Norbert's Gambit

What is Norbert’s Gambit?

It is a strategy first proposed by Norbert Schlenker who, in the early 1990s, realized he was losing a ton of money via the classic traditional foreign exchange methods.

Today a typical currency conversion fee at the Big 6 Banks is around 1.5% which may not sound like a lot at first. Fast-forward down the road when you’re portfolio is in the millions and you are losing $15k per million converted. That’s a ton of money, likely more than your first few years of contributions. (It certainly was for me)

How does it work?

The basic principle is to buy a stock or ETF that trades both on the TSX and one of the American Exchanges. You ideally want something that is very stable to not risk price fluctuations. In the past people would use something like Royal Bank stock (RY) for this purpose. Today we have DLR and DLR.U by Global X that give us a nice stable ETF to do this with.

Using DLR and DLR.U we can:

• Buy DLR in our dual currency account
• Wait 2 days for it to settle
• Journal DLR to DLR.U
• Sell DLR.U to receive USD
• Buy US securities at our leisure

Are there any drawbacks?

• If your brokerage has a commission fee for each trade you are adding 2 additional fees
  • This may be greater than the cost of the currency conversion
• If the stock your buying moves up quickly before your funds settle you would be out that difference
  • (This is also true in the opposite direction of the stock goes down)

Examples with a $9.99 commission

Amount to Exchange	Traditional Exchange @ 1.5%	Norbert’s Gambit 1.4 CAD per USD
$1000	$15 / 1.5%	$23.98 / 2.4%
$1600	$24 / 1.5%	$23.98 / 2.4%
$2000	$30 / 1.5%	$23.98 / 1.2%
$5000	$75 / 1.5%	$23.98 / 0.5%
$10,000	$150 / 1.5%	$23.98 / 0.24%

• As you can see in the table above the break even for using Norbert’s Gambit over paying the currency conversion fee is at th $1600 dollar amount assuming a 1.5% added exchange rate and an additional $9.99 CAD and $9.99 USD commission
• I have also noticed that depending on account type the exchange fee / rate changes. My RRSP gets a better rate than my checking account to my USD checking account.
• One final point to think about is the bid ask spread of the security that you are using. If you are using DLR the spread is rarely more than a dollar on each side so to play it safe you should likely factor in a 2cent loss per share.
  • I simply look at it this way. If I’m transferring more than $2,000 to USD I reach for Norbert’s gambit.
    • Unfortunately I didn’t always know about this and when I first heard about it I was hesitant to try

Looking at the brokerages

• Wealthsimple currently does not offer Journalling and thus no N.G.
• Questrade does support it and the commissions are generally lower than above meaning the breakeven is likely well below $1600
• The big 6 financial institutions all offer the ability to Journal and thus the ability to perform N.G.
  • Some are in app, some require a phone call, and some have unique fees such as buy passing the waiting period for a fee

My History of Currency Conversions (RRSP ONLY)

• I’ve converted CAD to USD a total of 28 times
  • I have only used Norbert’s Gambit 3 of those times
  • A couple of those transactions were for less than $50
• I’ve converted USD back to CAD a total of 5 times
  • One of those times would have benefited from Norbert’s Gambit but that was during my timid phase

Summary

Norbert’s Gambit is one of many tools to have in your investing toolbox. It sounds a lot more complicated than it actually is. If you are going to try it please use DLR and DLR.U or similar to cut down on loss from bid ask spread. At the very least I aim to use it a few times a year whenever I’m buying more heavily in USD accounts.