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A Cheaper Way to Buy U.S. Dollars

September 21, 2012 - 20 comments

Some of the lowest-cost ETFs trade on the U.S. stock exchange, forcing cost-conscious Canadian investors to bite the bullet and convert their loonies to dollars (most likely at a less than optimal rate).  There are now ETFs and trading strategies available that can help mitigate a portion of the hidden costs of converting Canadian dollars to U.S. dollars. 

The Tools

The Horizons U.S. Dollar Currency ETF (DLR) is an investment vehicle that holds cash and cash equivalents that are denominated in U.S. dollars.  It is traded on the TSX and priced and transacted in Canadian dollars. 

The Horizons U.S. Dollar Currency ETF (DLR.U) is the exact same investment vehicle as DLR.  It holds cash and cash equivalents that are denominated in U.S. dollars and also trades on the TSX.  The only difference is that it is priced and transacted in U.S. dollars.

Both DLR and DLR.U have the same International Securities Identification Numbers (ISIN), which is basically the “DNA” of the security.  The first two characters “CA” are the country code, the next nine characters “44049C104” are the Committee on Uniform Securities Identification Procedures (CUSIP) number, and the final character “1” is the check digit.


The process of using these two identical securities to convert Canadian dollars to U.S. dollars more cost-efficiently may seem like a daunting task at first, but once you get the hang of it, it’s a cinch.


An investor has $58,140 Canadian dollars that they would like to convert to U.S. dollars in order to purchase the Vanguard Total Stock Market ETF (VTI) within their brokerage account.  Their foreign exchange department has just offered them $1.0161 U.S. dollars for each of their Canadian dollars (for a total of $59,076 USD). The investor is not entirely convinced that this is such a good deal for them, and proceeds to use DLR and DLR.U to get a better currency conversion rate.  The four steps they would need to take are listed below (*Remember to always use limit orders when placing ETF trades):

Step 1:  Buy 6,000 shares of DLR in the Canadian Dollar Account

Since DLR is priced and transacted in Canadian dollars, there will be no forced currency conversion for the purchase of 6,000 shares of DLR on the TSX.  If the quoted ask price is $9.69 per share, the total cost in Canadian dollars (excluding commissions) would be $58,140.

  • Cost = 6,000 shares × $9.69 per share = $58,140 CAD

Step 2:  Sell 6,000 shares of DLR.U in the U.S. dollar account

It may appear as though you are selling a security you don’t have, but remember that DLR and DLR.U are identical securities – the only difference is the currency that their price is quoted and transacted in.  It is extremely important that you  sell 6,000 shares of DLR.U in your U.S. dollar account (to avoid unintentional currency conversions).  DLR.U will show as a short position (i.e. negative 6,000 shares) until the dust settles (approx. trade date + 4 days).  If the quoted bid price is $9.91 per share, you should end up with cash proceeds of $59,460 USD (excluding commissions).

  • Proceeds = (6,000 shares × $9.91) = $59,460 USD

By using this method, the investor ends up with $384 additional U.S. dollars in their account ($59,460 - $59,076).

Step 3:  Buy 800 shares of VTI in the U.S. dollar account

Since the proceeds from the DLR.U sale will settle on T+3, and the purchase of VTI will also settle on T+3, the trade can be initiated immediately.  If the quoted ask price for VTI is $74.325 per share, the total cost would be $59,460 USD (excluding commissions).

  • Cost = 800 shares × $74.325 per share = $59,460 USD

Step 4 (T+3):  Journal 6,000 shares of DLR in the Canadian dollar account to the U.S. dollar account

Recall that we sold 6,000 shares of DLR.U that the buyer now wants delivered to them – although we don’t own DLR.U, we have something equally as good!  We “journal” 6,000 shares of DLR from the Canadian dollar account to the U.S. dollar account in order to settle the sale of DLR.U, keeping the account in good order.

Perhaps as the Canadian ETF market develops, there will be equally comparable products both here and south of the border.  Until that time, using DLR and DLR.U is one potential method for lessening the burden of currency conversion costs.  For a more intuitive explanation of the process, please refer to the flow chart below.


By: Justin Bender with 20 comments.
Filed under: Currency, ETF, Strategy
  12/04/2016 3:24:48 PM
Justin Bender
@LauraH - so glad to hear! Please ensure that RBC does not charge you debit interest in the accounts over the next couple of months (if they do, just call them up and have them reverse it).
  12/04/2016 3:11:12 PM
It worked! I'm so pleased. Thank you very much for all your help.
  08/04/2016 9:57:53 AM
Justin Bender
@LauraH - when you place the buy order a few cents above the ask, it should fill right away. Place the sell order on the other side of the account immediately (no need to wait T+3). Before you finish up, just make sure both trades have been accepted.
  08/04/2016 9:02:22 AM
Laura H
Justin, thanks so much. One point of clarification - do I need to wait until the buy order goes through and then place the sell order? I assume that the longer I wait, the greater the risk the prices might diverge, is that correct? You can tell I don't do any active trading!
  07/04/2016 10:44:30 AM
Justin Bender
@LauraH - now I get it (I thought you were using DLR + DLR.U, which tend not to fluctuate much in price). If you are using an interlisted stock, place the buy limit order about 5 cents above the ask (USD-side of the account), and the sell limit order about 5 cents below the bid (CAD-side of the account). This will still allow you to receive the better price, but it should ensure that the order goes through if the stock moves up or down by a few cents as you are placing the trade (the limit order simply provides a bit of safety in case markets behave badly - such as during the flash crash). When you are obtaining the quotes for RY, double-check that you are looking at the correct market (i.e. NYSE vs. TSX).

Please let me know if this works.
  06/04/2016 9:32:26 PM
Apologies, I didn't explain very well. I'm trying to convert U.S $ to Can $. So I used my U.S. cash to buy shares of RY on the NYSE at the current ask price. Then I entered the sell order on the Can side at the current bid price, which was rejected. In both cases I used a limit order. The RBC rep told me the sell was rejected because the buy had not gone through and that if I wanted it to go through more quickly I should use a market order. I like the idea of the safety factor behind using the limit orders but am confused about the timing. Everything I've read about this process indicates that the two orders should be done one right after the other. Have I got that wrong? Thanks for your help, I appreciate it.
  06/04/2016 12:00:27 PM
Justin Bender
@LauraH - I'm not sure what you mean by "using the ask price meant my buy didn't go through right away". If you were buying a certain number of shares of DLR at the current ask price in the CAD account, it should go through right away (as long as there are enough shares available at that price).
  06/04/2016 11:09:01 AM
I just tried to do the Gambit at RBC, using your white paper advice about the ask and bid prices. However, using the ask price meant the buy didn't go through right away and my sell was therefore rejected. I got nervous about this and cancelled my buy order. Can you suggest a reasonable time to wait between the buy and the sell?
  30/01/2013 11:58:23 AM
Thanks for advice on DLR foreign exchange. As you said RBC DI practice accounts don't work, but phone advice said it would in real life, and it did.
Not sure how much it saved, as RBC offered 70bps on $25K - $75K conversion. On yesterday's rate of 1.0021, or current 1.0023 that makes cost either 1.0091 or 1.0093 through forex buy.
Bought today 5700 DLR @ 10.05 (ask) + 9.95 commission for $57,294.95 total cost, and sold DLR.U on US side of account for 9.98 (bid) + 9.95 getting $56,876.05 USD. I figure that's 1.007365 for net gain of 17.3 or 19.3 bps. Thought I'd save more because commission is a lower fraction on $50K, but maybe lower forex charge for this size offsets a lot of this "savings". Didn't proceed yet with the intended ETF buy on US side as market price gained a lot overnight, and may wait to see if EFA fluctuates down as it's swinging a lot daily.
Technique works great, and same-day transactions makes for zero market risk over two settlements (if journalling was required).
Please confirm if my math was correct, or did I gain more than I thought?
  18/01/2013 3:09:45 PM
Justin Bender
@JF - correctamundo!
  18/01/2013 12:28:39 PM
Thanks for clarifying this Justin. I do have one question, however. When entering the sell of DLR.U in RBC DI, I should select the US dollar side of my RRSP account but I should select "CDN" for the market since DLR.U is traded on the TSX. Is this correct?
  08/01/2013 2:02:31 PM
Justin Bender
@Davie215 - If you're with RBC DI, you can buy DLR on the Canadian dollar side of your RRSP, sell DLR.U on the US dollar side of your RRSP, and buy your US-listed ETF on the US dollar side of your RRSP (all in the same day). There is no need to call RBC to "journal" DLR over from the Canadian dollar side of the RRSP to the US dollar side of the RRSP on T+3 (in other words, RBC DI is the best IMO for using this strategy)
  08/01/2013 10:16:38 AM
For the DLR switch in a registered account -- does this mean you cannot short the DLR.U and hence must wait for the initial purchase to settle? What would changein the detailed timetable you've given under such conditions? We use RBC DI and a previous call led us to believe that journalling only done after settlement date, so subsequent purchase of ultimate ETF would then bed elayed until the DLR.U alsosettled. Seems like there is a currency risk factor while waiting for the journalling process, then a market risk in waiting for settlement of both sides of DLR/DLR.U?
  14/12/2012 9:35:26 AM
Justin Bender
@Jack - you would need to calculate the proceeds of disposition on the USD sale of DLR.U using the exchange rate on the settlement date - this could cause either a capital gain or loss on the security. I prefer using RBC Direct Investing for this strategy - you are able to buy DLR, sell DLR.U, and buy a US-listed ETF...all on the same day, and without any need to journal securities or call RBC directly.
  13/12/2012 3:26:10 PM
Justin Bender
@Philippe - you need to check with your particular brokerage to determine the exact procedure. From my experience, most will make you wait until the settlement date to journal (i.e. T +3)
  13/12/2012 2:59:22 PM
Thanks for your very clear explanation of this procedure. Just curious about the tax implications if you cannot short DLR.U and have to wait 3 days for settlement, then journal, then sell DLR.U. Particularly with an appreciating USD. Would you be on the hook for a capital gain? The question is asked well here with a 2% shift in exchange rate - toward the end of the comments by PM on November 5, 2011 at 8:56 am , unfortunately there was no answer. Assuming there is a 2 cent spread on bid/ask in your example the initial exchange rate would be 9.68/9.92. A 2% appreciation in the USD would cause a 1042 CAD capital gain (if one is not using an average annual exchange rate for tax purposes). Is there some rule that would allow an exemption for something that is clearly not a real gain? The exchange rate should be locked in when you buy DLR (as long as fees don't eat into DLR.U by the time you sell it).
  05/12/2012 12:30:47 PM
Philippe V.
When journaling the security, do you have to wait 3 days before initiating the process? Or do you initiate the process after selling DLR.U on the same day and it will take three days for journaling to happen?
  30/10/2012 10:53:07 PM
First, you need more than $100 to open account, (most firms rurqiee $500)and you need to be at least 18 years of age to open a brokerage account.Before you enter into any transaction, you should first know what you’re doing, why you are doing it and how to do it and the rules relating to what you are doing.Before you invest in any security, the first investment you should make is in yourself, and the best investment you can make is by educating yourself.
  30/09/2012 12:36:43 PM
Justin Bender
@Al - A "journal" is simply a transfer of a security from one account to another account. The procedure can be different for each brokerage - you should speak to a representative at your actual brokerage to determine the necessary steps.
  27/09/2012 6:39:15 PM
What does journaling mean and how to do it

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