Foreign Currency Investments and Exchange Spreads Inside Your RRSP

Well finally my E*Trade account has been set up and my XIC ETF has been transferred over and now I am just waiting for the mutual funds.

I was confused by something I read in E*Trade’s help:

E*TRADE Canada offers a U.S. dollar trading account and a Canadian dollar trading account for customers who wish to trade (and pay for their trades) in the currency of the market in which they trade, thereby insulating themselves from exposure resulting from fluctuations in Canadian/US dollar foreign exchange rates. This enables you to trade U.S. securities in your U.S. dollar account, and Canadian securities in your Canadian dollar account (except for registered accounts, which are available in Canadian currency only)

For a second, I thought this might mean that I could only trade Canadian-dollar based investments inside my RRSP. I realized that was probably not the case as I am sure that it was possible to hold USD based investments inside your RRSP. What they MUST mean is that the cash portion of the RRSP must be in CAD, therefore, every time you buy or sell a USD investment inside your RRSP you will be hit with the exchange spread. Apparently TD Waterhouse can do “wash trades” where you can buy a USD money market fund (and get hit with the exchange) but then you can sell part of that and buy a US stock, for example, without having to go back to Canadian dollars in between. Or vice versa, you can sell part of the stock and go back to cash (the money market fund is like cash) without incurring any expense from the exchange. You have to call TD for these trades and cannot do them online.

It turns out that Canadians are allowed to hold foreign currencies inside an RRSP, it’s just that no one has implemented it yet. A guy from Ontario is suing BMO over this issue. The spreads are about 4-5%. So if you take $20,000 CAD and change it to USD and then change it back to CAD, you will have about 4-5% less than what you had when you started. That is almost $1000 CAD. I am looking forward to hearing what happens in this case. I hope that once one company decides to (or is forced to) allow clients to hold USD or to trade between two USD investments without incurring exchange spread costs, that all the other online brokers will follow suit.

Update (2007/03/01): Larry McDonald talks about this in his article “Beware of the details of foreign diversification.”

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2 Responses to “Foreign Currency Investments and Exchange Spreads Inside Your RRSP”


  • This is exactly the reason why I chose TD Waterhouse over E*Trade. I have some US stocks that I am planning to sell this year and don’t like the idea of getting a 3% hair cut when I sell them and buy VTI, EFA or EEM.

    As you mentioned a $20K trade will work out to $600. I don’t spend that much in an entire year.

  • So you switched to TD from RBC? I vaguely remember you posting about that before. Maybe I’ll switch my wife’s RRSP over to TD from Clearsight, then I can compare E*Trade and TD Waterhouse. I’m stuck with E*Trade for now. The good thing is, I’m planning on buying and holding some USD stuff, but not selling any time soon, so I’ll be taking the same hit I would have taken had I put it into a USD money market fund initially. Hopefully by the time I have a desire to switch those investments to something else E*Trade might support these “wash trades.” We’ll see.

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