Avoiding Currency Conversion Fees: How To Do Cheap Conversions

Last week  you saw the hidden currency conversion fees that banks charge when you buy US-based stocks or ETFs and the ways you can avoid it. The five options I explained will let you avoid converting between currencies so you don’t have to worry about the fees.

Sometimes there is just no other way though. If you’ve decided that it’s best to buy ETFs that are based in the US and your income is in Canadian dollars then you have no choice.

So now let’s finish off the list with two ways I have exchanged currencies without paying the full fees.

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6. Use “Norbert’s Gambit” to convert Canadian dollars to US dollars more cheaply. This is a common trick that experienced Canadian investors do. Although it may seem complicated, if you have bought a stock or ETF you already know how to do most of it.

The reason it works is because some stocks are listed in both the Canadian and US markets. A company like Canadian Pacific is listed on the Canadian stock market and only trades in Canadian dollars, while a company like Apple is listed on the US stock market and only trades in US dollars.

But a handful of companies are listed on both markets. This means you can buy and sell their shares using Canadian dollars or US dollars. Even better, you can buy their shares using Canadian dollars and sell those shares for US dollars. This automatically does the currency conversion for you and can easily cost far less than the usual hidden fees if you are converting a large enough amount.

For example let’s say you received a $7,000 bonus and you want to buy a US ETF with it. If you just deposit that in your brokerage and enter an order, you’ll be charged a hidden fee that may be up to 2% ($140). But if you do Nobert’s Gambit to convert the currency you’ll only be charged two trading commissions which may total $20 – $100 depending on your broker. Then you can buy the ETF using US dollars.

There is one extra hidden cost with Norbert’s Gambit. Every stock has a bid-ask spread, which means that if you buy and then sell right away you will lose a bit of money. If a stock price is $70, you might be able to buy it for $70.02 or sell it for $69.98 right now. So if you bought the shares and then turned around and sold them immediately you would lose 4 cents on each share.

That difference is called the spread. The market always works this way but each stock has a different spread and it changes from day to day. There are only a few stocks you can use to do Norbert’s Gambit and they are usually popular companies so the spread is just a few cents per share.

For example I use RBC shares to do this. They have the symbol RY on the Canadian and US markets. Their stock price is around $70 and the spread the last time I checked was 4 cents. This means that if I convert $7,000 this way I’m losing $4 to the spread (4 cents per share for 100 shares) and $20 for the trading commissions to buy and sell shares. That total cost of $24 is far less than the usual hidden currency conversion fee.

This cost doesn’t change much, regardless of the amount. If you were only converting $1,000 the cost would be $20.50 because you still have to pay the two trading commissions. That’s over 2% of the total amount which is as bad as the hidden currency exchange fees at any broker I’ve seen.

So for small amounts it doesn’t make sense to do this. But if you convert $100,000 the cost is $77, far less than a 2% fee of $2,000. If you want to buy a house in the States this can actually be a good way to get the cash there.

I chose RBC shares because they are one of the highest-priced stocks that can be used. The share price doesn’t really matter, but you lose the spread on every share you buy. If the price is higher you don’t need to buy as many shares.

Remember that every company’s stock price can change quickly. If you can buy and sell the shares in just a few minutes this probably won’t affect you. But you don’t want to hold them for longer. It’s also good to wait 30 minutes after the markets have opened and do your trades after 10AM EST so the price doesn’t change as much as it does at the start of the day.

Make sure you check that it’s not a holiday in Canada or the US before doing this since you might be stuck with something you can’t sell right away if one of the markets is closed. You might also want to avoid doing this around the dividend record date. The last time I did this trade was one day before that date. Since all trades settle 3 business days after you do them (including the trade where I sold the shares), I was the registered owner of the shares at the time and received the Canadian dividend. And since I was borrowing the US shares for a few days so I could sell them, an amount equal to the US dividend was withdrawn from my account. This isn’t an issue for me but it ends up moving a little more cash around. And since I have automatic re-investment in my account I got 1 share of RY that I have to sell.

 

I do this in my RBC Direct Investing account. Let me repeat that so it’s not confusing: I buy and sell shares of RBC using my RBC Direct Investing account. They are one of the first brokers to let you do this all yourself. I just calculate how many shares I need to buy and put in the order to do that on the Canadian market, and as soon as it’s done I put in another order to sell the same number on shares on the US market. I check that I actually bought the shares before selling them. I always set a limit a few cents above the asking price so this usually happens immediately. Then to sell the shares I set a limit price a few cents below the bid price so they also sell right away.

With other brokers like TD you have to phone a trader and pay a higher commission. When you do this you want to prepare the buy order but not send it. Then you can call a trader, tell them what you want to do, and confirm that they will help you sell the shares immediately. After they say yes you can submit the buy order (by doing this yourself you pay the lower commission) and ask them to sell the shares for you. If they don’t know how to do it then you can just try again later instead of buying the shares and waiting. Because this takes longer, costs more, and you have to phone someone, it’s another reason that I avoid TD.

I have also done this at Questrade. Their rules change frequently but last time I did it you couldn’t even phone and have it done right away. You have to phone after buying the shares, but then they make you wait until the first trade settles which always takes 3 days. At that point the shares have been transferred to your account and they will let you convert them to the US market and sell them (remember you can request this ahead of time to avoid delays).

This can be a problem because the stock price for a company like RBC can change a lot in 3 days. In one 3-day period that I tracked this year it dropped by 2%, which is as bad as the hidden fee you are trying to avoid in the first place!

With Questrade I don’t use RBC shares because it’s too risky. Instead I buy DLR and sell DLR.U. This is a pair of related ETFs where each share owns $10 US. The DLR ETF trades in Canadian dollars and DLR.U trades in US dollars. Unlike RBC’s shares, both of these ETFs trade in the Canadian market even though one is in US dollars.

Because DLR is not an actual company, it’s not likely to lose a part of its value while I wait a few days. Each share is worth $10 US whether I trade them today or two weeks from now. And since it’s an ETF Questrade won’t charge a commission to buy the shares (only when you sell them). The spread is usually 2 cents per share. So if you convert $1,000 this way your cost will be a spread of $2 (2 cents for 100 shares, since each share is $10) plus one commission of $5 to sell them. That’s a total cost of $7. If you just let Questrade do the conversion their hidden fee of 2% would cost you $20.

Even though this is amazingly cheap, I don’t recommend doing this with Questrade unless you have a lot of time and you are willing to learn more details. They are harder to work with and sometimes you need to explain more to their agents or remind them a few times to get things done. If you are converting larger amounts and you don’t want to spend as much time on it, other brokers like RBC Direct Investing are well worth the extra cost.

One last note on this: some of the “evil high-frequency traders” are actually reducing the bid-ask spread so you can do this more cheaply. They are using computers to replace something that was once done by people. Naturally those people are complaining very loudly and telling everyone how the computers are ruining everything. But like with all technologies it can be done cheaper now. If you aren’t trading over $100,000 per day you don’t need to worry about HFT.

7. Use another currency exchange service. If you have Canadian dollar and US dollar bank accounts outside your brokerage, there are some services that will help you move cash between those accounts at a lower cost. I have used services such as XETrade and Knightsbridge to do this.

Some of these services require a minimum amount to do a conversion, as high as $10,000, and they may involve additional wire transfer fees. XETrade has fairly low minimum amounts. Typically the cost for a conversion like this might be 0.5 – 0.9% and there can be a wire transfer fee too since they aren’t a part of your bank. So to convert $10,000 you might pay $65 to the conversion service plus a $40 wire transfer fee for a total of $105. This is a total cost of about 1%.

They usually won’t tell you the exact fee. Instead they will give you an exchange rate that has the fee built in, just like the banks. You can call up a few of them to see which one will give you the best exchange rate. It can change every few minutes though, so don’t wait too long if you really want to know which one offers the best deal. You can then compare these to the current market rate on xe.com.

For example if you are converting Canadian dollars to US dollars and they quote you a rate of $0.9000 while xe.com shows a rate of $0.9060 at the exact same time, the difference is 0.6% ($0.006 for every $1 you convert) so that is the fee you are paying them. This is good since banks and brokers have hidden fees of 1 – 2%.

Once you do this exchange you’ll have US dollars in a bank account. You need a broker that allows you to hold US dollars in your investment account like RBC Direct Investing so you can just transfer the money in and then buy some shares on the US market.

I don’t use these services these days because it’s cheaper to do Norbert’s Gambit. And if you have a brokerage account at the same place where you do your banking you can transfer the money back and forth instantly with no wire transfer fees. I do this even when it’s not investment-related since I have business income in US dollars.

But you might find that they work for you. If you have multiple accounts they can take the US dollars from one bank and deposit the Canadian dollars at another one as part of the conversion. They will work with any bank. They are a bit easier too since you don’t need to do any trading, you just call them up and tell them what you want. Once they have received authorization they do the rest.

. . .

Every Canadian investor needs to look beyond our market to do well. We are just a few percent of the world economy so we can’t ignore the other options. And our nearest neighbour, the US, has a market that offers the best of just about everything. As a Canadian investor you still need to work with our less competitive banks and brokers. Use these tips and you can get the best investments for your portfolio without paying extra to buy them.

I have done all but one of these things as I tried to find what works best. They all work and they aren’t too hard to do once you know the right thing to ask for. Right now I have accounts at RBC Direct Investing and Questrade. Both of them allow me to have US dollars in the accounts.

I also transfer in US dollars when I can to avoid doing a currency conversion and use Norbert’s Gambit at other times including when I want to change US dollars to Canadian dollars. By taking advantage of this I have put the majority of my portfolio into US-listed ETFs.

Thanks to these ETFs I pay very low management fees that average 0.12% per year to own shares of 10,000 companies that cover everything from the apartment building down the street to Chinese forestry. And I can do all of this from an app on my phone. When you know what to look for we have options that no one would have imagined 30 years ago.

As you can see each broker is different. When you’re choosing a broker check which options they give you to see if they will make your portfolio management easy. And if you find that you can’t do some of these in your current accounts you can always switch to a different broker. If you stay even when they aren’t offering you what you need they will have no reason to improve.

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