Building Wealth And Being Happy

A Practical Guide To Financial Independence

Norbit’s Gambit – An Investment Fee Lowering Technique

In Building Wealth And Being Happy: A Practical Guide To Financial Independence, we discussed how even the smallest of investment fees can have a large, expensive impact on your portfolio.

Management expense ratios (MER), made up of both operational and administrative fees, are even higher in Canada than they are south of the border. For this reason, many Canadians who are striving for fee-optimal portfolios use a strategy called Norbit’s Gambit to get US-listed exchange traded funds (ETFs) into their portfolio without costly currency conversions.

Some companies have stocks that are listed on both the Toronto Stock Exchange (TSX) and New York Stock Exchange (NYSE).  For instance, the Vanguard Total Stock Market ETF includes nearly every publicly listed company in the US and trades on the NYSE (in US dollars, USD) with a stock ticker of VTI. There is a Canadian equivalent called VUN that trades on the TSX in Canadian dollars (CAD) but it is merely a ‘wrapper’. VUN’s only holding is VTI. VUN is typically easier for Canadians to buy because it’s listed in Canadian dollars and you don’t have to open a US brokerage account to buy it.

But with that extra layer—the wrapper—comes extra fees and potentially extra withholding taxes.  The fees of VUN are low—0.15% compared to 0.05% of VTI—but some people will want to go to great lengths to find the cheapest, optimized portfolio.  Exchanging your Canadian dollars to American dollars can be expensive if you do it at the mall or at the bank and Norbit’s gambit is a way around that cost.

All you need to start is taxable account, in both USD and CAD, with a brokerage that is willing to play ball with you. The most user-friendly product is Horizon’s US Dollar ETF (DLR) which trades on both the TSX and NYSE.  All you have to do is follow these steps:

  1. Buy DLR on the TSX
  2. Get your brokerage to “journal it over” to the DLR that trades on the NYSE
  3. Sell that DLR on the NYSE
  4. Buy VTI (or your US-listed fund of choice) with your new American dollars

Another way to do this involves wash sales and short sales, but the journal over method is probably the easiest for most people.  The cost to the investor here is the bid-ask spread and the commission from buying and selling but those costs are still significantly cheaper than what you would pay for a straightforward currency exchange.

This isn’t something you’ll want to be doing every pay day; it can get tiring. It might make sense to do it when you re-balance, say once or twice a year, if it’s a part of your strategy. Also, keep in mind that conventional wisdom is not to bother with this technique for amounts less than $50,000 or so. For lesser amounts, the benefits are simply not that large and VUN (or other Canadian listed ETFS) are good enough.

Even then, most people probably won’t lose sleep over .1% of MER. But if you’re a Canadian in search of the lowest fees, this is a must use strategy.

Categories: Canada, investing, personal finance

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