What is Norbert’s Gambit?

Norbert’s Gambit is a method used by investors to convert currency within a brokerage account at a lower cost than traditional foreign exchange methods. It involves buying and selling shares of a dual-listed stock simultaneously on both a Canadian and a U.S. stock exchange.

When it comes to investing, it’s not uncommon for Canadian investors to hold investments in both Canadian and U.S. markets. As a result, they may need to convert currency from Canadian dollars (CAD) to U.S. dollars (USD) to make these investments. However, traditional foreign exchange methods can have high fees and unfavorable exchange rates, which can eat into investment returns. That’s where Norbert’s Gambit comes in.

Norbert’s Gambit is a method used by investors to convert currency within a brokerage account at a lower cost than traditional foreign exchange methods.

It involves buying and selling shares of a dual-listed stock simultaneously on both a Canadian and a U.S. stock exchange. The result is that the investor ends up with U.S. dollars in their brokerage account, which they can use to buy U.S. investments without incurring foreign exchange fees.

The Origins of Norbert’s Gambit

Norbert’s Gambit is named after Norbert Schlenker, a Canadian journalist who is credited with inventing the technique in the 1990s. Schlenker was a frequent traveler to the U.S. and found that traditional foreign exchange methods were too expensive. He developed Norbert’s Gambit to convert currency in a cost-effective manner.

How Norbert’s Gambit Works

To understand how Norbert’s Gambit works, let’s use an example. Let’s say an investor wants to convert CAD to USD to buy U.S. investments. The investor has a brokerage account that allows them to trade on both Canadian and U.S. stock exchanges. Here are the steps the investor would take:

Step 1: Buy Shares of a Dual-Listed Stock in CAD

The investor would first buy shares of a dual-listed Canadian company that trades on both the Toronto Stock Exchange (TSX) in CAD and a U.S. exchange in USD. The goal is to buy the shares on the TSX in CAD.

Step 2: Transfer Shares to U.S. Account

Once the investor has purchased the shares on the TSX in CAD, they would transfer (journal) the shares to their U.S. account. This can usually be done by using the online functionality the brokerage makes available, but sometimes investors will need to call the brokerage to make this type of transaction.

Step 3: Sell Shares on U.S. Exchange in USD

After the shares have been transferred to the U.S. account, the investor would then sell the shares on the U.S. exchange in USD. The hope is the investor doesn’t have much “slippage” during this process. In other words, the investor doesn’t want the share price of the stock they are using to fall in value between the time they purchase it, journal it to the USD side of their account, and then sell it again.

Additional Risks & Costs to consider when using Norbert’s Gambit

Trading Commissions: The investor will incur trading commissions when buying and selling the shares of the dual-listed stock. These fees can vary depending on the brokerage used.

Bid-Ask Spread: The bid-ask spread is the difference between the highest price a buyer is willing to pay for a stock (the bid) and the lowest price a seller is willing to accept (the ask). When using Norbert’s Gambit, the investor may need to pay a wider bid-ask spread than they would for a traditional foreign exchange transaction, which could result in a higher cost.

Market Risk: As with any investment, there is a risk of market volatility. If the investor holds the shares of the dual-listed stock for an extended time, the value of the shares could decrease, resulting in a loss.

Liquidity Risk: Dual-listed stocks may not be as liquid as other stocks, which could make it difficult for the investor to buy and sell the shares in a timely manner.

Settlement Risk: The transfer of shares from the Canadian account to the U.S. account could take several days to settle, during which time the value of the shares could fluctuate.

Norbert’s Gambit Cost Comparison

The amount an investor is exchanging is a major factor they should use Norbert’s Gambit. As Norbert’s Gambit is more cost effective for investors exchanging large amounts compared to those exchanging small amounts. This is because the commissions charged by most brokerages are fixed.

Let’s review Norbert’s Gambit using an example. We’ll use Royal Bank of Canada as our stock and we’ll use TD Direct Investing $9.99 commission for trades. The bid/ask spread for Royal Bank of Canada shares is 2 pennies at the time of writing which represents a bid/ask spread of 0.015% (almost zero).

Amount	Traditional Exchange	Norbert’s Gambit
$1,000	$14.96 / 1.50%	$23.79 / 2.38%
$10,000	$148.50 / 1.49%	$25.13 / 0.25%
$100,000	$841.08 / 0.84%	$38.54 / 0.04%

As the table shows, it is cheaper to make small transactions using traditional foreign exchange methods. But, once amounts get larger, its more cost effective to use Norbert’s Gambit.

What’s not listed in the table above is the cost the investor might have by the underlying stock fluctuating in value (falling). This is a major risk when using a stock such as Royal Bank of Canada, but less important when using a money market ETF that is dual listed or traded on the TSX in both Canadian and US dollar versions. Investors using Norbert’s Gambit should keep this market price risk top of mind.

What is the best stock to use for Norbert’s Gambit?

The best stock to use for Norbet’s Gambit is the one with the most liquidity, but also the one with the least volatility. The biggest Canadian stocks with the most liquidity might include Royal Bank of Canada (symbol RY). But, the price of RY fluctuates moment to moment and using it for Norbert’s Gambit could expose investors to losses.

By comparison, other Canadian investors use the Horizons US Dollar Currency ETF (symbol DLR) for Norbert’s Gambit. The main benefits of using this ETF are the bid/ask spread is a penny most times, and since it’s a money market ETF, the share price volatility is very low compared to a company stock.

Is Norbert’s Gambit right for you?

The method you use to make foreign exchange transactions should also be determined by your level of sophistication. If you’re an investor with less time or if making large FX transactions using Norbert’s Gambit seems confusing or makes you nervous, you should simply use traditional foreign exchange methods. Getting the best price on foreign exchange is sometimes tough, but this might be another good reason to avoid making lots of foreign exchange transactions generally.