One of frustrations of being a well-diversified investor is the cost of changing Canadian dollars into U.S. currency.
Foreign exchange is a profit centre for online brokers and one of the biggest complaints readers bring to me about their firms. What can the everyday DIY investor do to reduce forex charges when using Canadian dollars to diversify with U.S.-listed stocks and ETFs?
To start, use a broker that lets you keep U.S. dollars in your TFSA, RRSP and RRIF accounts. The latest edition of my annual ranking of online brokers tells you which firms have U.S.-dollar versions of each of these three types of registered accounts. The benefit of these accounts is that your U.S.-dollar dividends stay in your account as U.S.-dollar cash instead of being automatically converted back to Canadian dollars. The proceeds from selling U.S. stocks stay in U.S. dollars in the same way.
Foreign exchange charges will still apply when you have Canadian dollars in your account converted to U.S. dollars. To see how brokers compare on forex, I asked each of them to report the cost in Canadian dollars of making a $15,000 purchase of U.S. stocks on the morning of Oct. 27, 2016. The accompanying chart shows that the average cost was $20,298 and that the differential between most and least expensive was significant but not striking. Note that high net worth individuals may qualify for better exchange rates.
Another way to contain foreign exchange costs is to buy TSX-listed exchange-traded funds that track U.S. indexes. Your money will be converted into U.S. dollars by your ETF firm at wholesale rates that should be better than what your broker offers.