XEQT vs Index Funds: Which is Better for Canadian Investors?

When building a passive investment portfolio in Canada, many investors face a crucial decision: XEQT or traditional index funds?

While both offer low-cost, diversified investing, there are important differences that can significantly impact your returns and investing experience.

In this guide, we’ll compare XEQT to traditional index funds and help you determine which option is best for your investment strategy.

What’s the Difference Between XEQT and Index Funds?

Traditional Index Funds:

• Multiple funds required for global diversification
• Manual rebalancing needed to maintain allocation
• Higher combined MER when holding multiple funds
• Available as ETFs or mutual funds

XEQT (All-in-One ETF):

• Single fund provides complete diversification
• Automatic rebalancing by fund managers
• Single low MER of 0.20%
• Only available as ETF

The key difference: XEQT is a fund of funds - it holds multiple index ETFs inside one wrapper, giving you instant global diversification with automatic rebalancing.

Common Index Fund Portfolios vs XEQT

Traditional 3-Fund Portfolio:

Many Canadian investors build portfolios using:

1. VCN or XIC (Canadian market index) - ~25%
2. VUN or XUU (US market index) - ~45%
3. XEF or VIU (International developed) - ~30%

Total MER: 0.15-0.25% (depending on mix) Rebalancing: Manual (quarterly or annually) Number of trades: 3+ per purchase Complexity: Medium

XEQT All-in-One Approach:

1. XEQT - 100% of portfolio

Total MER: 0.20% Rebalancing: Automatic Number of trades: 1 per purchase Complexity: Very low

Cost Comparison: XEQT vs Index Funds

Scenario: $100,000 Portfolio

Traditional 3-Fund Portfolio:

• Average MER: ~0.18%
• Annual fees: ~$180
• Trading costs: $0-30/year (depending on platform)
• Total annual cost: $180-210

XEQT:

• MER: 0.20%
• Annual fees: $200
• Trading costs: $0 (one fund to buy)
• Total annual cost: $200

Winner: Nearly identical costs, but XEQT offers more convenience for comparable fees.

Advantages of XEQT Over Index Funds

1. Simplicity

Index Funds: Managing 3-5 different funds

• Calculate allocation percentages
• Determine how many shares to buy
• Rebalance quarterly or annually

XEQT: Single fund investing

• Buy one ticker
• No math required
• Automatic rebalancing

2. Automatic Rebalancing

Index Funds:

• Manual rebalancing required
• Can trigger taxable events
• Requires monitoring allocation drift

XEQT:

• Professional rebalancing included
• Happens inside the fund (tax-efficient)
• Zero effort required

3. Lower Transaction Costs

Index Funds:

• 3+ separate purchases per contribution
• More opportunities for fees
• Currency conversion complexity

XEQT:

• Single purchase per contribution
• One trade = lower costs
• All in Canadian dollars

4. Easier for Beginners

Index Funds:

• Requires understanding asset allocation
• Need to research multiple funds
• More complex to maintain

XEQT:

• One decision to make
• Pre-set allocation
• Set and forget approach

Advantages of Index Funds Over XEQT

1. Slightly Lower MER (Sometimes)

If you carefully select the lowest-cost index ETFs, you might save 0.02-0.05% annually compared to XEQT’s 0.20% MER.

On $100,000: Save $20-50/year

2. Customization

With individual index funds, you can:

• Adjust geographic allocation
• Overweight certain markets
• Exclude specific regions
• Add bond allocation as needed

XEQT is fixed at 100% equity with specific allocation.

3. Tax Loss Harvesting

With multiple funds, you can:

• Sell losing positions for tax benefits
• Maintain similar exposure
• Optimize for tax efficiency

XEQT is one fund, limiting tax loss harvesting opportunities.

Performance Comparison

Historical Returns:

A properly managed 3-fund index portfolio and XEQT should deliver nearly identical returns since they hold similar underlying assets.

Expected annual return (both): 8-10% long-term

The slight MER difference (0.02-0.05%) has minimal impact over most timeframes.

Example - 20 Year Projection on $10,000:

• Index funds (0.15% MER): $46,610
• XEQT (0.20% MER): $45,762
• Difference: $848 over 20 years

While index funds might save you ~$850 over 20 years, XEQT’s convenience and automatic rebalancing may be worth the small difference for many investors.

Which Should You Choose?

Choose XEQT if:

✅ You want the simplest possible investing experience ✅ You prefer automatic rebalancing ✅ You’re a beginner investor ✅ You value convenience over small cost savings ✅ You want a true set-and-forget portfolio ✅ You’re investing in TFSA or RRSP (where MER difference is minimal)

Choose Index Funds if:

✅ You want to customize your allocation ✅ You enjoy managing your portfolio ✅ You want the absolute lowest possible fees ✅ You have large portfolio where 0.05% matters significantly ✅ You want tax loss harvesting opportunities ✅ You prefer more control over your investments

The Best of Both Worlds: Hybrid Approach

Some investors use both:

Strategy 1: XEQT Core + Satellite

• 80% XEQT (core holdings)
• 20% individual index funds (for customization)

Strategy 2: Start Simple, Grow Complex

• Begin with 100% XEQT
• As portfolio grows, transition to individual index funds
• Only when portfolio size justifies the complexity

Tax Efficiency: XEQT vs Index Funds

In TFSA or RRSP:

Both are equally tax-efficient since growth is tax-sheltered.

Winner: Tie

In Non-Registered Accounts:

Index Funds offer slight advantages:

• Can harvest tax losses
• More control over distributions
• Can strategically sell positions

XEQT is still tax-efficient:

• Mostly capital gains treatment
• Rebalancing happens internally
• No need to trigger sales

Winner: Index funds (but the difference is small)

Common Questions

“Is XEQT just for lazy investors?”

Not at all! XEQT is for smart investors who understand that simplicity often beats complexity. Many professional advisors recommend all-in-one ETFs.

“Will I underperform with XEQT vs index funds?”

No. The underlying holdings are similar, so returns should be nearly identical. The 0.02-0.05% MER difference is negligible.

“Can I switch from index funds to XEQT later?”

Yes! Many investors start with individual index funds, then simplify to XEQT once they realize the benefits of automation.

“What about Vanguard’s index funds vs XEQT?”

Vanguard offers both individual index ETFs (like VUN, VCN) and all-in-one options (like VEQT). VEQT is directly comparable to XEQT.

The Verdict

For most Canadian investors, XEQT is the better choice than building a portfolio of individual index funds.

Why?

The cost difference is minimal (pennies per year for most portfolios), while the convenience and automatic rebalancing are significant benefits. Unless you have specific needs for customization or have a very large portfolio (where 0.05% becomes meaningful), XEQT’s simplicity wins.

Remember: The best investment strategy is one you’ll stick with. If XEQT’s simplicity helps you stay invested and avoid mistakes, it’s worth far more than the tiny MER difference.

Ready to Get Started?

Whether you choose XEQT or individual index funds, you’re making a smart decision to invest in low-cost, diversified portfolios. The most important factor is starting early and staying consistent.

The difference between XEQT and index funds is minor. The difference between investing and not investing is massive.

Related Reading

• What is XEQT? A Comprehensive Guide
• XEQT MER: What It Costs
• XEQT vs Individual Stocks: Which Strategy Wins?
• XEQT Automatic Rebalancing Explained
• Get started with Wealthsimple and earn a $25 bonus

Disclosure: This post contains referral links. I may receive compensation if you sign up through these links, but this doesn’t affect my honest assessment of XEQT and index funds.