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. Even Canadian 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 comprehensive survey 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 a cross-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!