A Guide To Norbert’s Gambit

What Is Norbert’s Gambit?

Norbert’s Gambit is a method for Canadian investors to use a cheaper rate to exchange their Canadian dollars (CAD) into U.S. dollars (USD) to purchase U.S. equities.

This method is the alternative to the hefty currency conversion fees that brokerages charge.

These conversion fees vary, with some brokerages charging up to 3 percent on each transaction.

With Norbert’s Gambit, only regular commission fees are paid, saving potentially hundreds of dollars per transaction. 

Steps To Complete Norbert’s Gambit?

1. Fund your account with CAD

The first step is to have a brokerage account open that is funded with Canadian dollars.

Since this method still requires regular commission fees to be paid, Norbert’s Gambit is only worthwhile when you are converting larger amounts for money.

Since Norbert’s Gambit requires you first to buy a Canadian stock and then sell a U.S. stock,  you will have to pay commissions on two transactions.

Larger transactions make more sense for those trying to take advantage of this strategy because commissions are based on a flat fee instead of a percentage basis of the trade amount.

The commission fees can range from $1.00-$20.00 per transaction, depending on brokerage.

2. Purchase shares of DLR.TO

The second step is to purchase shares of a company that is listed in both CAD and USD.

An example of a stock to perform Norbert’s Gambit with is DLR.TO.

Decide how much money you wish to convert from CAD to USD and divide that number by the price of DLR.TO to determine how many shares to buy.

For example, if you want to convert $6,000 CAD to USD and DLR.TO was trading at $12 a share, then you would buy 500 shares. 

3. Journal shares to DLR.U.TO

After purchasing your shares, contact the customer support line for your brokerage and request that the shares be “journaled” over.

The customer service representative will then convert your DLR.TO shares (traded in CAD) into DLR.U.TO shares (traded in USD).

In general, it will take a few business days for the transaction to process.

After a short wait, your shares should be converted into DLR.U.TO.

To confirm, check your brokerage account and ensure your shares are now denominated in USD. 

4. Sell shares of DLR.U.TO

At this step, you should have shares in your account that are ready to be sold.

After selling these stocks that you have journaled over, you will see USD in your account balance.

You have successfully avoided paying currency conversion fees, and your USD is now ready to invest in any U.S. stock of your choosing. 

How Much Can I Save With Norbert’s Gambit?

To illustrate the benefits of Norbert’s Gambit, we can look at an individual with $10,000 CAD trying to convert into USD.

Assuming an average brokerage in Canada charges a conversion fee of 2%, an individual not using Norbert’s Gambit would be paying $200 to convert their CAD into USD.

In comparison, assuming an average brokerage charges $4.99 per trade, an individual using Norberts Gambit would be paying $9.98 in transaction fees (two transactions, one buying and then one selling).

Using Norbert’s Gambit would save this individual over $190!

Guy performing USD CAD Norbert's Gambit

Risks of Using Norbert’s Gambit

  • Consider the time it will take to complete the transaction. As the journaling over of shares needs to be done through the customer service team, conversion will usually take 1 to 2 business days but sometimes even longer. After that, selling and settling will take another 2 business days. Having money locked up means you will not be able to use it until the transaction is complete.
  • The lock-up of funds during the journaling and settling process also open you up to the risk of currency fluctuations. In those couple of days, exchange rates could fluctuate and lead to less USD in your account than anticipated when you started the process. Keep in mind, you lock in the exchange rate when you purchase DLR.TO, so currency fluctuation risk is not a product of norbert’s gambit, it exists regardless of which conversion method you use.
  • One last thing to consider is what type of account Norbert’s Gambit is being used in. In Canada, different account types have different rules regarding holding U.S. stocks. For RRSP accounts, there are no concerns as U.S. withholding taxes do not apply. This is because the U.S. government views RRSPs as tax-deferred registered accounts. However, this is not the case with TFSAs and the U.S. government does not recognize the accounts. Any dividends received from U.S. stocks held in a TFSA are subject to taxes. If individuals are thinking about using Norbert’s Gambit in their TFSAs, these taxes should be factored into calculating whether or not this method is worthwhile.

Don’t forget!

Exchange rates are constantly changing. To maximize the amount of savings when using  Norbert’s gambit, ensure you keep an eye on exchange rates when you’re journaling over and selling your shares.

Frequently Asked Questions

  • Is Norbert’s gambit legal?
  • Why is it called Norbert’s gambit?

I have been investing for half a decade, using the perspectives gained from my work experience in the private, public, and non-profit sectors to shape my investment outlook. I have a specific interest in the potential of emerging disruptive technologies and their impact on the future.