moneyrelations :: Aug.14.2007
I’ve been doing a lot of reading about buying US securities which I plan to hold in both RRSP and non-RRSP accounts. I’ve laid the foundation in that I have set up the accounts. There is one outstanding issue… I have no US money.
Over at the Financial Web Ring, I read something called “Norbert’s Gambit” which can save you a lot on foreign exchange fees. To summarize this Gambit, you need to have a Canadian and US account with your broker. You also need to find an interlisted stock on the Canadian and US stock exchange. You buy X amount of the stock on the Canadian exchange. You sell X amount of the same stock on the US stock exchange. You phone your broker to ask them to journal the stock from your Canadian account to the American account. You have just converted your Canadian money to American money. You can move up to $100,000 CDN using this method.
Okay, so I’m thinking why would I want to go through all this trouble. I made sample calculations and I think this is how it goes:
I buy 100 shares of Magna International on the TSE for $92.70.
100 * 92.70 = $9270 CDN
I sell 100 shares on the NYSE at $88.41.
100 * 88.41 = $8841 US
I phone the broker to journal the shares. I have just converted $9270 CDN to $8841 US not calculating the trading fees.
At the time of writing this post, the foreign exchange rate with my broker is 1.0727 %. Using this rate, $9270 CDN would have bought $8641.75 US. That’s a difference of $199.25 US (8841 – 8641.75). I’m sure if you’re a “very good customer” with the bank, you can probably get a better exchange rate, but this form of arbitrage is certainly intriguing if you can find a liquid interlisted stock that will give you a closer nominal exchange rate.
I’m with TD Waterhouse and the implication of this is that I now have the US dollars to buy the money market fund TDB166 in my taxable account and contribute in kind to my RRSP and have the benefits of the wash trades as described by the Canadian Capitalist. This is all in an effort to reduce those pesky conversion fees. Be also aware of distribution dates of your US dividends as you can wash these well.
I’m theorizing and I reassemble this information as something to try. If I’m wrong in my assumptions please let me know before I do anything stupid! But honestly, I’m not comfortable enough to do this yet as this works best with large amounts of money. People have encountered problems with journaling due to incompetent phone representatives. The websites I’ve mentioned offer much more than what I have explained so please check out the threads! Do your own due diligence.