Typically, the biggest cost involved in buying stocks or ETFs listed in the US markets is the foreign exchange fees. Discount brokers typically charge 1.5% or more for converting Canadian dollars into US dollars or vice-versa. If you want to convert $10,000 Canadian into US Dollars, it will cost you at least $150 at your discount brokerage. It is not charged as a separate fee but is hidden in the exchange rate at which the conversion is done.
A Canadian Money Forum member shared a neat trick for converting loonies into greenbacks and vice-versa for little more than the cost of two stock trading commissions, the buy-ask spread and a tiny amount of market risk. The idea behind the trick is to buy a highly-liquid stock that is listed in the Toronto Stock Exchange and sell the same stock in the US markets (or vice-versa if you want to convert US dollars into Canadian dollars). I’ll illustrate how to execute this trick at TD Waterhouse (read my review here) with TD Bank’s stock as an example but it should also be possible at other discount brokers and other inter-listed stocks such as Research in Motion (TSX: RIM, NASDAQ: RIMM), BCE or Potash Corporation (POT). Note that you may not want to try this strategy with a stock you already own unless you want to trigger capital gains or losses.
TD Bank trades on both the TSX and NYSE under the ticker symbol TD. To convert $10,000, first buy TD on the TSX at the current ask in your Canadian dollar account. If TD is trading at an ask of $74.58, you’ll buy 134 shares for a total cost of C$10,003.72 (assuming a $10 commission). Then you’ll call your broker and ask to “journal” TD Bank stock over to the US dollar account and sell it there at the current bid price. If TD is trading at a bid of $73.75 on the NYSE, selling 134 shares will gross $9,882.50 (USD). Since the transaction was done through a broker, TD Waterhouse will charge $39 plus 8 cents per share for a total commission of $49.72 (US), leaving you with a net of $9,832.78 (US).
You can also use the same method to convert US dollars into Canadian dollars by buying an inter-listed stock in the US markets and selling it on the TSX. The effective cost for converting to Canadian dollars to US dollars using this method works out to 63 basis points. But since the fee is more or less flat, you can save substantial amounts in conversion charges for larger sums of money. It should be pointed out that this method involves taking on the risk that the market moves sharply against you between the time you bought the stock on one exchange and phoned in the order to sell the stock in another exchange. Of course, the stock could move higher, which results in a lower conversion cost or perhaps, even leave you with a profit.
This strategy is popularly referred to as “Norbert’s Gambit” and is detailed on the Financial Webring Forum website.
Intelligent Speculator reports that this strategy is possible at National Bank Direct Brokerage (NBDB).
See the comments section below for how Charles in Vancouver saved on foreign exchange using “Norbert’s Gambit” at Credential Direct.
As I wrote in this post, the Horizons BetaPro US Dollar Currency ETF (DLR, DLR.U) offers a foolproof way to implement the Norbert Gambit.