Whenever Canadians buy American stocks, currency conversion fees add 1% to 4% to the overall cost. Thankfully though, there’s a common trick that savvy Canadian investors use frequently bypass currency exchange fees altogether. It’s called Norbert’s Gambit and if you don’t already know how to do it, you’re about to learn it right now.
Norbert’s Gambit is a method for exchanging Canadian dollars (CAD) and US dollars (USD) without paying currency exchange fees using stocks that trade in both currencies. Instead of using a bank or foreign exchange service to convert currency, Norbert’s Gambit uses discount brokerages to sidestep fees by buying shares in one currency and selling them in another.
If you’re curious about using this technique to save on foreign exchange fees, here’s everything you need to know about Norbert’s Gambit.
How Does Norbert’s Gambit Work
Exchanging currency is, in theory, a relatively straightforward transaction. If you have Canadian dollars worth a certain amount, and your friend has US dollars worth the same amount, you can freely trade and both walk away without having lost—or gained—anything.
In reality, it’s difficult to find a friend who happens to have the exact amount of foreign currency you need and is willing to trade at that moment. To solve for this, banks and foreign exchanges make it their business to buy and sell different currencies on demand. Rather than trading for equal value. However, these companies mark up the exchange rates in their favour and pocket the difference for themselves.
The margin on foreign exchange is typically around 2.5%. If you trade $100 CAD to USD, the currency exchange, bank or brokerage will help itself to its 2.5% ($2.50 in this example) and exchange the remaining 97.5% to you. In other words, you’ll have $97.50 CAD worth of US dollars after the financial institution performing the exchange takes its cut.
The foreign exchange fee is annoying, but acceptable for most transactions. Paying a $30 fee isn’t terribly bothersome when you’re taking out $1,000 in foreign cash for spending money on a vacation. But if you have a large amount to exchange, that small 2.5% fee adds up. If you were to exchange $250,000 CAD to USD to buy an investment property, for example, a 2.5% foreign exchange fee would amount to $6,250 CAD. Therefore, it’s easy to see why many Canadian investors would want to avoid this significant charge.
One such Canadian investor was Norbert Schlenker, a former retail broker and Certified Financial Planner who is based in Salt Spring Island, B.C. and is the president of Libra Investment Management Inc. Schlenker was the first to come up with a way to sidestep the markup on foreign currency exchanges with the method that would later bear his name. In 2001, Norbert first explained how instead of exchanging currency through the bank, he could buy shares listed in both currencies using CAD, exchange them for their USD equivalent at no cost, and then sell the shares for USD. His method incurred no foreign exchange fees and cost only the commission on the two trades—roughly $20.
How to Do Norbert’s Gambit
It sounds complicated, but Norbert’s Gambit is not a difficult maneuver. In fact, the method has become so popular that an exchange traded fund (ETF) was created specifically to simplify its use.
Follow these steps to use Norbert’s Gambit to exchange CAD to USD:
- Open an account with a discount brokerage. To execute Norbert’s Gambit, you need to be able to buy and sell shares cheaply. The best way to do this is using an online discount brokerage to open a self-directed account. Popular options for Canadians include Questrade and Wealthsimple Trade, as well as Big Bank offerings like Scotia iTrade and RBC Direct Investing. Trade commissions range from $4.95 to $9.99 depending on which platform you choose and how much you trade.
- Buy shares of Horizons US Dollar Currency ETF (DLR.TO). This ETF is specifically used for Norbert’s Gambit because it reflects the conversion rate from CAD to USD.
- Journal your DLR.TO shares to DLR.U.TO. Both are the same ETF, but DLR.TO is bought and sold in CAD, while DLR.U.TO trades in USD. “Journaling” simply refers to the method of formally saying “I’m taking these shares that I hold in CAD and holding them in USD instead.” If you contact your discount brokerage and ask them to do this, they’ll know what you’re talking about.
- Sell shares of DLR.U.TO. Once your shares have been journaled from DLR.TO to DLR.U.TO, you can sell them. When the trade settles, you’ll have US Dollars in your brokerage account.
- Use your USD. Now that you’re in possession of US Dollars, the exchange is complete. You can withdraw your USD to a bank account or keep it in your discount brokerage account and invest it.
If you want to exchange USD to CAD, follow the same steps but start by using USD to buy DLR.U.TO and journal your shares to DLR.TO before selling them.
It’s worth mentioning that you can use any security that trades in both currencies to perform Norbert’s Gambit, but most traders prefer DLR.TO because it specifically aims to reflect the conversion rate between CAD and USD by investing primarily in US cash and equivalents.
How Long does Norbert’s Gambit Take?
It takes about five days in total to complete Norbert’s Gambit. After you purchase shares of DRL.TO or DLR.U.TO, it takes about two days for the shares to become available in your account. It takes approximately one more day to journal your shares, and another two more days for your cash to become available after you sell your shares.
When is Norbert’s Gambit Worth It?
Norbert’s Gambit is worth it when you want to exchange a large amount of currency and you don’t need to complete the transaction urgently.
If you’re not exchanging a large amount of money, it may be cheaper and more convenient to use a traditional exchange. Norbert’s Gambit requires two trades. At $10 per trade, that’s a fixed cost of $20 to execute the trade. Considering that most foreign exchange fees are around 2.5%, Norbert’s Gambit only saves you money if you’re exchanging more than $800.
Even if you are exchanging a large amount of money, the expense of using a foreign exchange may be worth it simply to save time. It’s not difficult to execute Norbert’s Gambit, but it does take several steps and approximately five days to complete. Depending on how quickly you need your foreign currency, it might not be worth it to use Norbert’s Gambit.
How Much Does Norbert’s Gambit Save?
Your savings can be quite substantial when you use Norbert’s Gambit to convert large amounts of money. Let’s look at an example:
Imagine you want to use CAD to buy $10,000 USD.
At the time of writing, the Bank of Canada (BoC) says that $1 USD is worth $1.2824 CAD. In other words, $10,000 USD should trade for $12,824 CAD before any fees.
RBC, Canada’s largest bank, will sell $1 USD for $1.3100 CAD. In other words, the bank will sell you $10,000 USD (which is $12,824 CAD) for a cost of $13,100 CAD. That’s a markup of $276 or 2.15%.
Using Norbert’s Gambit, you can get $10,000 USD by selling 993.049 shares of DLR-U.TO. To buy those shares in its CAD equivalent, DLR.TO, costs $12,850.19 including commissions. That’s $249.81 less than the $13,100 you would pay at the bank and only a few dollars more than the BoC’s exchange rate.
Note that the savings aren’t very substantial for smaller trades. Imagine you want to use CAD to buy just $1,000 USD. RBC will sell it to you at a cost of $1,310 CAD, while Norbert’s Gambit will cost $1,303.02 including two $10 commissions – a savings of just $6.98. For very small amounts, you might actually lose money using the Norbert’s Gambit method. For example, to buy just $100 USD, Norbert’s Gambit will actually cost $17.30 more than exchanging your money at the bank.
When Should I Avoid Using Norbert’s Gambit?
Avoid using Norbert’s Gambit if you’re only exchanging a small amount of money. Based on a $10 trade commission, the breakeven point is roughly $800.
You should also reconsider using Norbert’s Gambit if you need your conversion done in less than a week. It takes five days to complete all the necessary steps whereas a conventional currency exchange through a bank can settle within a day.
Norbert’s Gambit can also backfire during times of market turbulence. Because it takes a day or two to settle each part of the transaction, a sudden swing in exchange rates could lead to Norbert’s Gambit costing more than paying the bank’s exchange fee. That’s because you’re “locked in” to the exchange rate at the time each trade happens.
For example, let’s say you were to start Norbert’s Gambit by investing in DLR.TO at a share price of $1.28 CAD, but a sudden fall in the Canadian Dollar pushed the price to $1.38 CAD by the time you could complete the sale. If you had invested $10,000 CAD, you would end up with $7,246 USD. But if you had paid the bank’s inflated exchange rate of $1.31 CAD in the first place, you would have come away with $7,634 USD.
Can I Avoid Currency Conversion Fees Without Norbert’s Gambit?
It’s not feasible to avoid currency conversion fees altogether without Norbert’s Gambit, but there are ways to save on exchange fees when trading CAD for USD.
Compare exchange rates at banks. Each bank sets its own exchange rate and some are more competitive than others. At the time of writing, the difference between the best and worst exchange rate among Canada’s Big Five Banks is 1.52 points. In other words, you could save $15.20 CAD on every $1,000 USD you buy just by choosing the right bank.
Don’t exchange cash. Non-cash transactions, like bank transfers and drafts, have better exchange rates. Exchange currency before withdrawing it as cash, if possible.
Limit the number of exchanges you perform. Every currency conversion costs money, so don’t exchange your money unless you have a good reason for it. If you think you’ll have a future use for your USD, it’s better to leave it in USD than convert it to CAD and back again.
Use USD credit cards for travel. Did you know that in addition to the bank’s typical spread on foreign exchanges, most credit cards charge an additional foreign transaction fee of up to 2.5%? If you frequently travel to the US, use a USD credit card to save on fees and currency exchange. The best US dollar credit cards for Canadians include the no-fee RBC Visa Signature Black card and the CIBC U.S. Dollar Aventura Gold Visa Card with travel rewards.
Watch Out for Scams
At least one online article about saving money on currency exchange suggests looking on Craigslist for people willing to trade. This is extremely bad advice.
People offering to trade currency online are almost always trying to scam you. They may give you counterfeit cash or a phony cheque, involve you in a more sophisticated scheme, or just rob you. If it seems too good to be true, it probably is.
Bottom Line
Norbert’s Gambit is an effective way to save on currency conversion fees, under the right circumstances. If you’re converting a large amount of money, and have at least 5 days to complete the transaction, you can save hundreds of dollars, if not more, using this technique. If you need foreign currency quickly or are exchanging less than $1,000, however, Norbert’s Gambit might be more trouble than it’s worth.
