Buying U.S. Stocks? Want to Avoid High Currency-Exchange Fees? Check Out This ETF Hack!

Using “Norbert’s Gambit” at your brokerage can save you tonnes of money when buying U.S. stocks. Here’s how to do it.

| More on:
Man holding magnifying glass over a document

Image source: Getty Images.

Everyone wants to buy U.S. stocks. Shares of companies like Microsoft, Apple, and Tesla have been on an absolute tear the last decade, outperforming the market with no signs of slowing down.

Unfortunately, as Canadians, we get paid in loonies, not greenbacks. When we buy U.S.-listed stocks, we often have to pay an additional currency exchange fee on top of the existing FX rate at a rate of anywhere from 1.5% to 3%!

Obviously, this can ding your returns substantially, even if you’re investing for the long run. Later, when you sell and want to withdraw in CAD, you’ll have to repeat the process again, getting dinged another 1.5-3% on a larger sum!

Fortunately, there’s a way to avoid these fees by using an exchange-traded fund (ETF) based “loophole” called “Norbert’s Gambit.” You can perform Norbert’s Gambit at most brokerages across Canada by following this guide.

What is Norbert’s Gambit?

Norbert’s Gambit is a technique named after Norbert Schlenker of Libra Investment Management in Salt Spring Island, B.C.

In 2001, good, ol’ Norbert pioneered the idea of using shares listed on both Canadian and U.S. exchanges to exchange currency for less.

In this case, we will be using Horizons US Dollar Currency ETF (TSX:DLR). DLR seeks to reflect the price in Canadian dollars of the U.S. dollar. What’s cool is that DLR has a version listed in USD called DLR.U, which does the opposite.

Step-by-step instructions

  1. Determine how much CAD you want to convert and buy the required number of DLR shares. For instance, if I wanted to convert $6,000, I need 474 shares of DLR at its current price of $12.64.
  2. Buy the required number of shares of DLR during trading hours. Make sure you use limit orders, unless you need the money sooner, in which case you can use a market order.
  3. Contact your brokerage’s customer service desk (call, email, or live chat) and ask them to “journal over your shares of DLR to DLR.U shares.” Wait (usually three to four business days) for the trade to settle.
  4. Once the DLR.U shares appear in your account, sell them to receive USD. Once again, make sure you use limit orders, unless you need the money sooner, in which case you can use a market order.
  5. Use your newfound USD to buy shares of all those lucrative U.S.-based stocks you’ve been hearing about.
  6. When you are ready to sell and convert back to CAD, simply reverse these steps!

What are the risks?

The main risk here is that the amount you’re exchanging is too small as to be worth it. When using Norbert’s Gambit, your main fees will be commission from buying DLR and selling DLR.U and from the bid-ask spread if you used a market order. Generally, I would recommend doing this on amounts of more than $3,000.

The other risk is that the CAD-USD FX rate changes while your shares are journaling over. For instance, the USD might be worth CA$1.26 when you journal over the shares. However, after four days, the USD might appreciate to be worth CA$1.28. This will lower the value of DLR.U, which reduces the amount you receive in USD.

The Foolish takeaway

Savvy investors can use the DLR ETF to perform Norbert’s Gambit at most Canadian brokerages. Using Norbert’s Gambit on a large amount of CAD can help you obtain USD without paying the pesky 1.5-3% currency exchange fee imposed by banks or brokerages.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Apple, Microsoft, and Tesla.

More on Investing

Various Canadian dollars in gray pants pocket
Dividend Stocks

2 Cheap Dividend Stocks to Boost Your Passive Income

Bank of Nova Scotia and TC Energy pay attractive dividends that should continue to grow.

Read more »

Energy Stocks

2 Top Dividend-Paying Energy Stocks to Buy on the TSX Today

These two dividend-paying Canadian energy stocks are outperforming the broader market in 2023 by a big margin.

Read more »

sale discount best price
Stocks for Beginners

3 TSX Stocks on Sale for Long-Term Investors

These three TSX stocks offer amazing options for long-term holders, thanks to a history of growth and more to come.

Read more »

Hands holding trophy cup on sky background
Dividend Stocks

3 Dividend Yield Champions to Buy Today

Manulife Financial (TSX:MFC) and two other Dividend Yield Champions look ripe for buying this fall and winter.

Read more »

edit Woman calculating figures next to a laptop

Adjusting Your Portfolio for the New Normal: Higher Interest Rates in Canada

Here's how I would personally adjust my portfolio for today's high interest rate environment.

Read more »

Man making notes on graphs and charts

Can You Become a Millionaire by Investing $500/Month?

Given their long-term growth potential and solid underlying businesses, these three TSX stocks can deliver superior returns in the long…

Read more »

A golden egg in a nest
Dividend Stocks

RRSP Investors: 2 Dividend Stocks to Build Your Retirement Nest Egg

These industry-leading stocks can be an excellent part of your portfolio to align with your retirement plan for a sizeable…

Read more »

edit Balloon shaped as a heart
Dividend Stocks

If You Like Dividends, You Should Love These 3 Stocks

Canadian investors can consider buying high dividend TSX stocks such as Enbridge to create a passive-income stream for life.

Read more »