Blogs & Comment

Buying U.S. securities: further reflections

To follow up on my previous posts on buying U.S. securities, lets explore a few more details relating to currency conversions.
U.S. dividends and interest
In a previous post, I looked at ways of avoiding currency-conversion fees when buying and selling U.S. securities in an RRSP. One way was to wash trades at a broker that allowed such trades, notably TD Waterhouse. But if the U.S. security pays dividends or interest, can they be washed too?
This doesnt seem to be a question the TD Waterhouse reps get too often. The first two times I asked, they were stumped. But on the third try, it was confirmed they cannot be washed.
It was also a challenge finding out if the currency-conversion fees on dividends would be higher due to the small lot size. At first, the rep said they couldnt say what the fees would be because the rate varies every day.
But I persisted and asked if they could at least give me a rough idea of what the conversion rate will be, on average, over time. Finally, I was told the currency spread historically averages 1.5% to 3%. So the rates are the same as for orders as large as $10,000.
Hopefully, RBC Direct and other brokers will soon start allowing investors to hold U.S. cash in their RRSPs. U.S. dividends and interest would then not have to be converted to Canadian dollars and bear currency fees. Otherwise, if you are getting a significant inflow of U.S. dividends over time, the costs can add up.
Not all U.S.-based ETFs provide exposure to the U.S. dollar
If you are looking to hold wealth in U.S.-dollar securities, watch out for buying U.S.-based ETFs that invest outside the U.S. Youll be exchanging your loonies for U.S. dollars while the ETF may be exchanging its U.S. dollars for foreign currencies. In short, the U.S. dollar washes out and you are left withexposure between the loonie and foreign currencies (although not fully if some foreign currencies are fixed to the U.S. dollar like the yuan).
Also, some U.S-based ETFs may have holdings that move in step with the U.S. dollar. A prime example is U.S.-based gold bullion ETFs. Given the inverse relationship between the U.S. dollar and gold, the Canadian owning a U.S.-based gold ETF would have gains in gold offset by declines in the U.S. dollar.
Wash trades and interest rates
A few years ago, you could get 3% to 4% interest on holding a U.S. money market mutual fund in an RRSP to do wash trades. But now the rates are almost zero. This would seem to provide more incentive to use another way of washing trades, which is to transfer the proceeds from selling a U.S. security into another U.S. security on the same day.