How To Reduce The Currency Bite With TD Direct International
TD Direct International is a brokerage based in Luxembourg. It’s popular among non-American expats for these reasons:
- It provides access to a variety of stock exchanges.
- Its platform is much easier to use than most of its competitors.
- Luxembourg doesn’t charge long-term capital gains taxes.
- Its transaction and platform costs for stock and ETF purchases are among the lowest in the industry.
But TD Direct International isn’t perfect. As with many brokerages, they take their pound of flesh from currency exchanges. For example, if you send U.S. dollars to the brokerage, to buy a Canadian listed exchange traded index fund (ETF), the brokerage will charge a rate of up to 1% above the institutional bid/ask spread. What’s the bid/ask spread? That’s the difference between what a bank could buy a currency at, compared to what it could sell that currency at. Even banks pay currency bid/ask spreads. Emmanuel Saphy, at TD Direct International, gave me an example. It was the bid/ask (bid-offer spread) at 9:33 CET yesterday between the U.S. dollar and the Canadian dollar. This is the spot. It’s the price at which an institutional market participant, such as a bank, would pay to buy or sell a currency. In this example, a bank could buy USD at 1.3419 CAD, and sell USD at 1.3415 CAD. The difference between the two rates is called the spread. In this case, the spread is 4 “pips”. One pip is the fourth decimal for this currency pair. By Mr. Saphy’s calculation, “this small 4-pip spread is equivalent to 0.029%.” He adds, “On top of the institutional spread, an individual will typically pay an additional spread, which will vary from broker to broker. Below is a table showing the cost of conversion for three amounts using either Saxo Capital Markets(spread of 0.50% on any amount) or TD International (which is tiered).”
TD Direct International versus Saxo Capital Markets Forex Commission Spread Source: TD Direct International
In this case, those with $10,000 USD to transfer into Canadian dollars (to buy an ETF listed on the Canadian market) would pay a $50 commission spread if they used Saxo Capital Market’s brokerage. They would pay $100 if they used TD Direct International’s brokerage. Exchange much larger sums, however, and the investor with TD Direct International gets a better deal. That said, regular Joes rarely invest $100,000 at a time. So the typical investor with Saxo Capital Markets pays lower currency commissions. That doesn’t, however, make up for the higher costs of Saxo Capital Markets. They charge higher ongoing account fees. That has a larger impact on long term returns. Plus, as Mr. Saphy describes, there is a way to reduce the currency commission bite, when using TD Direct International. To create the smallest possible spread, this is what Mr. Saphy recommends.
Let’s take the example where I have USD, and wish to purchase an ETF or stock on the Toronto exchange, for a value of $50,000 CAD (which is > GBP 15,000).
I have a couple of alternatives for the double transaction that includes purchasing the ETF and ensuring a favorable currency spread when transferring USD into Canadian dollars.
I would purchase the stock first, and select CAD as the settlement currency.
Then, only when the order is executed, would I do a standalone forex on the account (selling USD and buying CAD), to ensure a low spread of 0.5%. I would however do the FX no later than two days before settlement of the ETF purchase, so as to avoid overdraft interest on my CAD sub-account.
If I decided instead to purchase the Canadian stock directly using USD as settlement currency, each partial execution worth less than GBP 15,000, or about CAD 28,500, would be subject to a spread of 1%.
You can therefore slash the FX cost by half, and even by 80% for larger trades, by simply doing a standalone FX trade, instead of embedding it into the stock transaction.
For every $10,000 invested (when a currency exchange is involved) the investor would get a 50% discount on the usual $100 fee that TD Direct International would take.
You may find better rates, still, if you open a multi-currency account, at a bank (such as DBS) and transfer currencies before sending it to TD Direct International or another brokerage.