XEQT Automatic Rebalancing Explained: How It Works and Why It Matters

One of XEQT’s most valuable features is something that happens behind the scenes: automatic rebalancing.

Most investors don’t realize how much time, money, and hassle this single feature saves them. It’s one of the main reasons XEQT beats DIY portfolios for most people.

This guide explains exactly how XEQT’s automatic rebalancing works and why it’s so valuable.

What is Portfolio Rebalancing?

The Problem:

Your portfolio’s asset allocation drifts over time as different investments grow at different rates.

Example starting portfolio:

• Canadian stocks: 25% ($25,000)
• US stocks: 45% ($45,000)
• International stocks: 25% ($25,000)
• Emerging markets: 5% ($5,000)

After one year of US stocks outperforming:

• Canadian stocks: 22% ($26,400) [grew 5%]
• US stocks: 50% ($58,500) [grew 30%]
• International stocks: 23% ($26,250) [grew 5%]
• Emerging markets: 5% ($5,000) [flat]

Problem: Your portfolio is now overweight US stocks and underweight other regions.

The Solution: Rebalancing

Sell some US stocks, buy more Canadian/International/Emerging to restore the 25/45/25/5 target allocation.

How XEQT Handles Rebalancing Automatically

XEQT’s Internal Rebalancing:

XEQT holds four underlying ETFs:

1. ITOT (US stocks) - Target ~47%
2. XIC (Canadian stocks) - Target ~26%
3. XEF (International) - Target ~21%
4. XEC (Emerging) - Target ~6%

When allocations drift, iShares (the fund manager):

1. Monitors the allocation daily
2. Identifies drift from target
3. Sells overweight holdings
4. Buys underweight holdings
5. Restores target allocation

You do nothing. It happens automatically.

Why Automatic Rebalancing Saves You Money

Without XEQT (DIY Portfolio):

Rebalancing costs:

• Trading commissions: $4.95-9.95 per trade × 4 positions = $20-40
• Currency conversion: 1.5-2% on US purchases = $30-60
• Bid-ask spreads: $5-15 per trade
• Time spent: 30-60 minutes quarterly
• Tax implications: Potential capital gains in non-registered accounts

Annual rebalancing cost: $200-400 + taxes + time

With XEQT:

Rebalancing costs:

• Trading commissions: $0 (happens internally)
• Currency conversion: $0 (managed by iShares)
• Bid-ask spreads: Minimal (institutional pricing)
• Time spent: 0 minutes
• Tax implications: None (happens inside the fund)

Annual rebalancing cost: ~$0

Savings: $200-400/year + time + hassle

How Often Does XEQT Rebalance?

Official Policy:

XEQT rebalances quarterly, but adjustments can happen more frequently if needed.

Typical rebalancing schedule:

• January: Quarterly rebalance
• April: Quarterly rebalance
• July: Quarterly rebalance
• October: Quarterly rebalance

Plus: Small adjustments as needed throughout the year

Rebalancing Threshold:

iShares typically rebalances when an allocation drifts ±2-3% from target.

Example:

• Target: 47% US stocks
• Trigger rebalance if: US stocks reach 50% or fall to 44%

This prevents excessive trading while maintaining target allocation.

Tax Efficiency of Internal Rebalancing

Huge Tax Advantage:

When XEQT rebalances internally, you pay ZERO capital gains tax (even in non-registered accounts).

Why? The rebalancing happens inside the fund, not in your personal account.

Comparison: DIY Portfolio:

In non-registered account:

1. Sell overweight US stocks (trigger capital gains)
2. Pay tax on gains (up to 25% tax rate)
3. Buy underweight positions
4. Result: Lose 5-10% to taxes on rebalancing trades

With XEQT:

1. XEQT rebalances internally
2. No personal capital gains triggered
3. No taxes owed
4. Result: Keep 100% of your money working

Over 30 years: Save tens of thousands in avoided capital gains taxes.

Real Example: XEQT Rebalancing in Action

2020 COVID Crash Scenario:

March 2020 - Market drops:

• US stocks: -35%
• Canadian stocks: -30%
• International stocks: -32%
• Emerging markets: -25%

XEQT’s allocation after crash:

• US stocks: 44% (down from 47% target)
• Canadian stocks: 27% (up from 26% target)
• International stocks: 22% (up from 21% target)
• Emerging markets: 7% (up from 6% target)

What XEQT did:

• Sold some Canadian/International/Emerging (higher allocation)
• Bought more US stocks (lower allocation)
• Result: Bought US stocks at discounted prices automatically

April-August 2020 - Markets recover:

• US stocks surge back +50%
• XEQT benefited from buying the dip
• Allocation restored to target

Benefit: XEQT automatically “bought low” during the crash without you doing anything.

Rebalancing Bonus: The Rebalancing Premium

What is the Rebalancing Bonus?

Academic research shows that regular rebalancing adds 0.1-0.5% annual return by forcing you to “buy low, sell high.”

How it works:

1. Asset class goes up (becomes overweight)
2. Rebalancing sells some (sell high)
3. Asset class goes down (becomes underweight)
4. Rebalancing buys more (buy low)
5. Over time: Small but consistent return boost

XEQT captures this bonus automatically.

Example Over 30 Years:

Without rebalancing: 8.0% annual return With rebalancing: 8.3% annual return

On $500/month for 30 years:

• No rebalancing: $745,000
• With rebalancing: $786,000
• Rebalancing bonus: +$41,000

What You Would Do Without XEQT

DIY Rebalancing Process (Every Quarter):

Step 1: Calculate current allocation

• Check each holding’s current value
• Calculate percentage of total
• Compare to target allocation

Step 2: Determine rebalancing trades

• Calculate how much to buy/sell
• Consider trading costs
• Minimize number of trades

Step 3: Execute trades

• Place sell orders for overweight holdings
• Wait for settlement
• Convert currency if needed
• Place buy orders for underweight holdings

Step 4: Track for taxes

• Record all trades
• Calculate adjusted cost base
• Track capital gains/losses
• Report on tax return

Time required: 30-60 minutes quarterly = 2-4 hours/year

XEQT does all this automatically.

Currency Management: Hidden Benefit

XEQT Handles Currency Automatically:

When rebalancing involves US stocks, XEQT manages:

• CAD to USD conversion (buying US)
• USD to CAD conversion (selling US)
• Gets institutional forex rates (better than retail)
• No manual currency conversion needed

DIY Portfolio Currency Hassle:

To rebalance US holdings:

1. Convert CAD to USD (Norbert’s Gambit or forex fee)
2. Wait for settlement (3 days)
3. Buy US ETF
4. Pay forex spread (1.5-2%)

Annual forex cost on $100,000: $300-600

XEQT’s institutional advantage: ~$150-300/year savings

Behavioral Benefit: No Emotional Decisions

Human Rebalancing Mistakes:

❌ Waiting too long to rebalance (avoiding winners) ❌ Rebalancing too often (overtrading) ❌ Refusing to sell winners (attachment bias) ❌ Refusing to buy losers (fear) ❌ Skipping rebalancing during volatility

XEQT’s Automatic Advantage:

✅ Rebalances on schedule (no emotions) ✅ Buys losers automatically (contrarian) ✅ Sells winners automatically (discipline) ✅ No procrastination or fear ✅ Perfect consistency

Result: XEQT removes human error from rebalancing.

What Happens If You Never Rebalance?

Drift Over Time (No Rebalancing):

Year 1: 25/45/25/5 (target) Year 5: 22/52/21/5 (US overweight) Year 10: 18/58/19/5 (significant drift) Year 20: 15/65/15/5 (extreme concentration)

Problems:

• Excessive concentration in one region
• Higher risk than intended
• Drift away from diversification benefits
• Suboptimal risk-adjusted returns

With XEQT: Always maintains 25/45/25/5 target allocation

Advanced: How Does XEQT Decide When to Rebalance?

Rebalancing Triggers:

1. Threshold-based:

• If allocation drifts >2-3% from target
• Example: US stocks hit 50% (target 47%)

2. Calendar-based:

• Quarterly rebalancing schedule
• Typically late March, June, September, December

3. Cash flow-based:

• When investors buy/sell XEQT shares
• New money deployed to underweight positions
• Redemptions come from overweight positions

Smart Rebalancing:

iShares uses sophisticated algorithms to:

• Minimize trading costs
• Optimize tax efficiency
• Reduce market impact
• Balance between all triggers

You get institutional-level portfolio management for 0.20% MER.

XEQT vs DIY: Rebalancing Comparison

Winner: XEQT by a wide margin

Common Questions

“Does XEQT rebalance automatically in my account?”

No - XEQT rebalances the holdings inside the fund. Your XEQT shares don’t change, but what those shares own gets rebalanced.

“Will I see rebalancing in my account?”

No - it’s invisible to you. You’ll just see steady allocation maintained over time.

“Can I control when XEQT rebalances?”

No - iShares manages it based on their methodology. This is actually a benefit (removes your emotions).

“What if I want custom allocation?”

Then XEQT isn’t right for you. Build your own portfolio with individual ETFs. But you’ll pay the costs mentioned above.

The Bottom Line: Rebalancing Value

XEQT’s automatic rebalancing provides:

✅ Cost savings: $200-500/year in trading/forex fees ✅ Time savings: 2-4 hours/year ✅ Tax efficiency: Avoid capital gains on rebalancing ✅ Behavioral advantage: No emotional decisions ✅ Rebalancing bonus: +0.1-0.5% annual return ✅ Consistency: Perfect execution every time

Total value: $500-1,000/year + better returns + peace of mind

Over 30 years: Save $15,000-30,000 in costs + tens of thousands in better returns

All included in XEQT’s 0.20% MER.

Final Thoughts

Automatic rebalancing is one of XEQT’s “hidden” features that provides massive value.

While other investors spend hours calculating allocations, executing trades, converting currencies, and tracking taxes, XEQT investors do absolutely nothing while getting professional-level portfolio management.

This is the power of simplicity.

Ready to Experience Automatic Rebalancing?

Let XEQT handle all the complex portfolio management while you focus on what matters - contributing consistently and building wealth.

Remember: The best investment strategy is one that requires zero effort to maintain. That’s XEQT.

Disclosure: This post contains referral links. Rebalancing methodologies are subject to change by iShares. The cost savings and benefits described are estimates based on typical DIY portfolio management.