It’s Expensive to be a Canadian Investor

The One Big Investment Fee Most People Forget About

The cost of turning my Canadian dollars into U.S dollars is painful

ETF’s and specifically Index Funds have become the darling of the FIRE community for one simple reason; It is the cheapest way to invest in the stock market.

Why do Investing Fees Matter?

Annual investment fees matter bigtime because like your investments they compound in size over time.

Vanguard uses the following example to explain the impact of investment fees over your lifetime.

Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you’d end up with about $430,000.
If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000.
That’s right: The 2% you paid every year would wipe out almost 40% of your final account value. 2% doesn’t sound so small anymore, does it?

Now that people have wised up to investment costs, Index funds have become extremely popular. I can invest in the S&P 500 through a Vanguard Index for only 4 basis points (0.04%) per year. That means if I invest $10,000 it will only cost me $4 per year to get a diversified stock portfolio.

If I lived in the U.S that is. But since I am a Canadian Investor who gets paid in the Canadian dollar, I have another layer of fees that are quite difficult to bypass.

Currency Conversion Fees

Since most of the ETF’s I invest in are quoted in U.S Dollars (USD) I need to convert my Canadian Dollars (CAD) into USD before buying them. Which at almost every major online broker will cost 2%.

Right off the bat, I am in the hole 2% and that is before investment fees. Let’s say for the simple math that one Canadian Dollar is worth exactly one U.S Dollar.

If I invested $10,000 CAD into an S&P 500 Index fund quoted in USD, I would only have $9,800 USD after conversion. $200 Might not sound like all that much money, but let’s consider what my $10,000 investment is worth compared to my $9,800 difference after 30 years assuming a 7% annual return on investment.

  • The final value of an initial $10,000 investment would be worth $76,122 after 30 years
  • The final value of an initial $10,000 investment would be worth $74,600 after 30 years

My opportunity cost I pay through that $200 difference grows to nearly $2,000 by the time I retire.

But wait the fees do not end there. Remember I live in Canada and must buy things with Canadian money. That means in retirement I will need to convert my $74,600 USD back into CAD and pay an additional 2% conversion fee. That will cost me another $1,492 bringing my total down to $73,108.

The lifetime cost of converting my $10,000 to and from USD is more than $3,000.

Surely You Can Buy ETF’s Quoted in CAD?

You might be thinking, Vanguard must have thought of this and created an S&P 500 Index fund quoted in CAD.

They have but compared to the U.S ETF it sucks.

For starters, the annual expense ratio of the CAD fund is twice as expensive as the USD fund.

Second, since I hold my investments inside my “Tax-Free Savings Account” (similar to a Roth IRA) I have to pay 15% withholdings tax on all dividends I would collect.

Due to a very weird tax treaty between Canada and the U.S, if you hold an ETF with U.S stocks that are quoted in Canadian Dollars, any dividends paid out by the fund are subject to a 15% withholding tax. Since I hold the fund inside a “Registered” (retirement) account I have no way of claiming back the tax.

So, my options as a Canadian wanting to invest in an S&P 500 Index Fund are to pay 2% currency conversion fees when I deposit and again when I withdraw my investment OR pay twice the expense ratio and give away a portion of my dividends every year.

Or do I….

Norbert’s Gambit

Some very clever Canadian DIY investors have found a loophole that allows me to bypass the 2% currency conversion fee. It is referred to as “Norbert’s Gambit”.

Horizons has two versions of a U.S dollar ETF. One quoted in USD and one in CAD. With the spread between the two funds being equal to the USD/CAD exchange rate.

Essentially if I wanted to convert my $10,000 in CAD to USD, I would take the following steps

  • First, buy $10,000 worth of the Horizons U.S Dollar ETF that is quoted in Canadian Dollars.
  • Second, I would call my broker and ask them to “journal over” my investment to the version of the fund quoted in U.S Dollars. Many online brokers will do this for free (but it’s important to confirm before trying this).
  • I sell all my units of the and Presto! My $10,000 CAD has been converted into USD without paying 2% conversion fee.

It should be noted that Norbert’s Gambit is not “Free”. There will be a fee to buy and sell the Horizons U.S Dollar ETF. Find out what those fees would be and only do it if the fees are less than what you would pay with a traditional conversion fee.

Norbert’s Gambit can also be quite risky. It can take 2–5 business days to complete the process. In that time, you open yourself up to exchange rate risk.

Imagine on the day you execute Norbert’s Gambit one Canadian Dollar was worth 1 U.S Dollar. But in the time, it takes to complete the transaction the value of the Canadian Dollar drops so that one Canadian Dollar is worth only 90 cents U.S.

Rather than paying a 2% conversion fee you just paid a 10% conversion fee. Of course, the exact opposite could happen, and I could potentially make money if the exchange rate went the other way.

That is the life of a Canadian Investor. If I want to buy USD ETF’s in my retirement account I either have to pay significant fees or take significant risk to avoid those fees.

I would love to hear from all the “Non-U. S” investors out there. What kind of currency conversion fees do you typically pay? (if any). Let me know in the comments.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions