How to get a bigger bang for your (U.S.) buck

Four reasons to buy American right now:

1. The U.S. stock market is performing much better than Canada's.

2. Our high-flying dollar now buys you more than $1 in U.S. currency.

3. The U.S. stock market is not nearly as loaded with the commodities stocks that have fallen hard this week.

4. An increasing number of choices are emerging for investors who want to minimize the stiff foreign exchange fees that apply when buying U.S. securities for a registered account.

There are now four online brokerage firms that offer U.S.-dollar registered retirement plans, where you can hold U.S. cash and receive U.S.-dollar dividends without a forced conversion back to Canadian dollars. Another firm is offering registered investors a currency conversion rate without the usual markups, while virtually all others will "wash" your U.S. stock or ETF trades, meaning you'll only have to pay a single exchange fee, rather than paying for every transaction.

Investors with a non-registered account have it easy if they want to buy U.S. stocks or exchange-traded funds. They just need to set up a U.S.-dollar version of their account and fund it by converting Canadian dollars as required. After that, they can buy and sell stocks and receive dividends with full discretion about whether to keep everything in U.S. dollars or convert some money back to Canadian currency.

In registered retirement savings plans and registered retirement income funds, online brokers typically convert all U.S. cash into Canadian dollars. If you sell a stock or receive a dividend, the proceeds get converted automatically into Canadian dollars, at a high cost. Forex charges are a profit centre for brokers and they can add as much as 0.5 to 1.85 percentage points to the price that retail investors pay for their currency transactions.

With our dollar well above parity, you should be able to buy more than $1 (U.S.) with a Canadian dollar, even after these currency conversion fees are applied. Still, if you're investing through an online broker, you've clearly made a decision to keep costs as low as possible. Don't lower your standards with foreign exchange fees.

The convenience of a U.S.-dollar RRSP makes it the best option for investors who trade U.S. stocks in their registered plans. When you contribute money to your U.S.-dollar RRSP, you'll pay your broker's usual foreign exchange markup. From there on, you can transact in U.S. dollars exclusively. Sell a stock and keep the proceeds sitting in U.S. cash. Receive dividends and let them pile up as U.S. cash as well.

Questrade became the first online broker to offer U.S.-dollar RRSPs a little more than three years ago and it has since been joined by Qtrade Investor, Virtual Brokers and, alone among the bank-owned firms, RBC Direct Investing.

BMO InvestorLine says U.S.-dollar RRSPs are one of its top priorities, and that these accounts will be available in the fall.

Questrade and RBC Direct Investing charge no fees for their U.S.-dollar RRSPs, while Qtrade and Virtual Brokers charge $50 (U.S.) per year. Scotia iTrade charges $30 (Canadian) per quarter for its U.S.-Friendly RRSP, which offers a different spin on helping investors with registered plans avoid foreign exchange fees.

You can't hold U.S. cash in the U.S.-Friendly RRSP (tax-free savings accounts and registered education savings plans are included, too), but you get the offsetting benefit of having your money converted at the Scotia Capital mid-rate, which is a fancy term for the best institutional rate that iTrade can get its hands on. Mid-rate means a midpoint between wholesale buy and sell rates.

Let's say you wanted to use $10,000 in Canadian dollars to buy U.S. stocks in your registered plan early this week. Your purchasing power in the U.S.-Friendly RRSP would have been $10,532 (U.S.). In iTrade's conventional RRSP, an option if you only rarely trade U.S. stocks, you would have had $10,352 to invest.

The appeal of the U.S.-Friendly RRSP is obviously dependent on whether the savings in currency conversion fees outweighs the $30 per quarter fee. Note that all cash in the U.S.-Friendly account is automatically converted back to Canadian dollars. Scotia says a compensating benefit is that you get the preferential exchange rate, and the comfort of knowing that you're not exposed to fluctuations in the Canada-U.S. exchange rate.

One of the biggest issues when investing in U.S. stocks through a registered account is how foreign exchange is handled when you do multiple trades in a single day. Virtually all firms that don't have U.S.-dollar RRSPs will wash your trades.

This is important because brokers have separate exchange rates for buy and sell transactions. If they applied these differing rates to a series of buy and sell orders, the foreign exchange fees would be massive.

Generally, a broker doing a wash trade will peg your exchange rate according to whether you're doing more buying or more selling. The benefit of having a single rate applied to all transactions is that forex fees on buys and sells cancel each other out. The result is that clients pay fees only on the net amount of U.S. currency being converted back to Canadian funds after their trades are completed, or the net amount of Canadian dollars they're converting into U.S. dollars to pay for what they bought.

TD Waterhouse has done the most work to make wash trades easy for clients, which raises the question of why the firm didn't put all that effort into developing a U.S.-dollar RRSP. Regardless, while some firms require you to telephone a representative to request a wash trade, TD does it automatically.

TD's second option for washing trades is to let people with RRSP accounts sweep the proceeds of a sale of U.S. stocks directly into a U.S.-dollar money market fund without a currency conversion. Clients can set this process on automatic in their RRSP accounts, and they can arrange to redeem their U.S. money market fund holdings to cover purchases of U.S. stocks.

The practice of washing trades at other firms varies a lot, so check before buying. For example, you can use U.S.-dollar money market funds at CIBC Investor's Edge, but you have to arrange this by telephoning a representative by 4 p.m. ET on the day you make your trades.

If U.S. stocks keep outperforming and our dollar hangs tough, it's quite likely that investor interest in buying American in registered accounts will increase. Mind the foreign exchange fees if you jump on this trend. Next to stock market risk, they're the biggest threat to your investing success.

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Here are three ways online brokers have of helping clients limit the foreign exchange costs of trading U.S. stocks in their RRSPs and RRIFs.

1.) U.S.-dollar RRSPs: offered by Qtrade Investor, Questrade, Royal Bank Action Direct and Virtual Brokers.

2.) Wholesale rates on U.S.-dollar currency conversion: offered by Scotia iTrade.

3.) Wash trades: Virtually all firms offer this, but TD Waterhouse does it most conveniently.

TD Waterhouse prepared this example of how it would carry out a wash trade for a client placing multiple buy and sell orders of U.S. stocks in a registered plan over a single day. A U.S.-dollar money market fund is used here (US$ throughout).

The client places these sell orders:

The client places these buy orders:

TD Waterhouse automatically covers the net difference using the client's U.S. dollar money market fund:

Note: Stock trades take three business days to settle, while money market fund trades take a day; in this case, the stock trades were made on a Wednesday.

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