There are many ways for Canadian investors to get exposure to Canadian and U.S. dollar exchange rate movements, such as investing in domestic and foreign securities as well as buying property on either side of the border. However, the vast majority of these transactions require an expensive currency conversion, where a bank or foreign exchange (FX) company will charge a significant commission as a part of the transaction. Typically, on currency exchanges of less than $10,000 dollars, non-institutional rates apply, which are less favourable for individuals.

DLR and CAN: Better Tools for Capturing Currency Movements

Horizons ETFs created the Horizons Canadian Dollar Currency ETF (“CAN”) and the Horizons U.S. Dollar Currency ETF (“DLR”) to make investing in currency movements simpler and lower cost.

CAN provides investors with the opportunity to be “long” or bullish on the Canadian dollar, expressed in U.S. dollar terms. When the Canadian dollar appreciates relative to the U.S dollar (i.e. the Canadian dollar/U.S. dollar exchange rate increases), the value of CAN is expected to increase. Conversely, when the Canadian dollar depreciates against the U.S. dollar (i.e. the Canadian dollar/U.S. dollar exchange rate decreases), the value of CAN is expected to decrease.

DLR can be used as a tool to be long or “bullish” on the U.S. dollar without undergoing an expensive conversion process; or if U.S. dollars are required, it can be used as an easy and efficient way to avoid the high commissions charged on converting the loonie to the greenback.

How CAN Works

CAN is listed on the Toronto Stock Exchange (“TSX”) under the ticker symbol CAN, trades in Canadian dollars and tracks the value of the Canadian dollar as reflected in U.S. dollars, net of fees and expenses. When the Canadian dollar appreciates relative to the U.S dollar (i.e. the Canadian dollar/U.S. dollar exchange rate increases), the value of CAN is expected to increase proportionately. Conversely, when the Canadian dollar depreciates against the U.S. dollar (i.e. the Canadian dollar/U.S. dollar exchange rate decreases), the value of CAN is expected to decrease proportionately.

For example, if there is an appreciation in the exchange rate, which caused the Canadian and U.S. dollar to reach parity (CAD$1/USD$1), an increase from CAD$0.75/US$1, this would mean the Canadian dollar appreciated 33% relative to the U.S. dollar. In this example, the price per unit of CAN (originally issued at $10 per unit) would be expected to reflect a price appreciation in a proportionate amount, rising to approximately $13.30 per unit.

How DLR Works

DLR is listed on the TSX under the ticker symbol DLR, and tracks the value of the U.S. dollar, reflected in Canadian dollars, net of fees and expenses. DLR.U is the same ETF, but denominated for trading in U.S. dollars.

The difference in DLR.U and DLR’s unit price is meant to reflect the current exchange rate. For example, if the exchange rate is U.S. $1.00 to CAD $1.20, DLR’s unit price will be approximately $12, meanwhile DLR.U’s unit price will be approximately $10. Units of DLR and DLR.U are interchangeable in trading accounts through a simple process called journaling.

To maintain DLR and DLR.U’s unit prices and their ability to mirror the current exchange rate, DLR invests in U.S. cash and/or U.S. short-term cash equivalents.

Cost Comparison: Hypothetical Currency Conversion of $10,000 using DLR/DLR.U

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For illustrative purposes only.
1 Three - day holding period with 2 trades (1 buying and 1 selling)
2 Plus applicable taxes and operating expenses for the three - day period

Step 1 – Buy DLR

Ensure that you have both CAD and USD investment accounts with the same broker. Note, they will need to be the same type of account (i.e. cash or margin) and in the same registered name. Obtain a quote on DLR. Look for a reasonable bid-ask spread (generally, two cents).

If the quote and bid-ask spread are acceptable to you and you choose to proceed, the industry recommended practice is to place a limit order at the current ask price. A limit order ensures that the trade will not be executed at a higher price.

Step 2 – Convert Units of DLR.U

Have your advisor or brokerage firm journal or transfer your DLR units from your CAD to your USD investment account. Your DLR units will become DLR.U units in your USD account. There should be no cost associated with this transfer as the units have the same CUSIP, however, some dealers may require three or more days for this step to settle.

Step 3 –Sell DLR.U and receive USD

Obtain a quote on DLR.U. Again, look for a reasonable bid-ask spread (generally, two cents). If the quote and bid-ask spread are acceptable to you and you choose to proceed, the industry recommended practice is to place a limit order at the current bid price.

Once the trade settles, you will have U.S. dollars in your USD investment account, which you can then allocate as desired.

While this transaction should be more cost-effective than converting currencies in a bank account, investors should be aware that the value of their holdings may change over the course of the transaction. DLR investors are subject to the price movements of the U.S. dollar relative to the Canadian dollar.

Three Simple Steps to Converting Canadian/U.S. Dollars Using DLR/DLR.U

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All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.