Good advisors provide value by:

1. Generating returns, and
2. Reducing costs

Much is written about returns, but not so much about reducing costs. A somewhat hidden cost is exchange rates, and reducing costs here can materially improve returns, as will be shown.

Setting up a U.S. dollar (USD) account for RRSPs and TFSAs can help save money because (1) U.S. investments are generally cheaper than Canadian investments, feature lower fees and are more varied in the opportunities they present; and (2) USD accounts effectively end the ongoing and wasteful cycle of exchange rate conversions.

The Greenback still rules.

A currency must be well regarded to be used as part of a country's foreign exchange reserves. Globally, in 2022, the U.S. dollar accounted for almost 60% of foreign exchange reserves, while the Euro accounted for 20% and the Renminbi (the official currency of the People’s Republic of China) accounted for 3%. 

Much of the innovation that occurs on this planet happens in the U.S. Add to that the U.S. stock market, which is the largest in the world, and one can see why most growth ideas find their way to the U.S.A. to get funded.

To recap:

1. The world wants the USD
2. Many new growth ideas originate or get funded out of the U.S.

Now, imagine your advisor finds a new Artificial Intelligence investment (ABC) for you that is priced in USD, and you buy it in your regular, CAD-denominated TFSA. Later that year you sell it for a profit, and then use the proceeds to buy a quantum computing investment (XYZ) which is also priced in USD. The mismatch in currency leads to three different exchange-rate transactions (highlighted):

1. ORDER: BUY USD ABC
2. Account converts CAD to USD (~1.2% foreign exchange fee)
3. BUY order executed
4. 6 months later (investor sees a better opportunity)
5. ORDER: SELL USD ABC
6. SELL order executed
7. Account converts USD proceeds back to CAD (~1.2% foreign exchange fee)
8. ORDER: BUY USD XYZ
9. Account converts CAD to USD (~1.2% foreign exchange fee)
10. BUY order executed

Those fees add up. In and out, the investor may reduce returns by 3% or more due to exchange rate conversions.

If you think you don’t need to be thinking outside the border when it comes to investing, look at what our national pension fund, the Canada Pension Plan, is doing.

The Canada Pension Plan’s exposure to Canadian currency was 22% as at March 31, 2023, and its overall exposure to Canada was 14%.

While working as a Bay Street investment analyst I was tasked with finding Canada-based growth companies, since Canadians were limited to how much foreign content they could have in their RRSPs and TFSAs. As part of my industry analysis, I regularly reviewed U.S. companies, and many times I found that the U.S. companies offered better value.

These days, while Canadian stocks account for less than 4% of the global equity market, Canadian investors typically allocate more than 50% of their total equity to Canada.

If you are looking for growth and don’t have a USD account, you should get one.