Have you come across the term Norbert’s Gambit? This strategy, popularized by Norbert Schlenker, is designed to convert Canadian dollars (CAD) to U.S. dollars (USD) and vice versa with minimal currency exchange fees. It is especially beneficial for individuals looking to exchange large sums of USD, whether for investing in U.S.-listed stocks or purchasing property in the United States. Traditional methods of transferring money could lead to significant fees, costing you hundreds or even thousands of dollars, which is certainly something to avoid.
While Norbert’s Gambit may appear complex to newcomers in the investment world, the execution is relatively simple once you establish the necessary accounts. There’s even an exchange-traded fund (ETF) specifically created for this purpose, making it widely accessible. Here’s how you can carry out Norbert’s Gambit effectively.
What is Norbert’s Gambit?
Norbert’s Gambit allows traders to swap Canadian dollars for U.S. dollars (or vice versa) without incurring foreign exchange fees. This workaround leverages ETFs and Canadian stocks that are listed and traded on both U.S. and Canadian exchanges. The primary fee incurred is simply your brokerage’s commission.
This method is available to both Canadian and American investors and can be conducted in both registered and non-registered accounts.
Understanding How Norbert’s Gambit Works
Typically, exchanging Canadian dollars for U.S. dollars incurs an exchange fee ranging from 1% to 4%. While this may not seem excessive, it can result in considerable costs. For instance, if someone sells a vacation home in the U.S. for approximately $500,000 CAD, a 2.5% fee from a bank would translate to $12,500 in costs. In contrast, using Norbert’s Gambit allows you to bypass these fees altogether by purchasing interlisted Canadian or U.S.-listed ETFs.
As both ETFs are available on both exchanges, the only difference is the currency. Essentially, you purchase the ETF on one exchange and get it transferred (or journaled) to the other exchange. This method effectively allows you to convert currencies without incurring costs beyond the brokerage fees.
Executing Norbert’s Gambit
For seasoned investors, applying Norbert’s Gambit should pose little to no challenge. New investors may find the process somewhat daunting, but it is manageable with initial preparation. Here’s a straightforward guide:
- Establish a discount brokerage account that supports both CAD and USD trading.
- In your CAD account, purchase the ETF with the ticker symbol DLR, which trades in CAD.
- After the order settles (typically within three days), contact your brokerage and request that they journal your DLR shares into your USD account, converting them to DLR.U.
- Sell your DLR.U shares.
- Your USD will now be reflected in your USD trading account.
- You can either invest in U.S. stocks or withdraw your funds in USD as needed.
You may be curious about how this works. Essentially, DLR refers to the Horizons U.S. Dollar Currency ETF, which is available in both currencies. DLR.TO (or DLR CA) trades on the Toronto Stock Exchange, while DLR.U is traded in the United States. Journaling shares over is merely a matter of changing the currency type. The reverse conversion from USD to CAD follows the same principles, starting with DLR.U in your U.S. account.
**At TD Direct Investing, there’s no need to wait for the journaling process. You can call TD right after completing your purchase, and for a flat fee of $43, they can promptly journal your shares and facilitate the sale, which mitigates any currency fluctuations during the transaction.
Since you aren’t technically buying and selling two separate stocks in different markets, you avoid the foreign exchange fees that commonly accompany typical transactions, which can often be around 2.5%.
Notably, as of April 1, 2022, DLR was priced at $12.60 CAD, juxtaposed with DLR.U at $10.08 USD. This price difference reflects the current exchange rate. By merely switching currencies through a discount broker, you bypass the exchange fees imposed by banks. However, be aware that you may incur trading commissions, although some brokers charge only at the point of sale, potentially limiting it to just one fee.
Duration of Norbert’s Gambit
Typically, the process of completing Norbert’s Gambit takes about three days from the initial trade. Even if you swiftly journal the shares over, the settlement duration remains three days as per the standard timeframe for trades. Occasionally, it may take longer, but this is unusual.
Once your funds are deposited into your USD account, you can proceed to buy U.S. stocks. If your goal is to cash out for other purposes, you will first need to transfer your funds to a conventional U.S. dollar account.
Potential Savings with Norbert’s Gambit
The amount you save by using Norbert’s Gambit largely depends on the volumes being exchanged. For the sake of simplicity, let’s consider the previously discussed DLR prices, assuming a purchase of 1,000 DLR shares as an illustrative figure.
This would amount to a cost of $12,600 CAD for the ETF, plus an estimated $10 brokerage fee. Thus, your total investment would be $12,610 CAD. Following the journaling and sale, you would receive around $10,070 USD ($10,080 from the sale minus the $10 brokerage fee).
Therefore, in this scenario, your $12,610 CAD yielded you $10,070 USD.
In contrast, analyzing the exchange rates offered by banks, such as TD, reveals that on the same date, $12,610 CAD would only convert to $9,822.40 USD. This results in a disparity of $247.60 USD or approximately $299.82 CAD, a notable difference.
Percentage-wise, the savings would represent about 2.46%. This implies that, at the time, TD charged a currency conversion fee of 2.46%. If you needed to transfer $300,000 CAD into USD for a home purchase, employing Norbert’s gambit could result in savings of around $7,380 CAD.
In essence, utilizing Norbert’s gambit is the most economical method for exchanging CAD into USD, justifying the effort required initially in setting up accounts.
Where to Implement Norbert’s Gambit
To perform Norbert’s gambit, you will need to have an account with a discount brokerage such as:
- Questrade
- TD Direct Investing
- CIBC Investor’s Edge
- RBC Direct Investing
- BMO Investorline
- Scotia iTRADE
As for the types of accounts, Norbert’s Gambit can be executed within the following:
- Non-registered trading account
- Registered Retirement Savings Plan (RRSP)
- Tax-Free Savings Account (TFSA)
- Margin account
It’s important to note that not every brokerage facilitates Norbert’s gambit in all account types. Additionally, if you choose to do so in your TFSA, any dividends earned from U.S. stocks are subject to U.S. taxes. Most investors typically perform Norbert’s Gambit within their trading or RRSP accounts.
Moreover, you can also employ Norbert’s Gambit using any interlisted stock. For instance, CNR trades on the TSX while CNI trades on the NYSE. However, doing so might introduce more volatility than sticking with DLR.
Avoid overthinking the process; Norbert’s Gambit is most effectively utilized with a clear intention focused on exchanging CAD for USD.
Executing Norbert’s Gambit with Questrade
This article previously assumed a basic understanding of trading within a discount brokerage. However, recognizing that some readers may seek additional guidance, let’s outline a step-by-step guide for exchanging, for example, $10,000 CAD to USD via Questrade, following the previously mentioned rates.
- Navigate to your CAD account and select order entry.
- Search for DLR (opting for DLR CA) and identify the ask price (let’s assume $12.60).
- Calculate how many shares you can acquire by dividing your amount by the ask price.
- $10,000 / $12.60 = 793 shares (always round down).
- Under Quantity, input 793.
- For Price type, select limit.
- For limit price, input $12.60.
- For Good ‘til, select day.
- Click buy (noting that Questrade does not charge a fee for purchasing ETFs).
- If successful, your order should be filled promptly.
- After your trade has settled in roughly three business days, reach out to Questrade to journal your shares.
- Upon seeing DLR.U in your U.S. account, sell these shares.
- Your total would be approximately $7,983.49 USD (accounting for the $9.95 commission).
This explanation is specific to Questrade, but the principles are largely consistent across most discount brokerages. Variable terms such as limit order or limit price may differ slightly, but the underlying process remains the same.
Ultimately, the significant differences in cost are generally capped around $10. Although Questrade offers free ETF purchases, it’s reasonable to expect that Norbert’s gambit will only be performed once or twice per year across any platform.
Converting USD to CAD with Norbert’s Gambit
Up until now, the discussion has focused on converting Canadian dollars to U.S. dollars. But what if you’re looking to do the opposite? Yes, Norbert’s Gambit can be effectively utilized to convert USD to CAD as well, following a similar process:
- Deposit or transfer USD into your U.S. trading account.
- Select DLR.U as the ETF you wish to purchase.
- Determine quantity, price type, and Good ‘til settings.
- Click buy.
- Await three days for your trade to settle, then reach out to your brokerage to journal the shares into your CAD account.
- Use or withdraw your Canadian dollars as needed.
You may not anticipate the need to convert USD to CAD often, but it does occur more frequently than one might think. Many traders may seek to convert USD to CAD upon cashing in on gains, or individuals who have sold property in the U.S. may wish to repatriate their funds to Canada.
For example, as a freelancer earning approximately $40,000 USD annually, accepting standard bank rates would lead to a loss of around $1,150 CAD yearly due to fees.
For smaller sums, the exchange rate may not be as pressing. However, if you’re consistently dealing with USD, minimizing conversion costs becomes vital.
When to Reconsider Using Norbert’s Gambit
Using Norbert’s Gambit is advisable when the savings surpass any incurred fees. If your brokerage charges only $10 for selling, the break-even point is approximately $800. With additional fees for both buying and selling, the required amount to make it worthwhile rises to $1,600.
Also, due to the initial setup involved, it may not be feasible if regular monthly or yearly fees are attached to maintaining those accounts. Given the circumstances, setting up accounts for considerable exchanges, followed by closure later, could still be beneficial.
Additionally, Norbert’s Gambit may not be suitable for urgent needs, as the entire process spans a minimum of three days to complete.
Legality of Norbert’s Gambit
Many might question whether Norbert’s Gambit is legal. Rest assured, there is nothing unlawful about this strategy; you are merely exchanging one asset that is traded in CAD for an equivalent asset that is traded in USD.
Financial institutions are aware of Norbert’s Gambit and are not attempting to hinder its use. You aren’t violating any terms set by your brokerage, thus there is no issue from their side. Banks continue to benefit from exchange fees charged to individuals unfamiliar with Norbert’s Gambit.
Understanding DLR ETF
The Horizons U.S. Dollar Currency ETF, or DLR, was established by Horizons explicitly for executing Norbert’s Gambit. There is no other purpose for holding this ETF. Horizons earns a small commission on the spread with each transaction. Being interlisted, DLR trades in Canadian dollars under DLR and in U.S. dollars as DLR.U. The pricing between both is generally aligned with the exchange rate between the two nations.
Using previous rates as an example, one can ascertain the exchange rate by dividing the Canadian price by the U.S. price, exemplified by 12.60/10.08, yielding an exchange ratio of 1.25. Presently, the USD to CAD exchange rate is listed at around 1.26, indicating that DLR aligns closely with prevailing rates.
Definition of Journaling Shares
Journaling shares simply refers to the practice of transferring shares from one exchange to another, specifically for interlisted stocks. Not every brokerage facilitates this service, and those that do typically require both CAD and USD accounts.
Alternatives to Norbert’s Gambit
One aspect frequently overlooked in Norbert’s Gambit discussions is the potential fluctuation in the exchange rate during the waiting period between purchase and sale. If the Canadian dollar appreciates while the trade settles, you would ultimately receive more USD. Conversely, if the CDN dollar depreciates, you would end up with less USD, impacting your tax situation significantly.
Although it may seem difficult to mitigate these fluctuations, utilizing services like OFX could provide a quick quote for better understanding of your exchange costs.
Another viable option is Wise (formerly TransferWise), which enables users to create virtual accounts in numerous countries.
If your goal is simply to save on smaller USD transactions, consider opting for one of the best credit cards that do not impose foreign transaction fees. While this won’t provide actual physical USD, it would help you minimize fees associated with currency conversion.
Conclusion
While Norbert’s Gambit might appear intricate, those who have previously invested in stocks or ETFs online will find the process familiar and straightforward. Even for less experienced investors, performing the gambit becomes easy with the right accounts established. The initial setup and efforts truly pay off if you are aiming to exchange large sums between Canadian and U.S. dollars.