Like many others out there, one of my pet peeves is foreign exchange conversion costs – and conversion costs for stock trading are no different.
My long term plan for my RRSP is to slowly transition from Canadian stocks to American ones. After some quick research online and a couple calls to my broker, the transition could potentially cost more than I had anticipated.
Discount brokers are great because the costs per trade have been lowered substantially for DIY investors. However, after calling my broker I learnt that they charge an additional 1.99% (each direction) for a simple currency conversion.
This means if I want to buy shares in Coca-Cola, McDonald’s, Proctor & Gamble or any other US-listed stock, I will need to pay an additional currency conversion fee of 1.99%.
I came across a simple strategy over at Million Dollar Journey that proved to be successful. I managed to convert a small amount of money from CDN $ to USD using a simple strategy using the Horizons US Dollar Currency ETF (DLR).
I did this using the following steps:
- Buy shares of DLR.TO (the Canadian version – just like you would buy any other ETF). At this point you have essentially locked in your exchange rate. You will want to use a limit order equal to the ‘ask’ price.
- Transfer (journal) the DLR shares to DLR.U shares. For me, this was done through a quick email to the Questrade Support address. You can also do it by calling them and requesting it be done. There should be no additional charge and you need to wait 3 days for the trade to clear before this is done.
- Sell the DLR.U shares (the American version). You will want to use a limit order equal to the ‘bid’ price. You will now have USD in your account when you sell. I’ve heard some investors have trouble with Questrade not recognizing the DLR.U in the web trading platform but I had no issues with my trade.
For my conversion of approximately $5,000 I saved about $100. Keep in mind that this may seem small but I plan on doing this several times throughout the course of a year so the savings will really start to add up.
Essentially the savings means I can improve my overall rate of return on my US investments.
- I needed to wait 3 days for the initial trade to settle before I was able to journal the shares over. My plan is to invest over the long term and a difference of 3 days is less significant than the constant savings.
- I’ve also heard that this strategy will not work within an RESP.
Conclusion: a simple strategy for currency conversion can help me save money with my trading costs. I plan to use this strategy numerous times throughout the year.
Has anyone else used this strategy?