Now that the loonie has gained a great deal of purchasing power against the U.S. dollar, many Canadians are looking to invest in U.S. securities. But most Canadian brokerages dont allow U.S. cash to be held in a self-administered RRSP — so every time a U.S. security is bought or sold in an RRSP, a currency conversion is required.
And the fees are fairly substantial compared to the commissions to trade stocks and other securities. They are noteworthy enough for investors who make just a few transactions a year but for active trader types, they can really chew up returns.
The fees are easy to overlook. They arent charged explicitly like trading commissions. They are charged through the bid-ask spread on the exchange rate, which historically averages 1.5% to 3% for orders $10,000 (U.S.) or less (as Im told by my online broker). A $10,000 (U.S.) order will thus cost $150 to $300 (U.S.) round trip, depending on the day the orders go through.
By comparison, online trading commissions are between $9.99 and $29.99 per trade, for a round-trip cost of $19.98 to $59.98. The currency-conversion fees are thus roughly three to ten times as great. Yet, I cannot find any mention of the currency fees on the website of my online broker.
The section on brokerage fees does not post a schedule of currency-conversion fees. And when I go to place an online order, the currency-conversion fee does not, as far as I can see, show up with the commission data on the order-summary screen (that appears just before the screen to submit the order).
The explanation seems to be that currency-commission fees cant be disclosed on the website because they change from day to day. So if you want to know the cost, you have to call in and get a quote (last week, I had to wait 5 to 10 minutes on the phone to get such account-related information).
But this rationale does not explain why the website cant post an average of thehistorical cost for currency conversions — on either its fee scheduleor on the order-summary screen along side the trading commission. Some disclosure of this nature would be better than nothing, in my opinion. Then people would be less likely to overlook thecost.
Avoiding currency-conversion fees
One of the brokers that currently allow U.S. cash balances in RRSPs is Questrade. RBC Direct recently announced that it will permit U.S. cash balances inside RRSPs, starting sometime in late May to July. Maybe the other brokerages will follow RBCs lead.
Some brokerages, notably TD Waterhouse, currently offer wash trades as a way to reduce fees paid. As mentioned on Canadian Capitalist, this technique involves purchasing a U.S. Money Market Fund to proxy a U.S. cash balance in the RRSP. Then, after buying the desired U.S. security, you call a day before the trade settles and request enough of the U.S. money market fund be sold to cover the trade. Later, when you sell the US stock, you call them one day before the trade settles to have them buy an amount of the US Money Market Fund equivalent to the trade proceeds.
Blogs & Comment
Buying U.S. securities: currency fees
By Larry MacDonald
Now that the loonie has gained a great deal of purchasing power against the U.S. dollar, many Canadians are looking to invest in U.S. securities. But most Canadian brokerages dont allow U.S. cash to be held in a self-administered RRSP — so every time a U.S. security is bought or sold in an RRSP, a currency conversion is required.
And the fees are fairly substantial compared to the commissions to trade stocks and other securities. They are noteworthy enough for investors who make just a few transactions a year but for active trader types, they can really chew up returns.
The fees are easy to overlook. They arent charged explicitly like trading commissions. They are charged through the bid-ask spread on the exchange rate, which historically averages 1.5% to 3% for orders $10,000 (U.S.) or less (as Im told by my online broker). A $10,000 (U.S.) order will thus cost $150 to $300 (U.S.) round trip, depending on the day the orders go through.
By comparison, online trading commissions are between $9.99 and $29.99 per trade, for a round-trip cost of $19.98 to $59.98. The currency-conversion fees are thus roughly three to ten times as great. Yet, I cannot find any mention of the currency fees on the website of my online broker.
The section on brokerage fees does not post a schedule of currency-conversion fees. And when I go to place an online order, the currency-conversion fee does not, as far as I can see, show up with the commission data on the order-summary screen (that appears just before the screen to submit the order).
The explanation seems to be that currency-commission fees cant be disclosed on the website because they change from day to day. So if you want to know the cost, you have to call in and get a quote (last week, I had to wait 5 to 10 minutes on the phone to get such account-related information).
But this rationale does not explain why the website cant post an average of thehistorical cost for currency conversions — on either its fee scheduleor on the order-summary screen along side the trading commission. Some disclosure of this nature would be better than nothing, in my opinion. Then people would be less likely to overlook thecost.
Avoiding currency-conversion fees
One of the brokers that currently allow U.S. cash balances in RRSPs is Questrade. RBC Direct recently announced that it will permit U.S. cash balances inside RRSPs, starting sometime in late May to July. Maybe the other brokerages will follow RBCs lead.
Some brokerages, notably TD Waterhouse, currently offer wash trades as a way to reduce fees paid. As mentioned on Canadian Capitalist, this technique involves purchasing a U.S. Money Market Fund to proxy a U.S. cash balance in the RRSP. Then, after buying the desired U.S. security, you call a day before the trade settles and request enough of the U.S. money market fund be sold to cover the trade. Later, when you sell the US stock, you call them one day before the trade settles to have them buy an amount of the US Money Market Fund equivalent to the trade proceeds.