A press release from BetaPro today announces the launch of the Horizons U.S. Dollar Currency Fund (DLR), a new TSX-listed exchange-traded fund (ETF) that allows investors to “hold” U.S. dollars. (A timely release for me after my post yesterday about shifting into U.S. dollars and parking them in Vanguard short-term bond ETFs).
It’s billed as a cheaper alternative to currency conversions through a Canadian bank. The latter charge retail accounts up to 3% while the ETF charges: i) a 0.45% annual ETF fee, ii) the institutional currency spread (a pittance), and iii) commissions to buy and sell the ETF ($9.95 x 2=$19.90).
The press release has an example of the cost savings. The ETF can save $255 (2.5%) on $10,000 CAD converted into U.S. dollars, held for one year, and converted back again. I see a few caveats to the cost advantage, however.
It doesn’t look like the ETF earns interest (nor allow investors to invest U.S. dollars into other U.S. assets). On the other hand, investors converting currency through a bank can earn interest income on their U.S. dollars, currently ranging from 0.4% to 2% on the Vanguard ETFs (after netting out annual expense ratio).
The foregone interest, as well as the annual ETF expense of 0.45%, means the cost advantage of DLR can be eroded over time. So it seems the DLR will be of more interest to investors with shorter term horizons.
Addenum (April 12):
A HBP spokesperson sends this correction: “The ETF will likely have periods where it does pay a distribution due to the fact it can invest in T-bills. Right now with interest rates so low, it currently does not pay any distributions. Any distributions are used against the ETFs expenses before they are distributed to investors. If distributions are paid they will be treated as interest income.”