How Norbert’s Gambit Could Save You Serious Money on the US Dollar
With uncertainty striking the stock markets these past few months, Canadian retail investors, I included, see more buying opportunities south of the border than right here in Canada, especially in the tech sector.
The problem is the USD/CAD exchange rate has never been in the CAD’s favour these past few years, with 1 USD consistent costs 1.30–1.40 CAD. To make things worse, retail investors are not exactly getting the best exchange deal from their banks or brokerages. Here’s an example on June 03:
According to Morningstar’s data on Google, for each Canadian dollar (CAD), you can expect to get 0.74 US dollars (USD) in exchange before fees. Let’s say if you want to invest 10,000 CAD into the US markets, your converted available fund under this condition would be approx. 7,400 USD. But most of the time, you’d end up with less, or much less than this amount because of middlemen and fees.
There are three common ways DIY investors use to exchange their CAD to USD:
1. One of my brokerages is RBC Direct Investing, using RBC Foreign Exchange Currency Converter, that same 10,000 CAD would give you back 7,263.22 USD. That means you lose approximately 136 USD or 1.8%. Depending on how much is exchanging, that 1.8% could get significant. If you are investing double of that amount, you’d lose 272 USD.
2. If you do it directly on RBC DI, it could be a little bit better depending on when they settle the exchange request:
3. What if you exchange your CAD to USD through a third party, then deposit that USD to your RBC USD Savings Account then transfer that to RBC DI, let’s look at that. My go-to currency exchange shop for traveling needs is Vancouver Bullion & Currency Exchange (https://www.vbce.ca/rates). With their exchange rates, you’d get 7,347.54 USD for your 10,000 CAD today. If you can get their preferred rate, it’d be a little bit better. Among all conventional options, the VBCE route is the best out of all but you are still losing approx. 52 USD, coupled with the hassle of going through this way to get your USD fix.
Norbert’s Gambit
In fact, there is another option, which I have come to realize to be the best among all for regular investors if your USD need is not urgent or immediate. It’s called the Norbert’s Gambit technique, named after Norbert Schlenker of Libra Investment Management in Salt Spring Island, BC. Schlenker was a pioneer of the idea of using shares listed on Canadian exchanges but denominated din both CAD and USD to exchange CAD for USD for less.
One that allows you to execute the Norbert’s Gambit technique is in the form of an ETF by Horizons called Horizons US Dollar Currency ETF which trades under two tickers: DLR & DLR.U (http://www.horizonsetfs.com/horizons/media/pdfs/productsheets/DLR-Product-Sheet.pdf)
In short, DLR trades in CAD while DLR.U trades in USD. The ETF “seeks to reflect the reference value in Canadian dollars, of the U.S. dollar, net of expenses”.
My understanding is that the price ratio DLR.U / DLR refects the USD / CAD exchange rates with daily movements reflected in DLR’s price while DLR.U is a relative benchmark. Let’s look at their closing price on June 03:
Assuming you buy DLR at ask price (13.65 CAD) and sell the same amount fo DLR.U at bid price (10.11 USD), the USD/CAD exchange rate you can expect is 10.11/13.65, which is around 0.74 before commissions. Well, isn’t that the Morningstar’s rate on Google?
RBC DI charges $9.95 CDN or US flat per trade depending on your settlement currency. Ideally, you only need 2 trades to settle the exchange. I suggest you buy at ask and sell at bid to minimize the risk of getting partially unfulfilled that you’d have to execute another trade, hence incurring more commission fees.
FIRST TRADE — BUYING DLR (CAD):
Assuming you have 10,000 CAD to exchange to USD, you can place a trade to buy 731 shares of DLR at ask price of 13.65 CAD. After the $9.95 commission, your total cost would be 9,988.10 CAD.
ETFs now take around 2 business days (T + 2) to settle. As a good practice, I usually wait 2 days before executing the next trade to sell. However, depending on the brokerage and the account type, I was able to execute both trades on the same day before without incurring any additional cost. However, once you buy in DLR, you pretty much lock in the currency exchange rate that you are getting as DLR.U barely moves in the short term.
SECOND TRADE — SELLING DLR.U (USD):
Now that the first trade is settled, you have 731 shares of DLR in your account, equivalent to 9,988.10 CAD, it’s time to get that USD.
You’d need to place a trade to sell DLR.U shares in the exact amount that you have in DLR, in this case, 731 shares. If you have a margin account with RBC DI, there are actually two available options to sell (Sell & Short Sell). Go with Sell, not Short Sell as it is the option that has worked for me and I have never tried going with Short Sell.
You’d place a sell order for 731 shares of DLR.U at the bid price of $10.11.
There will be a warning window that pops up and says you do not own the security under the order and if you wish to still proceed. Proceed anyway!
After a $9.95 commission, you can expect to get back 7,380.46 USD. Your dashboard will still show a long position of 731 shares in DLR and a short position of 731 shares in DLR.U. Worry not, on the settlement date, the 731 shares of DLR you own will be journaled over to settle the sell order of DLR.U. This is how the whole strategy would appear under the activity history:
RBC DI does this automatically but I read for some other brokerages, you’d need to call in to instruct them to manually do so. Therefore, you should research your brokerage before carrying out Norbert’s Gambit. Depending on your brokerage, you might end up saving more. Questrade offers free ETF buying and only charges from $4.95 to $9.95 per trade to sell.
If you’ve been following the numbers, you will realize that for basically a bit less than 10,000 CAD, Norbet’s Gambit technique yields more USD than the amount you’d get for exactly 10,000 CAD from VBCE, even more so than through the banks.
In the end, the more USD your investment needs, the stronger the case Norbet’s Gambit makes. Like with any other security and strategy, research and carry out at your own risk!
