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February 7, 2020

Norbert’s Gambit – Exchange CAD to USD More Efficiently

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Mathieu Litalien

February 7, 2020

Canadian investors looking to purchase American stocks may be wise to take advantage of a popular trading strategy called Norbert’s Gambit.

As do-it-yourself (DIY) investing has increased in popularity, investor fees are also growing in importance and rightfully so. This phenomenon has caused a surge in the popularity of low-cost exchange traded funds (ETFs) at the expense of the traditional high-fee mutual funds.

It is also why discount brokers with the lowest trading fees such as Questrade are taking market share from the big banks.

Another type of fee that doesn’t generate near enough attention is the foreign exchange fee. Of particular interest to Canadians, the fee to convert Canadian dollars (CAD) to US dollars (USD) inside investment accounts.

Canada’s main stock exchange the TSX Index is highly concentrated. Financials, oil and gas, materials and industrials account for more than 80% of the Index.

It is for this reason that DIY investors are encouraged to invest outside the confines of their home country. The easiest and most recommended approach is to add exposure to the U.S. markets.

Since the U.S. markets are home to several international behemoths, investors can combine both strong Canadian stocks with U.S stocks to build an internationally diversified portfolio.

Of note, several brokerages now allow for U.S. dollar accounts, something that wasn’t prevalent at the beginning of the decade. The problem however, is that discount brokers charge a pretty hefty currency exchange fee.

Exchange fees are extensive with most brokerages

The fees themselves vary quite significantly, but they range anywhere from 0.75%-2.50% per transaction. Here is a table that outlines the currency exchange feels for the most popular Canadian brokers:

wdt_IDBrokerageFee (each way)
1Interactive Brokers0.02% + $2.00 USD
3BMO Investorline1.60%
4TD Waterhouse1.40%
5Scotia iTrade~1%
6CIBC Investors Edge2%
7RBC Direct Investing~1%
8Virtual Brokers0.75%

This means, that on a $10,000 transaction you can be paying between $75-$250 in foreign exchange fees. This significantly cuts into your margins and adds up over time.

Thankfully, there is a solution – Norbert’s Gambit

*Of note, the following is only applicable to brokerages that have USD accounts.

Norbert’s Gambit is a trading strategy that enables retail investors to greatly reduce foreign exchange fees. The premise is quite simple.

Horizon Currency ETFs

Prior to Horizon introducing its U.S. Dollar Currency ETFs (DLR and DLR.U), investors executed Norbert’s Gambit by buying dual-listed stocks on the Canadian exchange, and selling them on the U.S. Exchange.

Although this option still exists today, there is more risk associated with this strategy as the price of stocks tend to be more volatile. As such, by the time you buy and sell a stock and the trades settle, the price could have moved in either direction by a decent amount.

Considering the high volatility in today’s market, even stalwarts such as Canada’s Big Banks can move by a full percentage point in a short period of time.

Horizons seized on this opportunity and introduced the U.S. Dollar Currency ETF, whose goal is to reflect the price in CAD of the USD, net of expenses. One trades in Canadian Dollars (DLR) and the other in U.S. Dollars (DLR.U). The risk is greatly reduced and is limited to foreign exchange risk.

It is as though Horizon created the pair for the sole purpose of executing Norbert’s Gambit. In fact, maybe they did. Here is an image directly from one of their PDFs on DLR.U:


Norbert's Gambit

As per the diagram the process is incredibly simple.

If you want to change $10,000 CAD into USD, you would do the following:

  • Select your Canadian account and place a buy order for $10,000 worth of DLR;
    • The trade will settle in Canadian dollars
  • Select your U.S. account and place a sell order using DLR.U, and sell the entire lot of shares;
    • The trade will settle in U.S. dollars

Some brokerages may need a phone call

Of note, this process is extremely simple for those brokerages who have automatic journaling set up. No other steps are required.

If not, once you make the initial purchase, you may have to call your broker and ask them “journal over” the shares to the U.S. dollar side of your account. I have been a long-term RBC Direct Investing customer, and as they have auto-journaling I’ve never had to place a phone call.

It is best to check with your brokerage first before executing the trades.

It is also important to note, that you won’t get away without paying fees as each trade is subject to your brokers commission fee.

To illustrate, here is Horizon’s breakdown how this Norbert’s Gambit strategy can benefit investors. Again, this image is directly from one of Horizons fact sheet PDFs, which you can find here.

Norberts Gambit Savings

It is also worth noting, that it is not an exact science. Since the spread is in constant flux, it is likely that by the time you buy and sell the shares, the price will have moved slightly in either direction.

Considering the high foreign exchange fees charged by discount brokers, this could result in significant savings. The larger the dollar amount you want to convert, the bigger the savings as the costs are fixed.

For those who have U.S. accounts, using the Norbert’s Gambit to reduce the impact of foreign exchange fees is a no-brainer.

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Mathieu Litalien

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha, Motley Fool and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

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