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Beginner guide
Norbert's Gambit, step by step
Converting Canadian dollars to US dollars at a brokerage usually costs a percentage of the amount, often built into the exchange rate. Norbert's Gambit is a way to do the conversion through the stock market instead, so you pay a couple of trading commissions and a small spread rather than a percentage fee.
Steps, fees and which brokers support this vary and change over time. Confirm with your brokerage before you start, and read how to buy US stocks from Canada for background.
Why it can save money
A typical currency conversion fee at a Canadian brokerage might be somewhere around 1.5% to 2.5%, though it varies. On $10,000, a 1.5% fee is about $150. Norbert's Gambit replaces that percentage with a buy commission, a sell commission and the small bid-ask spread on the trades. For larger amounts the saving can be substantial; for small amounts it may not be worth the hassle.
How it works
The trick uses a security that trades in two versions: one priced in Canadian dollars and one priced in US dollars, both representing the same thing. You buy the Canadian-dollar version, have your broker move (journal) it to the US-dollar side of your account, and sell the US-dollar version. You end up with US dollars.
The most common choice is the US Dollar Currency ETF, which trades on the TSX as DLR (in Canadian dollars) and DLR.U (in US dollars). Because the fund simply holds US dollars, its price moves almost exactly with the exchange rate, which keeps the risk of price changes while you wait low.
Step by step
- Make sure you have a USD side. Your account needs to be able to hold US dollars. Many Canadian brokers offer USD versions of TFSAs, RRSPs and non-registered accounts.
- Buy DLR with your Canadian dollars. Use a limit order so you know the price.
- Ask your broker to journal the units to DLR.U. Some brokers let you do this online; others need a phone call or message. A few do it automatically if you sell DLR.U from the USD side.
- Wait for the trade to settle and the journal to complete. This can take a day or more depending on the broker.
- Sell DLR.U on the US-dollar side. The proceeds are US dollars, ready to invest.
To go the other way, from USD back to CAD, do the reverse: buy DLR.U, journal to DLR, sell DLR.
What it costs
- Commissions: one to buy and one to sell, if your broker charges them.
- Bid-ask spread: a small gap between buying and selling prices on each trade.
- Exchange-rate movement: while you wait for the journal, the rate can move a little in either direction.
Add these up and compare with what your broker would charge to convert directly. The break-even amount depends entirely on your broker's fees.
Things to watch out for
- Don't sell DLR before the journal. Selling the Canadian-dollar version just undoes the trade.
- Not every broker supports journaling. Check before buying, or you may be stuck with DLR and no simple way to move it.
- Non-registered accounts: because you're buying and selling a security, there can technically be a tiny capital gain or loss to report. In a TFSA or RRSP this doesn't matter.
- Some investors use interlisted stocks (shares listed in both Toronto and New York) instead of DLR. This works the same way but the stock's price can move more while you wait.
Is it worth it?
If you convert large amounts occasionally, Norbert's Gambit can save real money. If you buy US stocks in small amounts every month, a simpler approach may be to hold a US-dollar balance and convert less often, or to look for a broker with low currency fees. Keeping USD once converted, instead of converting back with every sale, also avoids paying the fee twice.
Keep learning
This guide is for education only. It isn't personalized financial, investment or tax advice, and nothing here is a recommendation to buy or sell any security. Investing involves risk, including the possible loss of your money.