Trying the Norbert Gambit at BMO Investorline

A while back Canadian Capitalist described a “foolproof method to convert Canadian dollars to U.S. dollars” using a version of the so-called Norbert Gambit. This involves buying the exchange-traded fund DLR with Canadian dollars, journaling it over to the U.S. dollar side of your account to make it DLR.U, and selling it to get U.S. dollars. I decided to try this at BMO Investorline. Overall it worked, but there were a few surprises along the way.

Note that each unit of DLR just holds US$10. This is true whether it is DLR or DLR.U. The difference is that DLR trades in Canadian dollars and fluctuates with the exchange rate, and DLR.U trades in U.S. dollars.

I don’t normally like to talk numbers about my personal accounts, so for the rest of this article, I’ll scale all the numbers down as though I was converting C$100,000 to U.S. dollars.

The bid-ask spread on DLR was C$9.79 to C$9.81. I placed an order to buy 10,100 units of DLR at a limit of C$9.81. This trade was filled at C$9.81 almost immediately. I then called Investorline to see whether I would have to wait until the trade settles in 3 days to complete the currency conversion. This is where things deviated from Canadian Capitalist’s recipe.

The Investorline representative told me that their online systems can’t handle selling DLR in U.S. dollars, but that he could do it for me over the phone for the online commission of $9.95. He also said that I didn’t have to wait the 3 days; he could do the trade immediately.

Curiously, the spread was US$9.95 to US$9.97. I’m not sure why this makes any sense when each unit is worth US$10, but at US$9.95, I was getting an implied conversion rate of 9.81/9.95 = 0.9859, which was quite close to the fair exchange rate at that time of 0.9852. So I had the representative place a limit order to sell my DLR.U at US$9.95, which was filled almost immediately at US$9.95.

After the transaction was complete, the representative told me that my implied currency-conversion rate was 13 basis points (0.13%) better than the “market rate,” which I took to mean that if I had called to ask Investorline to do the currency conversion without using the Norbert Gambit, I would have received a rate of 0.9872. This is only about 0.20% off the fair exchange rate.

It seems that you get a better rate when calling a representative than you get when converting currency online. I checked the Investorline online rates for converting $100,000, and the spread is 1.2%, or 0.6% lost for each conversion. This is a lot worse than the 0.2% cost that the representative could have given me. On $100,000, the difference is $400 for each conversion.

I found a minor glitch after the representative sold DLR.U for me: my account continued to show that I had DLR, but also showed that I had U.S. dollars from the sale. So my overall account balance shown was high by about $100,000. This was corrected the next day.

One thing that makes me nervous is that after a week my account continues to show a long position in DLR and a short position in DLR.U. The representative led me to believe that the sale of DLR.U would consume the DLR units and not create a new short position. This whole exercise won’t achieve the goal of reducing the cost of currency conversions if I have to pay margin interest. So far they haven’t tried to charge me any interest.

My complete list of transactions was to sell Canadian shares, buy DLR, sell DLR.U, and buy U.S. shares. I was able to do this all in one day and save on currency conversion costs. What could make it better would be allowing me to do the DLR.U sale without having to make a phone call. Even better would be to tighten the currency conversion spreads to make the Norbert Gambit unnecessary.

This whole area of currency conversion seems quite murky to me. The costs are not at all transparent. Doing transactions with large amounts of cash makes me nervous, but I’m reasonably confident that I paid significantly less than the default cost of $600 if I had gone the easier route.