Norbert’s Gambit is a way of converting money between Canadian dollars and US dollars at a much better exchange rate than you are ever likely to see from your bank.
Some securities are listed in two currencies
This technique works because some securities are listed in both US Dollars and Canadian dollars.
The values of these securities remain almost identical. If they deviate at all, it creates an opportunity for algorithmic traders to buy one and sell the other for an immediate profit. This ‘arbitrage’ ensures that the equivalent values of the securities match each other.
Using Norbert’s Gambit
Imagine you want to sell Canadian dollars and buy US dollars. First, you choose a security that is listed in both currencies. An ETF named DLR is a good choice and the one that many traders use for Norbert’s Gambit. RY (RBC) is another alternative.
Step one would be to use your Canadian dollars to buy the Canadian version of the ETF.
Step two is to ask your brokerage to switch that ETF to the US dollar version. This is a process named ‘journalling’, and some brokerages do it automatically for you.
Step three is to sell that US dollar ETF. Once that trade settles, you will receive US dollars into your brokerage account.
Note that the exact process varies from broker to broker. The commission charged will also vary, depending on your account size and the brokerage that you have chosen.