Converting currencies with Interactive Brokers can be confusing at first, so, as a follow-up to my post on paying as little commission as possible when converting US and Canadian dollars, here’s a quick tutorial on how to do that.

1) Linking Accounts

If you’d like to fund your account via ETF, you’ll need to configure your bank accounts in your Interactive Brokers (IB) account. For that, you need to add what they call an “Instruction”. They’ll then make a small deposit in your bank account, you’ll confirm the amount and you’ll then be able to use the instruction to transfer funds in and out of your IB account, subject to their hold policy.

Canadians can link both CAD and USD-denominated bank accounts held at Canadian banks to their IB account.

You can add Fund Transfer Instructions in the Account Management area of the IB website:

Once you’ve validated the instruction by entering the small deposit amount that you’ve received from IB to verify your bank account, you can deposit/withdraw funds by creating a Fund Transfer Instruction, also in your Account Management area:

More information:   Funding your account | Withdrawals

2) Converting Currencies

2.1) Log in to the Web Trader platform

2.2) In the order management section, choose Forex, and select Buy if you want to buy USD, and sell if you want to sell USD. Enter the amount of USD you want to sell for a SELL order, or the amount of CAD you want to convert to USD for a BUY order.

2.3) In the symbol field, type “USD” and then click the “Go” button. You should be able to choose the USD.CAD currency pair in the drop-down:

2.4) Change the order terms (order type, limit price, etc.) if you’d like.

2.5) Click “Preview Order” and make sure the information is accurate and that you’ve entered the correct amount in the source/destination currency (so you don’t end up selling the equivalent of 5000 CAD instead of 5000 USD, for example):

2.6) Click “Submit Order” and wait for your order to be filled (almost instantaneous for market orders during market hours, while limit orders may or may not be executed depending on your limit price).

That’s it! The interface may look scary at first, but I find it’s well worth the savings if you’re converting tens of thousands of dollars per year through Interactive Brokers.

3) What to do afterwards?

Depending on how you funded your account, there may be a rather long hold period for your funds (currently 3 business days for wire transfers and 60 business days for EFTs). You may leave the funds in your cash balance while waiting for the hold to expire, or you can use them to buy stocks/ETFs if you prefer. I tend to buy short-term bond ETFs like XSB and sell them after the hold period ends, but that’s a matter of personal preference.

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I hope this information was helpful. Don’t hesitate to post in the comments if you appreciated it (it’s always nice to see that people liked a blog post) or if you have any question.

One of the downsides of exchange-traded funds (ETF) compared to mutual funds when investing in the stock market used to be that you could not automatically reinvest your dividend/interest distributions. This meant that you ended up with money sitting in your account until you purchased more shares, but the commissions on each purchase didn’t always make it economical to do that often.

It is now possible to subscribe to Dividend Reinvestment Plans with several Canadian providers, but it is necessary to contact your broker for that (assuming they support it). I couldn’t easily find information on how to do that with Scotia iTrade in December, so I figured I’d now post about it in case it could benefit other people.

Here’s what they told me when I inquired about the procedure:

You can enroll your securities on DRIP by calling in and speak to a representative. You need to provide them the list of securities you want to enroll and the account number these securities are settled in. Alternatively, you can email this information to us. Please be advised: To qualify for DRIP, the dividends received must be enough for one additional share. We do not give fractional shares. We cannot enroll future securities in DRIP. Once new securities are settled in your account, you can give us instructions to enroll them on DRIP.

For further assistance, please contact us at 1-888-872-3388 or (416) 214-6457 from 8am to 9pm ET weekdays or 8am to 6pm ET weekends.

I therefore emailed them at service@scotiaitrade.com to request that they enroll my Vanguard and iShares ETFs on DRIPs and they did so the next day.

How do the DRIPs work?

Once your securities are enrolled to DRIPs, you’ll get as many full ETF shares as the dividends allow you to buy, and the remaining amount will be deposited as cash in your account. For example, if the stock trades for $25 and you get a $49 dividend, you’ll get 1 more share + $24, while if you get a $51 dividend, you’ll get 2 more shares + $1. This is because ETFs cannot issue partial shares.

Because of that, there’s a minimum holding amount under which DRIPs won’t help much, and it varies by ETF. For example, XBB has a monthly distribution of approximately $0.085 per share, and a share price of $31.26 as of 2013-01-03. This means that you would need a minimum of about 368 ($31.26/$0.085) XBB shares to get one new share as part of the DRIP. Canadian Couch Potato has an interesting post with examples for those who’d like to learn more about this.

Here’s an example with 566 shares of XBB. Note that the proportion of the distribution that gets reinvested is about 65% in this case ($31.26/$48.02), but it could be larger with more shares, or if the distribution was higher.

[Do you convert more than $10k from USD to CAD or vice-versa annually? If so, read below for tips to save hundreds or thousands of dollars on currency conversion fees.]

Some people don’t realize it, but banks make quite a bit of money with currency exchange, with some of them charging you over 3% of the amount you convert. Assuming you have $10,000 to convert, this means over $300 in fees for a single transaction. Fortunately, not all banks charge as much, and there are other options where you can pay as little as 0.01% of the amount converted. See below for a discussion of these options.

First option: banks

By default, people will look to their bank to do their currency conversion. Here’s what their spreads (difference between the rates at which they convert USD to CAD and the one at which they convert CAD to USD) were on 2012-11-05, along with the amount you’d give them just to have them convert $10,000 USD to CAD.

It turns out that if you want minimum hassle and don’t convert money that often, ING Direct is a good choice. It’s very easy to open a business or personal account online, and you can deposit cheques by simply writing your customer and account numbers on them and mailing them to ING Direct. It’s not as convenient if you need to receive wire transfers in USD, as they don’t allow that, but you can have a USD bank account at regular bank, link it with your ING Direct account and transfer funds to do the currency conversion at ING Direct.

Second option: forex brokers

Some businesses specialize in currency conversion and differentiate themselves by offering better rates than the banks do, among other things. While reading on the subject, I came across Knightsbridge FX and XETrade. Their spreads usually vary between 1% and 2%, which means that you’d lose $50-$100 to spread to convert $10,000. You also need to pay a wire transfer fee (approx $20) to fund your account with Knightsbridge, but it’s still a nice improvement over what you’d pay banks.

Third option: Interactive Brokers

Interactive Brokers is a trading platform that lets you convert currencies and which can be linked to both USD and CAD-denominated bank accounts based in Canada. They have a minimum monthly fee of $10, but their fee for currency conversions is hard to beat: 0.01%, with a $2.50 minimum. This means that any amount under $25,000 can be converted for a flat $2.50 charge.

With that said, IB is not for everyone:

• They have fairly lengthy paperwork. I estimate it took me 3-4 hours to set up the account.
• They require a $10,000 minimum deposit to open an account.
• Their $10 minimum monthly fee means it makes no sense to use them if you’re going to save less than $120 per year in fees with them.
• Their tools are designed for traders and can be confusing for laymen, especially at first.
• If you fund your account via EFT to save on wire transfer fees, you cannot withdraw the funds to a different bank account (e.g. to your CAD account if the funds came from the USD account) for 45 business days, or approx. 2 months*.

If you don’t mind these limitations, however, they can be great. If you have $50k to convert in a year, I estimate that Interactive Brokers can save you $1,180 compared to doing currency conversions at RBC and $605 compared to doing them at ING Direct. Not that bad for a 4-hour account setup and maybe an extra 2 hours to get familiar with the tools…

* They have cheap commissions on stock purchases, though, so you can buy some bond ETFs like XBB while waiting for the hold to expire to withdraw funds to your bank account.

My setup

I get payments from US clients both by wire transfers and by cheques.

I have a business USD account at RBC and maintain a $2,500 balance to avoid the $9 minimum monthly fee. Wire transfers and cheques are deposited in that account.

That account, as well as my CAD account, is linked with my Interactive Brokers account so I can move money between them via EFT.

When I need to convert money, I transfer it from RBC to Interactive Brokers, convert it to CAD there, and send it to my CAD bank account once the hold period expires. I sometimes buy stocks with the CAD funds while waiting for the hold to expire.

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This is the best setup I found for my situation, but as noted above, the best solution depends on your needs. If you have questions or would like more information about the options above, feel free to let me know in the comments.