful. Note that a bid-ask spread of 20 cents (DLR.U is targeted to trade at $10) will wipe out any savings on foreign exchange conversions at a typical discount broker.
Update (May 12, 2011): The Horizons BetaPro announcement of DLR.U can be found here.
TD Waterhouse shows a bid-ask on DLR of $9.65-$9.68. The bid-ask on DLR.U is $9.99-$10.01. Assuming you can execute trades at these prices, the exchange rate will be 1 CAD = 1.0320 USD. TD Waterhouse’s exchange rate on $1,000 works out to 1 CAD = 1.0169.