Losing Money with Norbert's Gambit

Can someone please clarify if Norbert's gambit is the optimal procedure to exchange CAD to USD?

I'm not sure I'd call an arbitrage trade the "optimal procedure," because as you point out you're introducing yet another point of risk in to the transaction. I think buying the foreign currency for an agreed upon price is the "optimal procedure."

If you must use this arbitrage trade, try with a government bond fund; they're typically very stable.

There's a possibility to lose money in exchange rate shifts, but just as much chance to gain money (Efficient Market Hypothesis and all that). If you're worried about it, you should buy a stock in Canada and short sell the US version at the same time. Then journal the Canadian stock over to the US stock exchange and use it to settle your short sell. Or you can use derivatives to accomplish the same thing.

I think your concern is equivalent to someone performing a currency exchange on Monday at one rate, and then wishing they had done it the following Friday because the exchange rate became more favorable over the week, so they've ostensibly "lost" money.

The moment you buy the DLR, you're locked in at (very close to) the spot exchange rate, since DLR and DLR.U are exactly the same security - DLR.U is simply DLR transacted in USD (they have the same legal entity identifier).

http://www.horizonsetfs.com/horizons/media/pdfs/productsheets/DLR-Product-Sheet.pdf

The price of DLR is directly proportional to the exchange rate and is constantly on the move, whereas DLR.U essentially remains at $10 USD regardless of the DLR price and is certainly constant over the transaction period of Norbert interest. This is a key point to your question; DLR is actually defined as the cost in CAD of $10USD. Had you sold the DLR in your CAD account, you'd have lost (or gained) money, but the goal is not to make (or lose) a quick buck, but to exchange currencies in the most efficient way possible. Once you purchased it, you had $10 USD regardless of any change in DLR's value. So your statement:

"When I sell the ETF after 5 days to obtain USD, I'll be selling it at a market price lower than what I bought it for".

isn't correct. You'll be selling it at $10 USD the same as you bought it for, in the same way that if I bought $10USD on Monday and paid zero fees i.e. the "optimal procedure", it would still be worth $10USD on Friday, but might be worth more or less in CAD. This change in Canadian value is due to the currency fluctuation ONLY, and has nothing to do with the buying and selling process - which as we know is the best possible procedure (exchanging with absolutely zero fees and risk).

So to answer your ultimate question, I believe there is no procedure that is more optimal than Norbert's Gambit other than finding some product in Canada that you can buy here in CAD and then sell in the US for more USD than the currency exchange rate (utilities, education, healthcare or beef perhaps?), without spending any money in the process (or at least less than two trades' worth).

In attempt to avoid the usual 1.5-2% exchange fees levied by brokers, I perform Norbert's gambit.

I'd rather follow below listed steps:

1. One time step - Open equivalent US$ account with same broker, if you don't have one.
2. In a CAD$ account buy a stable stock for which you are bullish and which trades on both side of the border e.g. TD, RY etc.
3. Call your broker to transfer the stock to your US$ account. They should do it for free.
4. Sell your stock in US market and receive US$.

You need to buy a dual listed stock. Forget about being bullish or bearish, it doesn't matter. You need tons of liquidity and tight bid asks. Buy the USD stock and sell the Canadian short the same number of shares. Should be 10 bucks a trade. YES you still have the currency risk until it settles. But if you want to minimize that risk sell an in the money put or call of the nearest duration for the dollar amount (the currency ie cad versus usd or vice versa. This will cost you (think insurance) but minimal. AND if you do it enough forget about it. Someone above said it will average out (win some lose some for the net same). They are correct.

I find in general, Norbert's gambit makes financial sense for everything above about 3K assuming the two $10 trade fees one pays. TD now allows you to journal shares over without ever talking to a broker using the transfer shares feature. Depending on how deep your brokerage/bank digs, you save between 2k and 3K per 100k on both in and out transactions.

There is a small risk of big change in the rate during the 5 days it takes both sides of this to settle. Depending on direction of rate move there is also "risk" of making a paper gain as I did when moving 100k. Your paper loss is claimable as capital loss as your paper gain will carry tax liability for capital gains. The broker will send you a slip at tax time.

DLR.TO takes about 1pct on the spread also. I put my order in for 1000 shares and the spot was 1.2091 so in theory a 1000 should cost me 12091.xx...But my total came to 12201.xx +9.99 commission I guess this is due to the ETF having ECN and mer fees.