Norbert’s Gambit – how to exchange Canadian to U.S. dollars – for less

Norbert’s Gambit – how to exchange Canadian to U.S. dollars – for less

A quick Google of “Norbert’s Gambit” might highlight a few results for how to exchange Canadian to U.S. dollars – for less.

And rightly so. 

This approach is named after Norbert Schlenker, of Libra Investment Management, who as best we know, first came up with a simple form of currency arbitrage decades ago where you leverage shares listed on both Canadian and U.S. stock exchanges to swap currencies, with little currency risk, while potentially saving money on big bank foreign exchange transactions.

Why gambit?  Avoid forex gouging!

If you like to hold U.S. assets inside your investment portfolio (like I do – see what I hold in terms of U.S. stocks here), be mindful that some discount brokerages might charge you a foreign exchange fee to exchange Canadian money to U.S. money to help you make that transaction.

If a small forex fee of say 1.5% fee doesn’t sound expensive, look at it this way:  that’s $150 in additional fees for every $10,000 transaction you make.  Over many years of investing, in order to have a good portion of your portfolio in U.S. stocks or U.S. ETFs, that’s ample change working against you.

Fight the fees

Unlike some other blogposts, I believe there are a couple of ways you can exercise the gambit.

Option 1 – Use Horizons DLR and DLR.U

One popular way touted by financial experts is to use Horizons US Dollar Currency ETF.  (This ETF is actually available in two versions:  DLR and DLR.U.)  While both trade on the TSX, DLR trades in Canadian dollars and DLR.U trades in U.S. dollars.

The Horizon’s gambit generally plays out like this:

1. Get a quote for DLR; place an order for those units. The trade will settle in Canadian dollars.
2. Call your discount brokerage’s customer service desk and ask them* to take your DLR units and “journal them” to the U.S. dollar side of your account, where they should show up as DLR.U.
3. Place an order to sell all of your DLR.U units. The trade will settle in U.S. dollars.

You’ll pay a couple of commissions with this process, but you’ll save on the forex. 

*Also, some discount brokerages now offer a client feature so clients’ can journal over their own shares within the brokerage website (e.g., TD Direct Investing); there is no phone call to the customer service desk to make for this transaction.  That makes life even easier!

Option 2 – Use Canadian inter-listed stocks

You might already know from following my site, that U.S.-listed ETFs or stocks are tax efficient in your RRSP.   Even better, many broad market U.S. ETFs have even lower fees than many Canadian-listed ETFs that hold U.S. assets – so that’s win-win.

Here are some posts on that subject, including taxable investing and what assets should likely go where.

These are great, low-cost, broad market ETFs you can consider holding in your RRSP account for growth.

If you’re going to own U.S. ETFs or stocks, you need U.S. dollars. 

To get these U.S. dollars, you can use Canadian inter-listed stocks including stocks that pay dividends in CDN $$ or USD $$.  I’ve used both. 

How does this gambit process work?

1. Get a quote for your Canadian inter-listed stock (e.g., Royal Bank (RY) or Brookfield Infrastructure Partners (BIP.UN)); place an order for those shares. The trade will settle in Canadian dollars.
2. Call your discount brokerage’s customer service desk and ask them* (*if you don’t have this online client feature to journal them yourself!) to “journal them” to the U.S. dollar side of your account. (For example, BIP.UN would now show up as BIP.)
3. Place an order to sell some or all of your shares, if you wish. The trade will settle in U.S. dollars.

What do you mean – “journal them”?

Journaling shares refers to exchanging equivalent, dual-listed shares from different exchanges. When an investment trades on two different exchanges (e.g., TSX and NYSE), you’re able to freely exchange shares from one exchange to another.

For example:

• RY.TO trades on the Toronto Stock Exchange (TSX) in Canadian dollars. 
• RY trades on the New York Stock Exchange (NYSE) in U.S. Dollars. 

Both ‘ticker’ symbols (short form of the company name) represent the same company, and asset, just in different currencies. There are many different dual-listed investments.

You can find a comprehensive list of those Canadian inter-listed stocks that pay out dividends in U.S. dollars here.   

There are hundreds of Canadian inter-listed stocks to use beyond my list above.

Why does this process work? 

Essentially because the price for the stock will be the same on both exchanges, in the relative currency.  Meaning, if the price of BIP or Royal Bank or another stock goes up in New York, it will go up on our TSX as well. 

Unfortunately the arbitrage process is not entirely free.  There are commissions to pay for buying and selling the inter-listed stock at your discount brokerage.

What have I done?  Have I used Norbert’s Gambit?

You bet.

I’ve used both Royal Bank (RY) and BIP.UN (CDN) < > BIP (USD) in the past and I will probably use either stock again in the future. I’ve only done this a couple times myself once with Royal Bank and the latter with Brookfield. 

In some cases, I’ve actually profited from the gambit because I was fortunate (luck only mind you) to perform my gambit when the BIP.UN was down in price only to see it rise a few days later (as BIP) when the transaction settled a few years ago.  I certainly wouldn’t bank on this happening though and I don’t assume it will happen to me again in the future.

Another word of caution:  this process is probably not really worth it until you have a few thousand bucks to invest (if not much more).  Otherwise, you’re going to incur many transaction fees many times over to get the job done. 

Other than waiting a few days, usually three business days including the initial transaction day for everything to settle, I’ve personally found this approach a great way to exchange Canadian to U.S. dollars in my investment portfolio – for less. 

Have you performed either process above?  Do you use any variation of this approach to exchange Canadian for U.S. dollars inside your portfolio?  Do tell and help others.

Further reading – check out other bloggers that have also performed this process including GenY Money with Questrade.