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Why buy U.S. ETFs?

I'm all for buying CAD listed ETFs, but sometimes, USD denominated ones make more sense for better tax efficiency. For instance, holding U.S. listed ETFs that contain U.S. stocks/bonds in your Registered Retirement Savings Plan allows you to avoid a 15% foreign withholding tax on the dividends. This can add up to significant cost savings over time. 

However, the trick is finding a cheap way to convert CAD to USD. While brokerages usually offer an in-house currency conversion service, the fees can be expensive, often amounting to 1.5% or more on top of the existing forex (FX) rate. This can become a significant source of drag that hampers your returns. 

Avoid Currency Exchange Fees with Norbert's Gambit

Fortunately, you can use a cool trick to avoid currency exchange fees and exchange your CAD to USD for cheap using ETFs. The technique is called "Norbert’s Gambit," named after Norbert Schlenker of Libra Investment Management in Salt Spring Island, B.C.

Way back in 2001, Norbert pioneered the technique of using stocks listed on both Canadian and U.S. stock exchanges to convert currency. In a nutshell, Norbert bought Canadian shares of that stock in CAD, "journaled" them over to the U.S. version, and then sold them for USD. 

Today, Canadian investors can use Norbert's technique with an ETF that directly tracks the USD-CAD currency pair – the Horizons US Dollar Currency ETF (DLR). DLR comes in both CAD and USD (DLR.U) denominated versions. 

A Step-by-Step Guide to Using ETFs to Convert from CAD to USD:

Step one: Determine how much in CAD you wish to convert and purchase the corresponding amount of DLR shares. 

• As of writing, DLR trades at $12.90 CAD per share. If I wanted to convert $5,000 CAD, I would buy approximately 387 shares of DLR. 

Step two: Buy the shares of DLR during trading hours on your brokerage platform of choice. 

• It is very important that you use limit orders here. This allows you to minimize slippage from the bid/ask spread and get a better fill on your order.

Step three: Call your brokerage's customer service line (or use the online chat function) to convert your 387 shares of DLR to DLR.U.

• The phrase to use here is "I would like to journal over XXX DLR shares to DLR.U shares in my personal/TFSA/RRSP/RESP/LIRA account". You'll have to wait 2-4 days for the trade to settle. 

Step four: Once the DLR.U shares appear in your account, sell them to receive USD. 

• Once again, make sure you use a limit order to minimize slippage from the bid-ask spread and to get a better order fill.

You can now use your newfound USD to buy U.S. listed stocks and ETFs. When you're ready to convert back to CAD, simply follow the steps in reverse. 

How Effective is Norbert's Gambit?

Let's examine how our example of converting $5,000 CAD to USD would have worked compared to exchanging at the current spot FX rate or at a Big 5 Canadian Bank's FX rate. 

• Spot FX rate: $1 CAD = $0.78 USD. Therefore, $5,000 CAD = $3,915.75 USD. 
• Big 5 Bank FX rate: $1 CAD = $0.756 USD. Therefore, $5,000 CAD = $3,780.00 USD. 
• Norbert's Gambit: As of writing, one share of DLR.U trades at $10.05 USD. We journaled over 387 shares of DLR.U at $12.90 CAD per share (total of $4992.30). If we sold all 387 shares as DLR.U at its current price of $10.05 USD, we would receive = $3,889.35 USD.

Using Norbert's Gambit saved $109 dollars compared to the rate the bank offered us. 

Risks of Norbert's Gambit

Norbert's gambit is an advanced technique that only becomes useful once the size of your account gets large enough. For most investors, the 15% foreign withholding tax on U.S. dividends is not much of a concern. The convenience of buying CAD ETFs that hold U.S. stocks and bonds is worth more than the hassle. Generally, Norbert's Gambit really begins to pay off if you're exchanging upwards of $5,000 CAD or more frequently. 

Investors also need to factor in trading commissions. Unless you're using a no-fee brokerage, you'll be charged a fee when you buy DLR, journal DLR to DLR.U, and sell DLR.U. Assuming a $6.95 commission for each leg of this trade, you could be paying upwards of $20 per conversion, which can eat into your returns. Once again, this is less of an issue if you're converting large sums. 

The biggest risk to using Norbert's gambit is fluctuations in the CAD-USD exchange rate when your shares are in transit (i.e., in the process of journaling over from DLR to DLR.U). If the USD suddenly appreciates during this limbo, the DLR.U you receive will be worth less. You could hold DLR.U until the CAD appreciates, but this will delay any subsequent transactions. 

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.