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I spoke to TD Waterhouse about conversion rates from CAD to USD in my TFSA account.
They suggested if I want to avoid going back and forth with currency conversion, that they can put it into a USD money market fund when I sell the shares.
Is this a better option than converting it back and forth each time? I'm not sure what a money market fund is exactly, or if there are fees/costs associated with those.
You definitely do want to avoid losing money on repeated currency conversions. Remember they are making a profit every time you change your currency.
A money market fund is basically like a 'savings account' mutual fund. They are open like mutual funds, in that you can buy or sell at any time. There don't tend to be fees of any kind (directly) as all management is paid for out of the interest/returns that the fund generates.
So using a money market fund to hold the "cash" portion of your TFSA or any other account for that matter would be a normal (and "free") thing to do.
Good Luck
@sdg's answer is spot-on with the advice to avoid repeated conversions, but I'd like to provide some specifics on the fees involved:
Each time you round-trip Canadian dollars (CAD) through a U.S.-dollar (USD) priced security at TD Waterhouse and leave your proceeds in CAD, you're paying a total foreign exchange fee – implied in their rate spread – of about 3%, give or take.
That's ~3% per buy & sell combination, or ~1.5% on each end. You can imagine if you trade back & forth frequently, you can quickly lose a lot of money. Do it back and forth ten times in a year and you're out ~30% on the fees alone!
The TD U.S. Money Market Fund (TDB166) that TD Waterhouse is referring to has no direct commission to buy or sell, but it does have a Management Expense Ratio (MER) of 0.20% per year – basically a fee which is deducted from the fund's returns (which, today, are also close to zero.) Practically speaking, that's a very slim fee to hold some USD in your Canadian dollar TFSA.
While 0.20% is cheap, a point to keep in mind is if you maintain a significant USD balance, you are maintaining currency risk: You can lose money in CAD terms if the CAD appreciates vs. USD.
Additional references:
Canadian Capitalist describes TD Waterhouse and the use of TDB166 and "wash trades" at How to "Wash" Your Trade? He's referring to RRSPs, but the same applies to TFSAs, which came out after the post was written.
Canadian Couch Potato has two relevant articles: Are US-listed ETFs Really Cheaper? and Lowering Your Currency Exchange Fees.
