Yesterday’s post looked at whether US-listed ETFs are really a good deal for RRSP investors. Interactive brokers forex quotes live dollers ETFs from Vanguard and other American providers have dramatically lower annual fees, Canadians may face hefty currency exchange fees when trading them.
Most discount brokerages in Canada do not allow you to hold US dollars in a registered account, which means that using US-listed ETFs can involve paying a currency exchange fee when you buy, again when you sell, and every time you receive a dividend. I’ve created a spreadsheet that helps investors compare the cost of Canadian and US-listed ETFs. With the headwind caused by a 1. 5,000 annually in an RRSP would need more than 11 years to see the benefit. Use a brokerage that allows you to hold US dollars inside an RRSP.
Don’t resign yourself to paying 1. You can probably live with a high currency exchange fee if you’re only collecting a hundred bucks a year in US dividends in your RRSP. But if you’re regularly exchanging currency inside your investment accounts, you really need to find a better deal. Many brokerages don’t publish their currency spreads because they would rather you not know how much they’re gouging you. Learn how to wash your trades.
This technique allows you to sell a US-listed stock or ETF and temporarily park the proceeds in a US-dollar money market fund. Then you can buy a different US stock or ETF with those dollars and avoiding paying a currency exchange fee twice. My spreadsheet assumed that our investor would eventually sell his entire position in the US-listed ETF after a couple of decades, at which point it would be worth six figures. In reality, paying anything like 1.
Hold your US-listed ETFs in a taxable account. If you can’t tax-shelter all of your investments, the usual advice is to put your Canadian equities in a taxable account, since the capital gains and Canadian dividends get the most favourable tax treatment. Can ETFs Make the Market Go Up in Smoke? I’ve used the Norbert Gambit to convert CAD into USD a couple of times.
Works as advertised and you can exchange at close to the spot rate at just the cost of two commissions. CC: Which stock did you use? I always thought it would be cool to have a gambit named after me. It seems that the mechanism for washing trades is slightly different for each brokerage. The more I think about it, the more I feel like ditching TDWH. The currency conversion rate, foreign dividend conversion in RRSP, and commission are all eating into my savings.
I haven’t done the math on how much, but I have a feeling I won’t like it. BTW: I also ditched ING direct for Ally. I am an ungrateful cheap bastard. CAD and vice versa for less than Questrade’s 0. Even under their non-professional rates, they only charge 0. You can then transfer this USD into Questrade directly, avoiding the FX fees. Which is about 100X what an institutional investor actually pays to exchange CDN for USD.
1000 from the my RRSP as profit. 29 for trades are missing the forest for the trees. With currency conversion fees like these, I’m certain that the popularity of Vanguard-ETF-laden lazy portfolios has been a giant profit windfall for Canadian discount brokerages. I have come to realize that unlike active investors who try to beat the market, I can’t shrug off the cost of maintaining my portfolio. I need EVERY edge I can get !
Just a note to readers that Interactive Brokers is designed for very active traders, not Couch Potato investors. They do not even offer RRSP accounts. Make sure you understand all of the fine print before making any switches. Any idea how transferring a US ETF in-kind from a non-registered USD Trading account into a RRSP would work? Could that potentially reduce any of the conversion fees? Thanks for the useful comments, everyone. I do think it’s worth clarifying some points, as it sounds like a number of readers are questioning whether they should ever use US-listed ETFs at all.