Lowering Your Currency Exchange Fees
With the Canadian dollar again hovering around parity, it seems like a good time to consider ETFs denominated in US dollars. But the problem of high currency exchange fees remains a problem for DIY investors, as I wrote about last month. This topic has generated a lot of discussion recently, and a number of useful resources have appeared to help investors make informed decisions about currency exchange costs.
First, The Globe and Mail just released its 12th annual review of online brokerages. This comprehensive survey ranks the major Canadian discount brokerages according to many categories, including costs, and features a table showing the cost to buy 100 shares of a stock trading at US$25. (The table is much more useful if you click the column heading “Total Transaction Cost” to sort it.)
According to the Globe’s numbers, TD Waterhouse has the lowest foreign exchange fees, well ahead of CIBC Investor’s Edge and Questrade. That was a surprise, to say the least. EvenCanadian Capitalist, a satisfied TD Waterhouse client wrote, “I wouldn’t have expected TDW to end up at the top of the list.” Indeed, Money Smarts Blog recently did its own comprehensivesurvey of discount brokerages and quotes TD Waterhouse’s forex fee at 1.5%, as appallingly high as most other banks.
The moral of this story is clear: before making a significant foreign exchange, call your brokerage and ask them to quote you the rate. If you’re converting a large sum, you can usually get a better deal. Readers have told me that they have been quoted rates as low as 0.3% to 0.6% if the amount is in the mid five figures.
I’d also like to highlight a couple of online calculators created by a reader who uses the name Northern Raven. For my October post comparing the cost of Canadian and US-listed ETFs, I included an Excel spreadsheet and invited readers to download it for their own use. Raven went a step further and built a web version of the spreadsheet that adds some extra features. If you’re considering holding the foreign equity portion of your portfolio in US-listed ETFs, such as those from Vanguard, give it a whirl and see how long it will take you break even after paying upfront currency exchange fees and incurring withholding taxes on dividends.
Northern Raven has also created an online calculator you can use if you’re considering Norbert’s Gambit, a technique for sidestepping currency exchange fees by buying and immediately across-listed stock. The calculator allows you to compare the bid-ask spreads of six liquid stocks that trade on both the Toronto and New York exchanges (RIM, Potash, Barrick Gold, TD Bank, Royal Bank and CIBC). By choosing the one with the smallest spread, you’ll have best chance a smooth, inexpensive transaction. (Use this calculator at your own risk, please. The CAD–USD exchange rate is preset at parity for now, and the stock data may not be precisely real-time.)
A couple of very cool tools, Raven. Thanks for sharing them!
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If all the banks allowed US dollars in RRSPs, we wouldn’t have to go through the hoops so much to minimize currency conversion fees. The bank brokerages were once required by the government to have only Canadian currency in registered accounts but that requirement was ended in 2001. The Investment Dealers Association of Canada gave the OK to have U.S. dollar balances in RRSPs a few years later and still, the banks continued to charge the fees. Maybe the class action lawsuits will finally tip the scaleshttp://blog.canadianbusiness.com/the-end-of-currency-conversion-fees/
Your advice about calling the brokerage about forex rates is spot on. The rates seem to be dependent on the amount converted and probably other factors as well.
Northern Raven has reported some findings about TD exchange rates that he figured out by trial and error on the web interface. I think it’s ridiculous that they can’t just publish the rates. Questrade does, IB does, but I don’t think anyone else does.
Mike
I wouldn’t say the G&M review of brokerages is comprehensive – I emailed Rob Carrick about why IB wasn’t on the list of brokerages in consideration and am waiting for the rationale. Nor do I think TDW would be the best for Forex either – using Raven’s calculator and assuming a $9 trade, using Norbert’s Gambit still has fees of about 0.15%. IB is less than that.
I get that IB has monthly minimums of $10/month ($120/year), but in retrospect that’s only about 12 trades a year at your local $9.99 broker. So why isn’t IB mentioned more?
@Simon: I think IB is fundamentally different from the other online brokerages because it does not offer RRSP or TFSA accounts and is clearly designed for active traders, not long-term investors. That’s not a criticism, just an observation. I never bring it up simply because it’s an inappropriate platform for a Couch Potato investor.
I’m almost certain that the Globe table is wrong. I can’t imagine TDW’s rate being lower than the Bank of Canada’s CAD low for that day. I think the Norbert Gambit is the best way to go. I’ve done it a couple of times with excellent results.
Thanks for the mention.
I’m a bit confused. In the post, you say that the Globe reported that TDW’s foreign exchange fees are lower than Questrade’s fees. But Questrade doesn’t have any foreign exchange fee, just the spread which is very small. Can TDW be lower than that?
A couple of clarifications on the calculators I created. The US ETF calculator has a preset figure for the CAD->US exchange rate – right now it defaults to today’s 0.9915, but you can change it to whatever you like by clicking on “Advanced Options”. I keep meaning to have the calculator do a live lookup of the exchange rate when it loads; perhaps I’ll do that this weekend.
The Norbert’s Gambit one was mainly for me; I was curious as to how the bid/ask spreads and so on would affect things, and whipped this up. Please be careful in applying its displays to real life. Also, the stock and dollar quotes are retrieved from Yahoo (it was the code I could scrounge up the quickest), but I haven’t investigated closely the exact delays on each. If the stock and exchange rate quotes have different delay times it will probably affect the Savings on a volatile exchange rate day.
As for the Globe & Mail brokerage forex chart, there are some comments attached to Canadian Capitalist’s posting (http://ow.ly/38TAi) and MoneySmarts (http://ow.ly/37XqF). My own opinion is that the TD value is completely bogus – I think they just multiplied 2500 by their normal 1.57% spread (which would assume the dollar at exact parity), instead of calculating the cost of buying $US 2500 on Sept 20, as they were supposed to do. CIBC seems to be something similar – no plausible exchange and spread assumption for Sept 20 can produce that number. I did a quickie back-of-the-envelope spreadsheet and set the exchange rate to a value that produced the expected 2% for Disnat, and it made the BMO value come out at the expected 1.25% as well. RBC and HSBC shouldn’t be the same amount as BMO if MoneySmarts info is correct, but we’ll probably never know for sure what went wrong without access to the raw G&M info. I hope they try again – a correct chart would be very helpful.
If the brokerages were forced to disclose their basic small-volume spread (like VISA cards do), I’m sure they’d fall all over themselves to provide fancy charts showing the better rates for higher amounts. As it is, there is no incentive for them to draw attention to this lucrative little corner of things.
I have a forex question but not related to investments. What would be the best way to get USD or any other foreign currency for travelling? I have always used currency exchange place close to my work place (better rates than banks) and recently I used HSBC debit card at the destination. HSBC did not have exchange fees. Is there a better method?
I am thinking that I may be able to use Norbert’s Gambit method for USD but that means I need a USD chq account for the brokerage send wire or EFT the money.