Ask Dave: US Dollar Investments Inside Your RRSP

With no more foreign holding limits inside RRSPs, a lot of people are looking into holding foreign currency investments inside the RRSP. In fact my first ever “Ask Dave” post was about this very topic (see “Ask Dave: USD Holdings In an RRSP“).

Another reader recently wrote me with similar questions. Rob writes:

I’m confused. I want to own US $ investments in my RRSP. RBC Direct advises that all RRSP investments must be in CDN $. They didn’t know what a “wash trade” was. With the Cdn $ at $1.08+ is this a good time to own US $ denominated equities or a USD ETF? If so, can I do this in an RRSP or does it have to be held outside?

Rob, you can certainly own US $ investments inside an RRSP (ie. any US stock (this includes ETFs)). As for US$ mutual funds I’m not really sure (as I’ve never done it) although you probably could. If RBC Direct truly does not allow you do hold USD investments in your RRSP (I would be REALLY surprised if they didn’t), find another broker. The one restriction that the Canadian banks and brokers place on customers (although there is nothing in Canadian laws/regulations that forces them to do so, see “Foreign Currency Investments and Exchange Spreads Inside Your RRSP” and this class action lawsuit against BMO for more information) is that you may not hold any foreign currency inside an RRSP. All cash inside an RRSP must be in Canadian dollars. As a consequence of this ridiculous restriction, if a USD investment is sold, the proceeds must be converted into CAD, then to buy another USD investment, the CAD cash is converted into USD again. Hence huge foreign exchange rate spread-related costs, and hence, wash trades’ raison d’être…

I am not surprised that RBC Direct did not know what a “wash trade” was as I think TD Waterhouse is the only one that offers it (and even then, they will only do it for a phone trade, not an online trade). Refer to the Canadian Capitalist’s site on how to make a wash trade. At the time (August 2006) the Canadian Capitalist said that “as far as I know, RBC Action Direct, which is our primary brokerage account does not offer this feature.”

It is impossible to predict what the US or Canadian dollar will do at this point. Much like with the Vancouver housing market 2 years ago in Vancouver, would it defy all odds and go up even further? Or would it come crashing down as it seemed destined to? The pundits and economists will say whatever they want but they have no clue what will actually happen (although there have been some rumblings about possible Bank of Canada currency intervention measures). I say don’t worry about timing your purchases of USD investments and don’t ask the question “is this a good time to own US $ denominated equities.” Instead you should think long term and ask “should I have US $ denominated equities in my portfolio (for the next 10+ years).” You especially should not be trying to “time” investments in USD investments (or any other currency) because the costs of buying and selling USD investments inside an RRSP are huge unless you use wash trades. Your best bet to minimize costs is to buy them once and hold. For more on the costs associated with USD investments inside an RRSP, see “Foreign Exchange Costs Associated With USD Investments in an RRSP.” If you really want to speculate, use a non-RRSP US$ trading account.

It’s good to be diversified and not have all your investments in Canadian dollars, although if you plan to retire in Canada you definitely want to have most of your retirement assets in Canadian investments as you approach retirement and not expose yourself to unnecessary currency risk (see “US vs. Canadian dollar investments made inside an RRSP” for more detail, especially bullet point 2). You will also incur lower costs (assuming you don’t incur too many foreign exchange-related costs). Observe the difference in MERs between the Canadian iShare XSP (0.24%) vs. the American iShares’ IVV (0.09%) or the Vanguard’s VTI (0.07%), for example. Adding foreign currency investments also decreases the correlation between the different components of your portfolio even further, thus providing more diversification, and in the end, a higher risk-adjusted return.

Send your questions for my “Ask Dave” posts using my contact form. I look forward to hearing from you. My queue of questions is not long, but it’s not short either, so I may take anywhere from a few days or a few weeks to respond. Thanks for your patience.