My stock market model suggested selling gold (a Canadian-listed ETF) and buying US small caps. Not surprisingly, there is no Canadian-listed ETF to buy US small caps. IWM is a great choice, and it’s listed on the NASDAQ, so in my RRSP I sold IGT and bought IWM.

There are two problems with this trade that are both the result of currency conversion. The first is leakage. When I sold IGT, I paid a commission of $6.88, and when I bought IWM, I paid another commission of $6.88. In total, the round-trip cost was $13.76. That’s a known cost, and it represents just 0.06% of the value of the trade, which is manageable. The currency conversion, however, is an unknown cost. It’s usually quoted as a spread, and it’s not available anywhere on the website of the brokerage. I think it’s safe to assume, however, that it’s in the range of 1% – 2%. When I sell the position, the currency conversion will again take place automatically, since it’s held in my Cdn$ RRSP.

The second problem is that the currency conversion adds another level of complexity to the trade. It’s not difficult, but it’s easy to forget. For example, I sold 1500 shares IGT, which I multiplied by the price (about $16.00) to get the proceeds of my trade. I then subtract the two commissions ($13.76) and add in the cash balance (if I want to include that). This is the amount of cash I can use to buy the new shares. Normally, I would divide that by the share price to find out how many shares to buy. When I pressed the Execute button, though, I got a warning saying there wasn’t enough cash available and another warning about the currency conversion. That reminded me to go back, take my “amount of cash” and divide it by whatever I guessed the exchange rate is (from Google Finance at about 98.5 cents US per Cdn dollar). I edited my trade to buy 10 fewer shares of IWM and the trade went through without warning about insufficient cash.

Of these two problems, the leakage is the much bigger issue. My plan to address this is to sell my RRSP holding, but not buy the US$ stock in my RRSP. Instead, I’ll hold cash in the RRSP and buy the US stock in my US$ margin account. This will balance properly for the portfolio, but it will also avoid the currency cost, instead costing only interest (at the US rate). Luckily, it can be margined against holdings in my Cdn$ margin account, where there is plenty of margin room.

Currency conversion

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