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Jun 2, 2014

Norbertís Gambit: The Savvy Way To Reduce Currency Conversion Costs

by Dan Bortolotti

Dan BortolottiTechnology and competition have dramatically reduced the cost of investing, but currency exchange remains one of the financial industry’s great rip-offs.

Consider the rates posted on the Bank of Montreal website in early February 2014. On a day when the U.S. dollar was worth about $1.1018 CAD (according to the Bank of Canada), BMO was offering to buy U.S. dollars for $1.0745, while selling them for $1.1325. That’s a spread of over 5%, which means that converting $10,000 would cost more than $250. The rates at online brokerages are typically much better than at bank branches, but spreads of 2.5% to 3% are common on transactions under $50,000.

Fortunately there’s a technique you can use at almost every online brokerage to dramatically reduce the cost of currency exchange. It’s called “Norbert’s gambit,” after Norbert Schlenker, an investment advisor in B.C. who was the first to popularize it.

A Fair Exchange

Before we explain the specific steps, it helps to understand the idea behind Norbert’s gambit. Imagine you live in a city that borders the U.S. and you want to exchange $1,000 CAD, which at today’s exchange rate is worth $900 USD. Your local bank offers you only $870 USD, because it will keep the other $30 as its profit. You think 3% is too a high a cost for such a simple transaction, so you come up with a bright idea: you go to your local Walmart and buy an item for $1,000. Then you drive across the border into the U.S. where there is another Walmart that sells the same items. You take your newly purchased item to the customer service desk and return it for a refund of $900 USD. Now you’ve received a fair exchange on your money and sidestepped the bank’s $30 fee.

Obviously you can’t do this at a real store, but you can do something similar in your brokerage account.  Because some stocks and ETFs trade in both Canadian and U.S. dollars, you can buy them in one currency and sell them in the other. This transaction isn’t free—you’ll typically pay two trading commissions and lose a little on the bid-ask spreads—and it’s tricky to pull off at some brokerages. But once you master Norbert’s gambit you can use it to save hundreds, even thousands of dollars in currency exchange costs.

Using An Interlisted Stock

The traditional way to do Norbert’s gambit is to buy and sell a stock listed in both Canada and the U.S. There are many to choose from—all of Canada’s largest public companies are interlisted—but it’s safest to choose a highly liquid stock with a fairly high share price. This ensures the bid-ask spread will be tight, which keeps your transaction cost as low as possible.

Let’s say you decide to use Royal Bank of Canada, which trades with the ticker RY on both the Toronto and New York Stock Exchanges. We’ll assume the Canadian dollar is worth $0.90 USD, so when Royal Bank is trading at $70 CAD in Toronto it will be priced at $63 USD in New York. Here’s how you’d use Norbert’s gambit to convert $35,000 CAD:

1. Use your Canadian dollars to buy 500 shares of Royal Bank on the TSX at $70 CAD per share for a total of $35,000.

2. “Journal” the shares from the Canadian-dollar side of your account to the U.S.-dollar side. (At some brokerages, this step is not necessary.)

3. Place an order to sell 500 shares of Royal Bank on the NYSE at $63 USD per share. When this trade settles, you’ll have $31,500 USD and will have successfully converted your currency at a rate very close to the spot rate (that is, with no spread).

In this example, we assumed commissions and bidask spreads were zero, which of course is not the case in the real world. But these costs are likely to be very small: online trading commissions are commonly $10 or less, and RY generally trades with a bid-ask spread of one cent, which would add another $5 or so to the round trip transaction. That’s a total cost of about $25 on a $35,000 conversion, compared with $525 if you’d exchanged your currency with a 3% spread.

The ETF Alternative

Our Royal Bank example also assumes you can buy the stock in one currency and immediately sell it in the other. But not every brokerage allows you to do this: in some cases you need to phone a customer service representative and ask them to journal the shares from one side of the account to the other. Some brokerages even require you to wait three business days for the first trade to settle before you can journal and sell the shares. A lot can happen in that intervening period: if Royal Bank’s stock were to plunge, you could end up losing a lot more than you saved on the currency exchange.

In our opinion, a safer way to do Norbert’s gambit is with the Horizons U.S. Dollar Currency ETF. This ETF—which is equivalent to buying U.S. cash—is available in two versions. Both trade on the TSX, but the first, with the ticker symbol DLR, is bought and sold in Canadian dollars, while the second, DLR.U, trades in U.S. dollars. The two versions always trade close to $10 per share, and the price difference between them reflects the current exchange rate.

The advantage of using the Horizons ETF is that it eliminates the risk of loss as a result of a stock market move. The trade-off is the slightly higher cost: because of its low unit price, a one-cent bid-ask spread for DLR and DLR.U works out to a cost of about 0.2% on a round-trip transaction. That means a Norbert’s gambit for $35,000 would cost about $70, plus the two trade commissions.  That’s higher than it would be if you used an interlisted stock, but still dramatically lower than your brokerage’s normal rate.

We have successfully used Norbert’s gambit with our clients at all of the Big Five bank brokerages. Each of these has different policies, however, and it’s important to learn the specific steps necessary to use the technique at your brokerage. To help, we’ve prepared a series of white papers with step-by-step instructions which you can download for free by visiting and clicking “White Papers” on the home page. These papers focus on using Norbert’s gambit in an RRSP, but they also include instructions for non-registered accounts.

TRICKS OF THE TRADE: What To Watch For When Using Norbert’s Gambit

• Some brokerages—including TD Direct Investing and CIBC Investor’s Edge—do not allow you to hold USD cash in registered accounts such as RRSPs and TFSAs. You can still do Norbert’s gambit in these accounts, but it’s more complicated. Visit and download our white papers for detailed instructions.

• If you do Norbert’s gambit with an interlisted stock such as Royal Bank, you’ll be making one trade on the Toronto Stock Exchange and another on the New York Stock Exchange. However, if you use the Horizons U.S. Dollar Currency ETF, both versions trade on the TSX. Don’t make the common mistake of looking for DLR.U on a U.S. exchange.

• We have generally found customer service reps and traders helpful if we need to contact them while executing Norbert’s gambit. But occasionally we encounter reps who don’t understand what we’re trying to do, and even some who say it’s not possible. You may have to ask to speak with a different trader until you find one who gets it.

• Don’t be alarmed if your account looks odd after a Norbert’s gambit: some brokerages show both long and short positions in the security you bought and sold. This should correct itself by the settlement date, but monitor the account to make sure the trades do not settle out of order, which would result in interest charges.


Dan Bortolotti,

Author of The MoneySense Guide to the Perfect Portfolio and creator of the Canadian Couch Potato blog (

Justin Bender,

Portfolio Manager at PWL Capital in Toronto (  Together they offer a flat-fee service for DIY index investors across Canada.