There are many ways for Canadian investors to gain exposure to Canadian and U.S. dollar exchange rate movements such as investing in domestic and foreign securities, as well as buying property on either side of the border. However, the vast majority of these transactions require an expensive currency conversion, where a bank or foreign exchange company will likely charge a significant commission as a part of the transaction. Typically, on currency exchanges of less than $10,000 dollars, non-institutional rates apply, which are less favourable.
DLR: Better Tools for Capturing Currency Movements
Horizons ETFs created the Horizons US Dollar Currency ETF (“DLR”) to make investing in currency movements simpler and more economical.
DLR can be used as a tool to be “long” or “bullish” on the U.S. dollar without undergoing an expensive conversion process; or if U.S. dollars are required, it can be used as an easy and efficient way to avoid the high commissions charged on converting the loonie to the greenback.
The Horizons US Dollar Currency ETF
DLR, listed on the TSX, seeks to reflect the price, in Canadian dollars, of the U.S. dollar, net of expenses, by investing primarily in U.S. cash and cash equivalents. The U.S.-dollar-denominated version of this ETF, (“DLR.U”) has the same investment objective but is priced and transacted in U.S. dollars and reflects the current exchange rate. When the U.S. dollar appreciates relative to the Canadian dollar (i.e. the U.S. dollar/Canadian dollar exchange rate increases), the value of DLR is expected to increase proportionately. Conversely, when the U.S. dollar depreciates against the Canadian dollar (i.e. the U.S. dollar/Canadian dollar exchange rate decreases), the value of DLR is expected to decrease proportionately.
FOR ILLUSTRATIVE PURPOSES ONLY
All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
Three Simple Steps to Illustrate Converting Canadian/U.S. Dollars Using DLR/DLR.U
Step 1 – Buy DLR
Ensure that you have both CAD and USD investment accounts with the same broker. Note, they will need to be the same type of account (i.e. cash or margin) and in the same registered name. Obtain a quote on DLR. Look for a reasonable bid-ask spread (generally, two cents).
If the quote and bid-ask spread are acceptable to you and you choose to proceed, the industry recommended practice is to place a limit order at the current ask price. A limit order ensures that the trade will not be executed at a higher price.
Step 2 – Convert Units of DLR.U
Have your advisor or brokerage firm journal or transfer your DLR units from your CAD to your USD investment account. Your DLR units will become DLR.U units in your USD account. There is typically no cost associated with this transfer, however, some dealers may require three or more days for this step to settle.
Step 3 –Sell DLR.U and receive USD
Obtain a quote on DLR.U. Again, look for a reasonable bid-ask spread (generally, two cents). If the quote and bid-ask spread are acceptable to you and you choose to proceed, the industry recommended practice is to place a limit order at the current bid price.
Once the trade settles, you will have U.S. dollars in your USD investment account, which you can then allocate as desired. While this transaction could be more cost-effective than converting currencies in a bank account, investors should be aware that the value of their holdings may change over the course of the transaction. DLR investors are subject to the price movements of the U.S. dollar relative to the Canadian dollar.
All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.