The same sort of thing happens to investors when they buy a U.S. stock with Canadian dollars. The brokerage will convert the amount for them, charging a fee for their trouble.
There’s a way to exchange Canadian and U.S. Dollars cheaply and relatively easily using a couple of Horizons ETFs and a strategy called Norbert’s Gambit.
The execution is relatively simple. Use your online broker to buy the Horizons U.S Dollar Currency ETF (TSX:DLR). This ETF is priced in Canadian dollars, yet the underlying assets represent U.S. dollars. If you do the math, it’ll trade at the same rate of exchange as the Canadian/U.S. dollars.
Next is only real tricky part. You’ll have convert the Canadian version to the U.S. version, which most brokerages allow you to do online. The Horizons U.S. Dollar ETF (listed in U.S. Dollars) has the ticker symbol DLR.U.
The only step remaining is to sell the newly converted U.S. shares. The cost to you will be the commission used for the two trades, as well as any small move in the underlying currencies. At a cost of $10.00 per trade, the fee to exchange $5,000 of Canadian currency into U.S. dollars is just 0.4%, much cheaper than using a bank or other more traditional methods.
