Norbert’s Gambit – Save money on CAD/USD conversion

I always enjoy getting emails and questions from readers. This is my way to help and connect with readers. 

Recently a reader asked me the most cost-effective way to convert CAD to USD at discount brokers. Although there have been a lot of articles written on Norbert’s Gambit, the reader was wondering whether there are advantages in buying a dual traded Canadian stock rather than an ETF. 

The reader’s question:

“I’m looking to add around $50,000 USD worth of Berkshire Hathaway Class B stock (BRK.B) by converting a large sum of CAD. I think it’s best to utilize Norbert’s Gambit to save the conversion fees. Are there any benefits in buying a dual traded Canadian stock to do currency conversion rather than the typical DLR and DLR.U conversion method?”

What an interesting question! Let’s examine should we? 

What is Norbert’s Gambit

Typically, discount brokers will charge fees anywhere between the range of 1% to 4% to convert between currencies. For example,  Questrade charges 1.5% and Wealthsimple charges a 3% fee.  

If you’re converting a large sum, the fees can add up quickly. Say you’re converting $50,000 CAD, at a 2.5% fee, that’d be $1,250 worth of conversion fees you have to pay. 

As a result, Norbert’s Gambit is a great way to avoid these annoying currency conversion fees. Many Canadian investors, myself included, have been using Norbert’s Gambit for years. In case you’re wondering, we need to thank Norbert Schlenker, an investment advisor in BC, for popularizing this money-saving strategy. 

Norbert’s Gambit is possible only because some ETFs and stocks are traded on both Canadian and US exchanges (i.e. dual traded stocks, also known as interlisted stocks). 

Essentially, you would buy an ETF or a stock that’s traded on both exchanges, then the shares journal (i.e. exchanging equivalent interlisted shares from different exchanges) over to the other exchange. 

Norbert’s Gambit – Requirements 

It’s great to be able to save on fees but before you perform Norbert’s Gambit, you need to make sure your online brokers meet the following requirements:

• A trading platform that supports journaling. Ideally, if you don’t have to call or chat to journal the shares would save a lot of time.
• An investment account that can hold both CAD and USD investments. 

While it’s not a requirement, it would be more cost-effective if the broker offered free commission trading so you can save commission fees when doing Nobert’s Gambit. 

Norbert’s Gambit – Step by step to convert CAD to USD

The easiest way to perform Norbert’s Gambit is via the Horizon US Dollar Currency ETFs – DLR and DLR.U. DLR is bought and sold in Canadian dollars whereas DLR.U is bought and sold in US dollars. 

At the time of writing, DLR.U trades at $10.13 and DLR.U trades at  $13.70, which corresponds to an exchange rate of 0.73941606. The USD to CAD exchange rate at the time of writing is 0.738626, so the DLR/DLR.U exchange rate is pretty decent. 

Here’s the step by step guide to convert CAD to USD. 

1. Purchase DLR (DLR.TO or DLR CA) – depending on your broker, DLR may be listed as DLR.TO or DLR CA. Find the ask price (let’s assume it’s $13.70).
2. Figure out how many DLR shares you can purchase. Say you have $50,000 CAD, then you can purchase 3,649 shares (3,649 x $13.70). If your broker charges a commission for ETF purchase, you need to include the commission in the calculation (Questrade offers free ETF trading). 
3. Once the trade is completed, you can contact the broker to journal your shares over to DLR.U. The journaling process typically takes between 3 to 5 days. 
4. Once you see DLR.U shares show up in your account, sell your all shares. 
5. At $10.13 per share for DLR.U, if you were to sell 3,649 shares, you’d end up with $36,964.37 USD (ignoring trading commission).

Norbert’s Gambit is a really simple cost saving strategy that every DIY investor should utilize. 

Norbert’s Gambit – converting USD to CAD  

The beauty of Norbert’s Gambit is that you can go both ways. If you want to convert USD to CAD, you simply purchase DLR.U first, journal your shares, and then sell DLR shares once everything is settled.

Simple, right?

Is Norbert’s Gambit supported by all the Canadian discount brokers? 

While Norbert’s Gambit is an excellent cost saving strategy for converting between CAD and USD, you need to make sure your discount broker can support journaling. Fortunately, most of the Canadian discount brokers support journaling.

The following discount brokers support journaling:

• Questrade – You need to contact Questrade by phone or live chat to journal the shares. I’ve always used the live chat function and it always worked quite well. If using a registered account, you must ensure the currency settlement setting is set to “currency of the transaction.” You can find this under Settings -> Account Management -> Currency Settlement.
• TD Direct Investing – You can phone TD Direct Investing to journal the shares. If you don’t want to wait for 3 days, you can pay $43 to journal your shares and sell them immediately (I wouldn’t recommend paying). You can also go to your accounts tab and select security transfer. If converting CAD to USD, first enter DLR in the search bar, and transfer all shares into the USD account. Once the transfer is completed, go into your USD account and make sure you sell DLR.U. 
• RBC Direct Investing – You can initiate the sale of your desired final currency shares as soon as the transaction is filled. No need to contact RBC Direct Investing
• CIBC Investor’s Edge – You can initiate the sale of your desired final currency shares as soon as the transaction is filled. Just make sure you manually enter the correct ticker. 
• BMO Investorline – Can initiate the sale of your desired final currency shares as soon as the transaction is filled. 
• ScotiaiTrade – In your account, click on “Additional Service,” then click on the link “transfer securities and funds between accounts, finally fill out the form provided to make sure you’re moving the DLR/DLR.U shares. 
• National Bank Discount Brokerage – Need to call NBDB to journal the shares. Please note that despite NBDB offering free trading, the discount broker charges $9.95 to journal your shares. 
• QTrade – Once the order is filled, go to “My Accounts,” Transfer Funds,” then “Move Securities.” Move the shares to the desired final currency shares, then once the transfer is completed, sell the shares. 

Due to Interactive Brokers’ spot currencies feature, it is one discount broker where Norbert’s Gambit doesn’t make sense. For less than $1M monthly trade value, Interactive Brokers charges 0.20 basis points for fees (0.002% or 0.00002). In other words, if you exchange $50,000 CAD to USD, it’d cost you $1 worth of fees. 

Depending on the discount broker, you can typically perform Norbert’s Gambit in non-registered accounts, RRSP, TFSAs, and RRIF.

Can you perform Norbert’s Gambit on Wealthsimple Trade? 

Although Wealthsimple Trade is an excellent discount broker due to its free-commission trading, Wealthsimple Trade falls short when it comes to Norbert’s Gambit.

You can’t journal shares with Wealthsimple, so you simply cannot perform Norbert’s Gambit on Wealthsimple’s platform. The only way to exchange between USD and CAD on Wealthsimple is to pay for the exchange fees. You can save some money on the exchange fees by subscribing to TradePlus. This will cost you $10 per month. You still need to pay a 1.5% fee when converting CAD to USD but you’d save the 1.5% fee when you sell USD stocks (without the TradePlus, Wealthsimple converts USD back to CAD and charges you a 1.5% fee). 

Are there benefits in buying stocks when doing Norbert’s Gambit

Now we’re familiar with the idea of Norbert’s Gambit, let’s answer the reader’s question – are there any benefits in buying a Canadian stock to do currency conversion rather than the typical DLR and DLR.U conversion method?”

The reason DLR and DLR.U are best used for Norbert’s Gambit is because the bid/ask spread is usually a penny. Furthermore, the share price volatility is very low for these currency ETF pairs.

You can certainly do Norbert’s Gambit by buying a Canadian stock that’s listed on both the Canadian and US exchanges. For example, Royal Bank trades both on the TSX and the NYSE. You can purchase Royal Bank on the TSX for your Canadian account, then journal the shares over to your American account, then sell the shares on the NYSE, and get USD in the end.

But there are a few reasons why this isn’t all that beneficial:

• The bid/ask spread for Canadian stocks is typically much higher than DLR/DLR.U. At the time of writing, the Royal Bank bid/ask spread is $0.03. 
• You typically have to pay both buying and selling commissions for Canadian stocks.
• Stock volatility is the key reason not to buy stocks when performing Norbert’s Gambit. Say you purchase 380 shares of Royal Bank at $130.53 CAD per share and the NYSE equivalent is at $96.44 USD per share, you’d get $36,647.20 USD (ignoring trading commissions). But if the market goes down suddenly by more than 5% over the next few days, once the shares are journaled over, settled, and you’re ready to sell, Royal Bank shares now trade at $90 USD per share. As a result, you’d end up with $34,200 USD, a loss of $2,447.20. The market could go the other way and you end up making some money. Since you can’t predict the market, you may be better off just paying the currency conversion fees.

Norbert’s Gambit Advantages and Disadvantages

What are the advantages and disadvantages of Norbert’s Gambit? 

Advantages:

• Cost saving: you can save the currency conversion fees.
• Straightforward: it’s straightforward to journal shares so any investor can easily do it

Disadvantages:

• Takes time: the biggest downside of Norbert’s Gambit is that it takes three to five days to complete this strategy. If you’re in a rush to get the currency (say the market drops significantly and you want to buy a stock at a deep discount), Norbert’s Gambit won’t work.
• Exchange rate risk: since it takes a few days for the shares to journal and settle, the exchange rate fluctuations may go negatively for you. 

Should you always perform Norbert’s Gambit? 

Does it make sense to perform Norbert’s Gambit every time you need to convert currencies? 

The table below gives a quick comparison, assuming there’s a $9.99 trading commission for buying and selling (i.e. TD Direct Investing). 

CAD Amount	Conversion fees at 2%	Norbert’s Gambit fee
$500	$10	$19.98
$1,000	$20	$19.98
$5,000	$100	$19.98
$10,000	$200	$19.98
$50,000	$1,000	$19.98

Generally speaking, it’s not really worth the effort if you’re exchanging less than $1,000. If you use Questrade where you only pay $4.95 for selling ETFs, it may make sense to do Norbert’s Gambit for as low as $500 CAD. 

However, you need to consider the time and effort required to do a Norbert’s Gambit. For us, to be as passive and efficient as possible, it makes sense to only do Norbert’s Gambit once or twice a year. 

Summary – Norbert’s Gambit Convert CAD to USD

So, is Norbert’s Gambit worth doing? Absolutely! It’s very easy and straightforward to convert between CAD and USD using Norbert’s Gambit. The most efficient way is to use DLR and DLR.U, not dual traded Canadian stocks. 

To be cost and time effective, it makes sense to convert a large sum of money once or twice a year, instead of performing Norbert’s Gambit every other week.