Norbert’s Gambit- Save thousands of dollar from foreign exchange conversion fees 13


As a Canadian, it is very hard not to invest in US market. In order to invest in US market, you could buy US market ETFs that are listed in Canadian stock market such as VUN and VGG or if you prefer to buy companies directly then you will first have to exchange Canadian dollars to US dollars. However as you know bank would charge you up to 3% in foreign exchange conversion fee and I hate paying my hard-earned money to the bank for a simple transaction like that. If I convert $50,000 at the bank then I would be paying close to $1,500 to the bank.
As a shareholder of many banks, I appreciate you for paying that much money for that little work šŸ™‚ however I wouldnā€™t pay that much money for myself.

 

Here is a good news, I just saved about $1,000 of US dollarĀ conversion fees by using Norbertā€™s Gambit and it was very simple.

Think it as this. Letā€™s say you purchase a Kitkat in a Walmart by the Canadian border in Canada at $2 Canadian dollar. You received a receipt and crossed the border to US and dropped by a Walmart and you returned the kitkat at $1.80 in US dollar (assuming $1CDN =$0.9 USD). The end result is that you successfully exchanged $2 Canadian dollar to $1.80 US dollar without paying any fees.

Norbertā€™s Gambit works exactly like that. You buy stocks (kitkats) that are listed in both US and Canadian exchanges (Walmart) in one currency and sell them in the other currency. If you do, you will incur only 2 transaction fees and minor bid-ask spread. There are two ways to do this. Genius isnā€™t it?

  • By using Horizons U.S. Dollar Currency ETF (DLR and DLR.U).Ā DLR is bought and sold in Canadian dollars and DLR.U trades in U.S. dollars.

  1. Buy DLR or DLR.U ETFsnorbert 1
  2. Call your broker and have them to journal from DLR to DLR.U or DLR.U to DLR.
  3. Sell DLR or DLR.U ETF in that market.norbert 2

Or you can actually do everything with your broker. You could let the teller know what you are trying to achieve by using Norbertā€™s Gambit and ask whether he/she knows it and how to do it. If he/she knows then great, if he/she does not then call again until teller is aware of what Norbertā€™s Gambit is. If he/she knows then he/she can help you buy DLR or DLR.U, journal them and sell them for you for 2 transaction fees.

I purchased $US and purchased VTI when it was like ($1US= $1.07CDN) however when it became $1US= $1.226CDN I decided to sell big chunk of my $US at the rate.I converted $34,625.34US to $42,478CDN and did not look back at all. By using Norbertā€™s Gambit, instead of spending about $1,000-$1,200 for the conversion, I only spent $20 for buying and selling DLR and about $10 for bid-ask spread. The whole process took me about 20 minutes. Life is better when you can save 98% of transaction fees.Ā 

  • By using inter-listed stocks

  1. Buy one of the following stocks (Interlisted stocks)Ā that are listed in both Canadian and US exchanges. However I highly recommend using stocks that have low bid-ask spread such as CM, TD, RY etcā€¦ and avoid days that you expect big news for the stocks that may impact on the stock price. It is strongly recommended to pick a quiet day to execute this strategy by using inter-listed stocks.
  2. Call your broker and have them to journal from one currency to the other currency for the stocks that you purchased.
  3. Sell the stocks in the opposite currency immediately.
  • Ā Important things to note

  1. Make sure to talk to your broker first whether the strategy works under their system.
  2. Find stocks that have low bid-ask spread.
  3. Avoid big news that would result higher bid-ask spread.
  4. Avoid major holiday seasons such as Christmas because trading volumes would be lighter than usual so bid-ask spread would be higher.
  5. Watch out when exchanging in a taxable account such as RRSP. You may incur superficial loss. Talk to your tax accountant before using the strategy in a taxable account.
  6. The method would not be very effective if you are exchanging less than $5,000 due to bid-ask spread and transaction fees of $20.
  7. It is perfectly legal J Execute as much as you like!

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