Many Canadian Muslims invest or trade stocks and ETFs listed on US exchanges. As a result, there is a need to convert Canadian Dollars to US Dollars in order to purchase these securities. Usually, brokerages happily offer currency conversion services. However, high fees and unfavorable exchange rates make this service unattractive.

Norbert’s Gambit is an alternative solution to the currency conversion service offered by the brokerages and can potentially save a lot of money. For example, Questrade and Wealthsimple charge 1.5%-2% fee for foreign exchange. Assuming 2% fee, you will lose 2% of your capital just to one currency to another (e.g. $5,000.00 x 2% = $100.00). To avoid this 2% fee using Norbert’s Gambit, you have to do the following:

1. Identify several dual-listed Canadian shariah-compliant companies that trade on both the Toronto Stock Exchange (TSX) in CAD and a US exchange in USD.
2. Check these stocks’ liquidity and volatility using appropriate metrics.
3. Buy the stock that has the lowest volatility and highest liquidity through the TSX for CAD (adjust the number of shares as needed).
4. Journal (or transfer) the shares from the TSX to a US exchange.
5. Sell these American shares for USD.

Now you possess US Dollars from your share proceeds, which you can use for buying other US dollar denominated shariah-compliant stocks or ETFs.

Issues with DLR and DLR.U

DLR and DLR.U are considered ideal for Norbert’s Gambit. Per Horizon ETFs:

DLR seeks to reflect the reference value in Canadian dollars (in respect of the Cdn$ Units) and U.S. dollars (in respect of the US$ Units) of the U.S. dollar, net of expenses, by investing primarily in cash and Cash Equivalents that are denominated in the U.S. dollar.

However, these ETFs are exposed to interest bearing debt, such as 0-3 Month U.S. T-Bills. Therefore, from shariah perspective, it is highly desirable not to get involved with these instruments.

Key implementation considerations

Before going ahead and using Norbert’s Gambit, please beware of potential risks that may lead to additional costs:

• Price volatility – stock prices can become very volatile, especially during extreme market stress events. Therefore, it is advisable to avoid this strategy during earnings seasons, major economic data releases, political events, etc.
• Liquidity – keep in mind that bid and ask spreads will directly translate into your cost.
• Settlement – ensure that you understand how trades settle. Usually, stocks and ETFs follow a T+2 settlement schedule. However, if the stock or ETF that you plan to purchase settles with T+1 schedule, and your broker allows such transactions, you may end up with a negative balance due to settlement mismatch. Ironically, DLR serves as a good example for this scenario. Assume that you have a Canadian shariah-compliant company shares in your portfolio. You decide to sell them and buy a dual-listed company to execute Norbert’s Gambit. If your sale settles on a T+2 schedule while the stock that you are buying settles on a T+1 schedule, your broker could exploit this mismatch. They might allow you to proceed with the trades and on the T+1 date they could lend you the money needed to purchase the shares for your Norbert’s Gambit as your sale will settle next day. And they may charge you exorbitant interest for one day on the money that they lent you.
• Trading commissions – some brokers may charge fees for buying and/or selling shares.
• Execution delay – journaling (or transfer) may take several business days, consequently extending the time required to complete Norbert’s Gambit for purchasing your stocks or ETFs.

Effectiveness of the strategy

The effectiveness of the strategy depends on currency conversion fees, trading commissions, journaling (or transfer) capabilities, your available time, and your level of sophistication. As a rule of thumb, calculate your currency conversion fees for the amount and see if it is reasonable. If it proves reasonable, you may choose to avoid Norbert’s Gambit altogether.

Information from brokerages

• Wealthsimple. Wealthsimple doesn’t support journaling or Norbert’s Gambit at this time. This is a process of moving an asset listed in both CAD and USD to avoid currency conversion fees.
• RBC Direct Investing. Journaling is automatic (a huge benefit). Further details will be provided soon, inshaAllah.
• Questrade. Journaling shares.
• NBDB. Journaling is possible, but it takes about three business days to settle and complete all the transactions.

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May Allah grant you barakah!