Norbert’s Gambit – How To Convert CAD To USD Without Exchange Fees?

What is Norbert’s Gambit? Why do you need it? No matter the kind of monetary transaction, no one likes extra fees, even though they understand why they are tacked onto their transaction. One place where fees are particularly annoying is in foreign exchange.

If your business or hustle demands you to always receive money in a foreign currency or to frequently transact between currencies, it is already clear how you feel about that tiny 2.5% conversion fee and transaction fee that comes with it.

Norbert’s Gambit costs the fee for two trades – one to buy the DLR, one to sell the DLR.U. In my case with CIBC, that would be $6.95 CAD and $6.95 USD. The % really depends on how much you are exchanging.

As an example: If I exchanged $10,000 from CAD to USD using a standard brokerage rate of 2%, it would cost me $200. Using Norbert’s Gambit, it would cost me $6.95 CAD + $6.95 USD, which is approximately $16 CAD (or 0.16%), a saving of around $184 CAD. That’s where your value of 0.2% comes from.

Obviously, therefore, the less money exchanged, the lower the difference. If I converted $16 using Norbert’s Gambit, the fee would be 100%. The point of intersection between the two for 2% and $16 CAD is $800.

These numbers are especially irking when you transact in large amounts: those conversion and transaction fees add up quickly. Let me help you by answering all your questions about Norbert’s Gambit in this article. Let’s get started. 

What Is Norbert’s Gambit?

In the bid to save money, most people have learned to use credit cards that do not charge any fee for foreign currency conversion. Add to that a checking account that refunds your international ATM usage fees and you have the perfect solution for circumventing forex fees – or so it seems.

There is just one problem – hidden fees. The thing is, even when your bank (or brokerage) says they charge zero for currency conversion, they technically don’t. At the back end, they mark up the forex rate at which you’re exchanging your currency. This gives them a spread of anywhere between 1.5% to 3% on which they make their profit.

But we’ve had to deal with these costs, sometimes unknowingly, and other times resigned to the fact that we couldn’t get a better deal. But that’s all changed, thanks to Norbert’s Gambit strategy. This strategy was named after the man who popularized it – Norbert Schlenker.

Norbert is a financial adviser working at B.C. investment firm, Libra Investment Management. This strategy talks about leveraging the shares of companies listed in both the Canadian and U.S. exchanges to convert money from CAD to USD and vice versa without conversion fees and at the market or near-market exchange rate, thereby shirking the banks, brokerages, and their thieving habits.

How Does The Norbert’s Gambit Work?

So first, let’s paint a scenario that explains how this strategy works at its most fundamental level.

You live in Canada and you’re planning a trip to the U.S. to attend a buddy’s 30th birthday party. It’s going to be a grand affair and you decide to get him a gift worthy of the celebration. You travel to the U.S. and have bought him an exclusive line of scents and perfume products worth $800 CAD.

You get to the U.S. to find out that the celebration has been canceled and your friend has relocated to another country on work grounds. So now you’re left with no contingency plans to turn up and $800 CAD worth of scents that you don’t need either.

Luckily, the store you purchased the gift from having a store policy that lets you return the gifts in any of their U.S. stores. So you find a store and get back your money at the market currency equivalent retail price of $616 USD.

What you’ve essentially done here is convert your money from CAD to USD without paying a dime for conversion.

How Do I Convert Canadian To US Dollars With Norbert’s Gambit?

So how does this work in reality? What if you want to transfer some heavy funds to U.S. Dollars with this strategy?

As stated earlier, this happens through stocks. You will need to buy an Exchange-traded fund (ETF) that is listed on both the Canadian and U.S. markets. You’ll have to first purchase the ETF in the Canadian market and exchange the ETF to its U.S. market equivalent.

Next, you sell it off as a USD-denominated ETF.

Now, it is not as easy as you’re probably thinking right now to find an ETF that is listed on both these markets.

Thankfully, since we are speaking specifically about CAD/USD conversions, we recommend that you purchase Horizon’s U.S. Dollar Currency ETF. This ETF provider, Horizons, created this find specifically for investors to be able to use Norbert’s Gambit to exchange their funds between currencies and avoid conversion and transaction fees. How cool is that?

So first things first, you will need a few things before you can utilize Norbert’s Gambit:

• Create an account with a discount brokerage (such as Questrade). This will be your investment account

• Next, open two registered or non-registered accounts within your brokerage account. It could be two TFSAs, RRSPs, or a non-registered account. Do one in USD and the other in CAD

• Next, purchase the above-mentioned Horizon ETF using the amount you want to exchange

At this point, we should probably paint another more realistic scenario to show you exactly how this works.

Exchange Of $12,000 CAD To USD Using Norbert’s Gambit? – Case Study 

So let’s say you want to spend a month in the United States, and by your calculations, you will need around $12,000 CAD to cover all your expenses for the entire month. If you were to convert that money today using today’s closing rates, how much would you get in USD, using Norbert’s wisdom?

The first thing to do will be to purchase the Horizon U.S. Dollar Currency ETF (listed in the Toronto Stock Exchange as DLR and on the NYSE as DLR.U.

As of today’s closing rate, the DLR stands at $13.20 CAD, and the DLR.U closed at $10.10 USD. From these figures, the CAD to USD exchange rate stands at 1.3069 ($13.20/$10.10). According to Xe, the live mid-market rate at the time of writing is 1.3052, which is just marginally different from the DLR exchange rate.

This gives a picture of the possible exchange rate you could receive your money at.

Norbert’s Gambit Questrade

So let’s say you purchase $12,000 CAD worth of DLR shares. At a price of $13.20 CAD per share, that comes to 909 shares ($12,000/$13.20 = 909 shares), which is more accurately $11,998.80 CAD.

If you use a discount brokerage like Questrade, you will be charged a small exchange fee (should be around $3 for this transaction value). So your total spend becomes $12,001.80 CAD ($11,998.80 + $3).

After you’ve successfully purchased the DLR, you can inform the brokerage you’re using – Questrade, Wealthsimple Trade or Banks that you would like to journal your DLR shares over to the DLR.U listing. The process of transferring your shares over to its USD-equivalent listing will usually take anywhere from 24 hours to 2 days after the trade is settled.

After 2 days, your DLR shares are gone and replaced by 909 DLR.U shares as displayed in your account. At this point, you are ready to sell off your shares. You sell them at the DLR.U value of $10.10 USD per share, which amounts to $9180.90 (909 * $10.10).

Again, Questrade charges a commission fee of around $10 for every sale (they don’t charge trade commissions for the buy trades). So what you get at the end is $9170.90 USD ($9180.90 – $10).

So after accounting for the brokerage’s exchange fee and trading commissions, you have successfully turned $11,998.80 CAD into $9180.90 USD using Norbert’s Gambit strategy.

Norbert’s Gambit Bank Strategy

So did we get a better deal than if you had just gone through your bank? Let’s see.

Judging from your purchase and sale prices, you were effectively able to convert your money at the CAD/USD rate of 1.3086 ($12,001.80/$9170.90), which is just 0.26% away from the actual mid-market exchange rate.

Let’s say you use Scotiabank for your banking needs. If you had used Scotiabank’s exchange rate (which stands at 1.3406 as at the time of writing this), a $12,000 CAD conversion to USD would have given you $8951.21 USD ($12,000/1.3406). This means you would have lost $219.69 USD in the process. That’s a lot of money to just gloss over.

You can see that even with the exchange fee and trading commission that totaled $13, using Norbert’s Gambit currency conversion method is still well worth it.

Bear in mind that this strategy can also work backward, from USD to CAD, and with any other currency pair that share a common ETF.

Everything Else About The Norbert’s Gambit 

There are a few nuggets of information you must have in mind before going ahead with this.

• This strategy may fail if you opt for a stock/ETF that is volatile. This is because this strategy can take up to 2 days to complete. And in that time period, your investment will be exposed to the craziness of the market. This means there may be wild price fluctuations that will wipe out your conversion savings before you have the time to sell off the ETF

• One of the requirements for a qualifying ETF for Norbert’s Gambit strategy is heavy trading volume. This helps the trade to fill up faster, thereby shortening the bid/ask spread and essentially sheltering your foreign exchange savings from loss. If the trade volume is not sufficient, the opposite scenario will play out and kill the whole objective for making the foreign exchange

The Horizon U.S. Dollar Currency ETF (DLR) checks all these boxes:

• The Horizon U.S. Dollar Currency ETF is traded quite heavily

• It is listed in both the NYSE and the TSX markets

• It doesn’t experience wild price changes and is relatively solid and steady. This is because it is designed to simply hold USD and nothing more

Pros Of Norbert’s Gambit

As to whether Norbert’s Gambit is still advantageous – it depends on the size of your portfolio, the type of investment account (TFSA or RRSP), and how often you exchange currency, but if you do the math on the difference in MER alone, I think you’ll see it’s favorable even at low portfolio values if you limit the number of currency exchanges.

Personally, I only perform Norbert’s gambit once or twice a year – a total spending per annum of $32.

That is far less than the difference in MER between XAW (0.22%) and ITOT/IEFA/IEMG in a 3:2:1 ratio (0.06%), to the tune of over a hundred dollars (for me).

That difference, which goes directly to my portfolio value rather than into a broker’s pocket, then gets compounded annually – so in the long run, it is even more substantial.

The break-even point without compounding would be a total holding of $20,000 CAD ($32 / (0.22% – 0.06%)) i.e. if you were holding less than $20k CAD, you would be spending more per annum performing NG (at twice per year) than you would be making from the reduced MER on the US-listed equivalents.

Cons Of Norbert Gambit

You’ll need to consider the money you currently lose on dividends to foreign withholding taxes if you keep Canadian ETFs that hold US-listed ETFs and stocks.

Assuming a payout of 2% per annum, the US Govt is currently withholding 0.15 x 2 = 0.3% of the value of your US ETFs held in your Canadian-listed ETF. (e.g. XAW). They do not do this however for retirement accounts that hold US-listed stocks and ETFs directly, and that is important – this tax saving is only applicable to a registered RETIREMENT account (RRSP or RRIF) and not a TFSA or RESP.

The US govt knows when a registered account is meant for retirement purposes, and when it isn’t, and applies to the tax accordingly. Note that in a non-registered account, foreign withholding taxes are still applied but recoverable on your tax return.

Conclusion

So there you have it: the genius of Norbert’s Gambit strategy. A note of warning, if you’re doing this with a currency pair and a stock that is more volatile, it is wise to try to wrap up the conversion as soon as possible so as not to expose your funds to the market elements.

Consider buying the shares and selling them at the same time using a margin account from your brokerage. This way, you’re essentially locking in the exchange rate for the day, which significantly reduces the risk you face while your brokerage journals your funds.

Norbert’s Gambit is something that everyone who deals in CAD and USD (or other currencies) should try, especially if they transact huge sums of money. If you’re only changing a few hundred dollars, then Norbert’s Gambit/DLR combo may not be worth the hassle.