Currency conversion fees can easily eat into your investment returns with brokerages taking a spread around 1.5% – 2.5%. However, investors can utilize Norbert’s Gambit as a sneaky workaround to keep brokerages hands out of your pockets. The technique is completely legitimate and takes advantage of investors’ ability to sell their shares in the market of their choosing.
This article will teach investors the logic and steps on how to use Norbert’s Gambit for their own investment purposes to keep their currency conversion fees next to nothing!
Foreign Exchange Fees are Critically Important
For investors with accounts in more than one currency, foreign exchange fees can quickly add up. With annual historic equity markets returning around 10%, currency conversion costs of 1.5% – 2.5% are very significant.
Wise investors know to convert currencies once and leave the money in the account forever (or at least until retirement!), but the most knowledgeable investors have heard of a technique called Norbert’s Gambit, which makes currency conversion costs practically nothing.
The only expenses to carrying out Norbert’s Gambit are two trade commissions on the buy and sell order which will be discussed when go over the steps later. As long as the dollar amount being transferred is sufficiently large, the net cost will be well below the normal currency conversion spread charged by your broker.
While many U.S. investors might not be faced with this problem given most companies, including major foreign companies, can be traded on U.S. stock exchanges or in over-the-counter markets in the U.S., the need for more than one currency account is quite normal for investors in other countries such as Australia, Canada, India, and the United Kingdom to name a few.
The Origins and Logic of Norbert’s Gambit
The technique was developed by and named after Norbert Schlenker while he was a financial advisor in British Columbia, Canada. In the quest to save his clients money on their currency conversions, Norbert realized that his clients held securities in their Canadian dollar ($CAD) accounts that were also traded in the U.S. markets and could be sold there for U.S. dollars ($USD).
Not only could the technique be used for investment purposes but it could also be used for his client’s personal lives. Once the portfolio holding is sold for $USD, the funds can be withdrawn directly into their $USD bank accounts to support cash needs while vacationing down south for the winter months.
The logic behind Norbert’s Gambit lays in the fact that an investor’s ownership interest is an asset that is versatile. In the olden days, companies use to grant stock certificates to investors (and some still do so for a small fee as a fun gimmick!) and these shares could be taken to different markets or countries and traded in various venues. All investors are doing with Norbert’s Gambit is choosing to sell their shares in a different market and settle in a different currency.
How to Perform Norbert’s Gambit?
The steps to perform Norbert’s Gambit are quite simple and after doing it a couple of times, it will become second nature for investors. The security chosen to complete Norbert’s Gambit should be highly liquid and not very volatile in order to minimize the chance of price movement between the minute or two in time it takes to buy the security in one account and sell it in the other. As long as the security is highly liquid, no arbitrage opportunities will exist due to currency effects between the two securities in different markets.
- Buy the security in the account and currency where you currently have the money.
- Sell (ie. short) the same security and number of shares in the account and currency where you want the money. This short sale will immediately give you funds in that account.
- Ask your brokerage to “journal” the security you bought in step one into the other currency account from step two. One this journal is complete in a couple of business days, the short position in the second account will be covered and the net holdings will show as zero.
The biggest effort in performing Norbert’s Gambit comes from contacting your brokerage and asking them to journal over your shares between the two accounts. This can be done over the phone, by live web chat, or even through email depending on which communication options your brokerage provides. Most brokerages in my home country of Canada are familiar with the practice now and representatives should not give you any fuss.
Authors Application: On the Toronto Stock Exchange, there is an ETF which can be bought in $CAD with the underlying holdings of the ETF only being $USD that is called Horizons U.S. Dollar Currency ETF (DLR.TO). The version priced in $CAD can be journaled over to the U.S. dollar version (DLR-U.to) and settled in $USD. As my brokerage gives free ETF purchases, I often use DLR to perform Norbert’s Gambit instead of actual company shares. However, as DLR only has around $6.5 million of average daily liquidity, I have noticed the pricing between the $CAD and $USD version can sometimes move slightly away from the exchange rate.
What Securities Work with Norbert’s Gambit
The practice of Norbert’s Gambit works with any dual-listed security. Between Canada and U.S. stock exchanges there are dozens of such dual-listed securities including Royal Bank of Canada, Bell Canada, and Canadian National Railway to name a few.
While the practice of using Norbert’s Gambit is slowly becoming popular in Canada with intelligent investors, I am not able to find any mention on it of it being used by investors in other countries.
I would be interested to hear from some of eInvesting for Beginners readers in other countries (such as Australia, India, and the United Kingdom) if they are able to use the procedure with securities listed in their home country and also U.S. stock markets (such as HSBC, Unilever, Rio Tinto, ICICI Bank, or Tata Motors).
The Takeaway for Investors on Norbert’s Gambit
Currency conversion fees can easily eat into your investment returns and using Norbert’s Gambit is a great way to keep your brokerage’s hand out of your pocket! The practice is quickly becoming popular among intelligent investors in Canada and brokerages should not give you any fuss when you request your shares to be “journaled” to another exchange in order to be settled in a different currency. Utilize your privileges as an investor and start using Norbert’s Gambit for your currency conversion needs!