Lowering Your Currency Exchange Fees

With the Canadian dollar again hovering around parity, it seems like a good time to consider ETFs denominated in US dollars. But the problem of high currency exchange fees remains a problem for DIY investors, as I wrote about last month. This topic has generated a lot of discussion recently, and a number of useful resources have appeared to help investors make informed decisions about currency exchange costs.

First, The Globe and Mail just released its 12th annual review of online brokerages. This comprehensive survey ranks the major Canadian discount brokerages according to many categories, including costs, and features a table showing the cost to buy 100 shares of a stock trading at US$25. (The table is much more useful if you click the column heading “Total Transaction Cost” to sort it.)

According to the Globe’s numbers, TD Waterhouse has the lowest foreign exchange fees, well ahead of CIBC Investor’s Edge and Questrade. That was a surprise, to say the least. Even Canadian Capitalist, a satisfied TD Waterhouse client wrote, “I wouldn’t have expected TDW to end up at the top of the list.” Indeed, Money Smarts Blog recently did its own comprehensive survey of discount brokerages and quotes TD Waterhouse’s forex fee at 1.5%, as appallingly high as most other banks.

The moral of this story is clear: before making a significant foreign exchange, call your brokerage and ask them to quote you the rate. If you’re converting a large sum, you can usually get a better deal. Readers have told me that they have been quoted rates as low as 0.3% to 0.6% if the amount is in the mid five figures.

I’d also like to highlight a couple of online calculators created by a reader who uses the name Northern Raven. For my October post comparing the cost of Canadian and US-listed ETFs, I included an Excel spreadsheet and invited readers to download it for their own use. Raven went a step further and built a web version of the spreadsheet that adds some extra features. If you’re considering holding the foreign equity portion of your portfolio in US-listed ETFs, such as those from Vanguard, give it a whirl and see how long it will take you break even after paying upfront currency exchange fees and incurring withholding taxes on dividends.

Northern Raven has also created an online calculator you can use if you’re considering Norbert’s gambit, a technique for sidestepping currency exchange fees by buying and immediately a cross-listed stock. The calculator allows you to compare the bid-ask spreads of six liquid stocks that trade on both the Toronto and New York exchanges (RIM, Potash, Barrick Gold, TD Bank, Royal Bank and CIBC). By choosing the one with the smallest  spread, you’ll have best chance a smooth, inexpensive transaction. (Use this calculator at your own risk, please. The CAD–USD exchange rate is preset at parity for now, and the stock data may not be precisely real-time.)

A couple of very cool tools, Raven. Thanks for sharing them!

23 Responses to Lowering Your Currency Exchange Fees

  1. larry macdonald November 12, 2010 at 7:39 am #

    If all the banks allowed US dollars in RRSPs, we wouldn’t have to go through the hoops so much to minimize currency conversion fees. The bank brokerages were once required by the government to have only Canadian currency in registered accounts but that requirement was ended in 2001. The Investment Dealers Association of Canada gave the OK to have U.S. dollar balances in RRSPs a few years later and still, the banks continued to charge the fees. Maybe the class action lawsuits will finally tip the scales http://blog.canadianbusiness.com/the-end-of-currency-conversion-fees/

  2. Money Smarts Blog November 12, 2010 at 7:59 am #

    Your advice about calling the brokerage about forex rates is spot on. The rates seem to be dependent on the amount converted and probably other factors as well.

    Northern Raven has reported some findings about TD exchange rates that he figured out by trial and error on the web interface. I think it’s ridiculous that they can’t just publish the rates. Questrade does, IB does, but I don’t think anyone else does.

    Mike

  3. Simon November 12, 2010 at 9:35 am #

    I wouldn’t say the G&M review of brokerages is comprehensive – I emailed Rob Carrick about why IB wasn’t on the list of brokerages in consideration and am waiting for the rationale. Nor do I think TDW would be the best for Forex either – using Raven’s calculator and assuming a $9 trade, using Norbert’s Gambit still has fees of about 0.15%. IB is less than that.

    I get that IB has monthly minimums of $10/month ($120/year), but in retrospect that’s only about 12 trades a year at your local $9.99 broker. So why isn’t IB mentioned more?

  4. Canadian Couch Potato November 12, 2010 at 9:50 am #

    @Simon: I think IB is fundamentally different from the other online brokerages because it does not offer RRSP or TFSA accounts and is clearly designed for active traders, not long-term investors. That’s not a criticism, just an observation. I never bring it up simply because it’s an inappropriate platform for a Couch Potato investor.

  5. Canadian Capitalist November 12, 2010 at 5:29 pm #

    I’m almost certain that the Globe table is wrong. I can’t imagine TDW’s rate being lower than the Bank of Canada’s CAD low for that day. I think the Norbert Gambit is the best way to go. I’ve done it a couple of times with excellent results.

    Thanks for the mention.

  6. craigelj November 12, 2010 at 9:06 pm #

    I’m a bit confused. In the post, you say that the Globe reported that TDW’s foreign exchange fees are lower than Questrade’s fees. But Questrade doesn’t have any foreign exchange fee, just the spread which is very small. Can TDW be lower than that?

  7. NorthernRaven November 13, 2010 at 7:15 am #

    A couple of clarifications on the calculators I created. The US ETF calculator has a preset figure for the CAD->US exchange rate – right now it defaults to today’s 0.9915, but you can change it to whatever you like by clicking on “Advanced Options”. I keep meaning to have the calculator do a live lookup of the exchange rate when it loads; perhaps I’ll do that this weekend.

    The Norbert’s Gambit one was mainly for me; I was curious as to how the bid/ask spreads and so on would affect things, and whipped this up. Please be careful in applying its displays to real life. Also, the stock and dollar quotes are retrieved from Yahoo (it was the code I could scrounge up the quickest), but I haven’t investigated closely the exact delays on each. If the stock and exchange rate quotes have different delay times it will probably affect the Savings on a volatile exchange rate day.

    As for the Globe & Mail brokerage forex chart, there are some comments attached to Canadian Capitalist’s posting (http://ow.ly/38TAi) and MoneySmarts (http://ow.ly/37XqF). My own opinion is that the TD value is completely bogus – I think they just multiplied 2500 by their normal 1.57% spread (which would assume the dollar at exact parity), instead of calculating the cost of buying $US 2500 on Sept 20, as they were supposed to do. CIBC seems to be something similar – no plausible exchange and spread assumption for Sept 20 can produce that number. I did a quickie back-of-the-envelope spreadsheet and set the exchange rate to a value that produced the expected 2% for Disnat, and it made the BMO value come out at the expected 1.25% as well. RBC and HSBC shouldn’t be the same amount as BMO if MoneySmarts info is correct, but we’ll probably never know for sure what went wrong without access to the raw G&M info. I hope they try again – a correct chart would be very helpful.

    If the brokerages were forced to disclose their basic small-volume spread (like VISA cards do), I’m sure they’d fall all over themselves to provide fancy charts showing the better rates for higher amounts. As it is, there is no incentive for them to draw attention to this lucrative little corner of things.

  8. A.Rajah November 13, 2010 at 11:43 am #

    I have a forex question but not related to investments. What would be the best way to get USD or any other foreign currency for travelling? I have always used currency exchange place close to my work place (better rates than banks) and recently I used HSBC debit card at the destination. HSBC did not have exchange fees. Is there a better method?
    I am thinking that I may be able to use Norbert’s Gambit method for USD but that means I need a USD chq account for the brokerage send wire or EFT the money.

  9. Corey February 7, 2011 at 4:17 pm #

    I recently made a large exchange at TD Waterhouse, and was quoted the following spreads:

    $0 – $10K = 1.6% (which means the buy/sell were approximately 3.2¢ apart for up to $10,000 exchanged)
    $10K – $25K = 1.4%
    25K – 50K = 0.85%
    50K – 100K = 0.6%

    I had a great deal of difficulty finding published spreads, so hopefully this will give everyone a ballpark idea and save a phone call.

  10. Mark January 3, 2012 at 6:31 pm #

    Dan, I read your explanation in the most recent Moneysense about how to use DLR and DLR.U to execute “Norbert’s Gambit” to exchange $Cdn for $US. It makes total sense to me–except for the fact that, according to Globeinvestor, the volume of trading of DLR.U on the TSX has been exactly 0 since May 2011. I’m sure I must be missing something. Can you explain the source of liquidity for DLR.U?

    Love the blog. Keep up the great work!

  11. Canadian Couch Potato January 3, 2012 at 6:51 pm #

    @Mark: Thanks for the comment. That information is not correct: on iTrade, I’m seeing 34,000+ shares traded today alone. In any case, trading volume does not necessarily affect the liquidity of ETFs the way it does with small stocks. If you do have a question about DLR, however, I would suggest you email Horizons directly. They are quite good about responding with answers to questions like this:
    http://www.horizonsetfs.com/pub/en/Contact.aspx

    Cheers!

  12. dave777 November 24, 2012 at 5:31 pm #

    In 2004 I moved money form USD to CAD in a big way, now I have been moving it the other way and going offshore with investments as it is hard to find many good Canadian investments these days be they long or short term. And no, I am not investing in the USA either, and in fact in the last year have reduced USA holding by 50%. \

    Couch potatoes might want to explore other currencies. I would love to get 6% domestic Chinese rates in Yuan, an appreciating currency as China has no net debt. But these markets seem closed to me. But others like Brazil, Panama, Costa Rica and Chile are getting more of my read time. I am ready to move serious money offshore.

    Best part is, if you move out of Canada, you no longer need to declare the income to Ottawa.

  13. Karim January 25, 2013 at 4:39 pm #

    Hi Dan,

    I did not realize how much the spread cost on foregn exchange. I have my accounts with Questrade and it was always 0.005 but I just called them and they told me the spread as of last fall is 0.0199 (1.99%) which is very high and eliminates any savings from their lower commissions. Any suggestions? I am thinking of iTrade to take advantage of the $30 / quarter assuming I do all my trades in one quarter.

    thanks

  14. Canadian Couch Potato January 25, 2013 at 4:47 pm #

    @Karim: That’s one option. Another is to get familiar with Norbert’s gambit.

  15. Milhouse April 10, 2013 at 3:19 pm #

    Hi Dan,
    Thanks for all your great advice. With regards to Norbert’s Gambit, I know it works well if one is converting amounts greater than, say, CAD$2,000 o – $3,000. What if you’re trying to convert smaller amounts? If an investor is in a dollar-cost-averaging program, where he makes frequent, small investments into a US dollar ETF, then the investor finds himself converting relatively small amounts, four or five times a year, to put towards the US ETF.

    Is he better off reducing the frequency of his investments (say only 3 – 4 times/year), so that he can put in larger sums into the US-ETF (thereby taking advantage of Norbert’s Gambit to reduce foreign currency exchange fees)?

    Or is there a better method of US-CAD currency conversion so that the investor can save on currency exchange fees when converting amounts less than CAD$2,0000?

    Thanks!

  16. Canadian Couch Potato April 10, 2013 at 3:43 pm #

    @Milhouse: If you happen to be using a brokerage that offeres commission-fre rades of DLR (such as Scotia iTrade) you can do Norbert’s gambit with small amount, but otherwise there is no cost-effective way to exchange cash. You would be better off paying the the brokerage’s spread than paying for the two trades.

    If you’re investing small sums of money, you’re really best off using Canadian-domiciled ETFs (or e-Sereis funds), since the higher MERS are offset by the lower transaction costs. This is especially true for US equities, where VFV and ZSP are low-cost choices with no currency hedging. The choices are not so good for Canadian-listed international equity ETFs.

  17. Milhouse April 11, 2013 at 3:57 pm #

    CCP, I was just looking at other brokerages, I noticed that Questrade offers commission free trades on all ETFs. This sounds great – I can buy DLR without commissions (to do the gambit), and even buy my US listed ETFs without commissions. Am I missing something here? This sounds too good to be true. Is there a “catch” I should be looking for?

    – Milhouse

  18. Canadian Couch Potato April 11, 2013 at 4:02 pm #

    @Milhouse: The commission-free deal is only for purchasing ETFs: you will still pay a commission when you sell. So the DLR gambit is half price, not free.

  19. Freddie June 17, 2013 at 10:52 am #

    Just tried to perform a NG at TD this morning. They are now saying that they will not do the back end trade for the online rate. Instead of $9.99 it will now be $43 for 51 shares. They said this started about a year ago but I’ve done it a couple of times since then and no additional fees.

    Anyone else had this problem?

  20. D Wills September 18, 2013 at 9:01 am #

    Another way to minimize FX in a non-reg account would be to buy and sell an interlisted security. For example if you wanted to convert around $50k CDN to USD, purchase 550 shares of TD on the TSX and then have your broker move the shares to the US side of your account and sell them on the NYSE. As long as this is done together your cost would be the commission paid and a minor spread if rates move which is unlikely.
    The complication is finding a broker who will allow you to do the sell (or short sell) right away. I have heard that RBC allows this with no extra fees. TD will only do it after settlement and charge an additional fee.

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