XEQT vs S&P 500

When it comes to building a long-term investment portfolio, many Canadians often debate between two popular options: XEQT (iShares Core Equity ETF Portfolio) and the S&P 500 (Standard & Poor’s 500 Index). Both are solid choices for growing your wealth, but they serve different purposes and cater to different types of investors.

In this post, we’ll compare XEQT and the S&P 500 in terms of diversification, risk, returns, and suitability for Canadian investors to help you decide which one is right for your investment goals.

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What is XEQT?

XEQT is an all-in-one ETF that provides 100% equity exposure to global markets. It’s a low-cost solution for investors looking for instant diversification without the hassle of managing multiple ETFs or rebalancing a portfolio.

Key Features of XEQT:

• Global Diversification: XEQT holds a mix of Canadian, U.S., international developed, and emerging market stocks.
• All-in-One Solution: No need to buy multiple ETFs or rebalance manually.
• Low MER: Management Expense Ratio (MER) of 0.20%.
• Designed for Canadians: XEQT is available in CAD, making it easy to hold in TFSAs, RRSPs, and other Canadian accounts.

XEQT provides exposure to over 9,000 companies worldwide, making it an excellent choice for those seeking a simple, diversified portfolio.

What is the S&P 500?

The S&P 500 is an index that tracks the 500 largest publicly traded companies in the United States. It’s widely regarded as one of the best benchmarks for the U.S. stock market and is often used by investors to gauge the health of the economy.

Key Features of the S&P 500:

• U.S. Focused: Contains only U.S.-based companies like Apple, Microsoft, and Amazon.
• Large-Cap Companies: Represents some of the most successful and stable businesses globally.
• High Returns: Historically delivers strong long-term returns.
• Available via ETFs: Canadian investors can access the S&P 500 through ETFs like VFV (Vanguard S&P 500 ETF) or SPY (SPDR S&P 500 ETF).

The S&P 500 is a go-to choice for investors seeking exposure to the U.S. market specifically.

Comparing XEQT and the S&P 500

1. Diversification

• XEQT:
  XEQT offers global diversification, holding stocks from Canada, the U.S., international developed markets, and emerging markets.

  • Approximate Allocation:
    • 25% Canadian stocks
    • 45% U.S. stocks
    • 20% international developed stocks
    • 10% emerging markets

  By spreading investments across multiple regions, XEQT reduces the risk of being overexposed to one country or market.

• S&P 500:
  The S&P 500 focuses solely on the U.S. market, which can be a strength and a limitation. While the U.S. is home to many of the world’s largest and most innovative companies, relying solely on one country’s market can increase risk if the U.S. economy underperforms.

Winner: XEQT (for global diversification)

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2. Risk and Volatility

• XEQT:
  With its diversified portfolio, XEQT tends to have lower risk and volatility compared to the S&P 500. The inclusion of Canadian and international stocks helps cushion against market downturns in any one region.

• S&P 500:
  The S&P 500 is more volatile because it relies entirely on the U.S. market. However, it often delivers strong returns during bull markets, making it a higher-risk, higher-reward investment.

Winner: XEQT (for lower risk)
S&P 500 (for higher reward)

3. Returns

• XEQT:
  XEQT aims for long-term growth but sacrifices some potential returns due to its diversification. Historically, global equity portfolios deliver slightly lower returns compared to U.S.-focused investments, but they also experience fewer sharp declines.

• S&P 500:
  The S&P 500 has a track record of strong long-term returns, averaging around 10% annually over the past several decades. Its performance is driven by large-cap U.S. companies that dominate global markets.

Winner: S&P 500 (for higher historical returns)

4. Costs

• XEQT:
  The MER for XEQT is 0.20%, which is very low for an all-in-one ETF. Additionally, it

is designed for Canadian investors, so you won’t have to deal with currency conversion fees when buying or selling XEQT in Canadian dollars.

• S&P 500 ETFs:
  MERs for ETFs tracking the S&P 500 are also very low, with options like Vanguard’s VFV offering an MER of 0.08%. However, Canadian investors holding U.S.-based ETFs may face currency conversion fees unless the ETF is listed in CAD.

Winner: S&P 500 (slightly lower MER)

5. Suitability for Canadian Investors

• XEQT:
  XEQT is tailored to Canadian investors, offering CAD-based investments and significant exposure to Canadian equities (around 25% of the portfolio). This makes it an ideal option for those looking for a globally diversified portfolio with a Canadian focus.

• S&P 500:
  While the S&P 500 offers excellent exposure to the U.S. market, it lacks Canadian and international diversification. Canadian investors may need to combine it with other ETFs to achieve a well-rounded portfolio, adding complexity.

Winner: XEQT (for Canadian investors seeking simplicity)

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Key Differences: XEQT vs. S&P 500

Which One Should You Choose?

The right choice depends on your investing goals and risk tolerance:

• Choose XEQT if:

  • You want a simple, globally diversified portfolio in one ETF.
  • You’re a beginner or a hands-off investor looking for low-risk, steady growth.
  • You prefer to avoid the complexities of combining multiple ETFs or dealing with currency conversion fees.

• Choose the S&P 500 if:

  • You’re comfortable with higher risk in exchange for potentially higher returns.
  • You want concentrated exposure to large-cap U.S. companies.
  • You’re willing to supplement it with other ETFs to build a diversified portfolio.

Final Thoughts

Both XEQT and the S&P 500 are excellent investment options, but they cater to different investor needs. XEQT shines as a one-stop, globally diversified solution, making it perfect for Canadian investors who want simplicity and exposure to multiple markets. On the other hand, the S&P 500 offers a more aggressive approach with its strong focus on U.S. equities and higher potential returns.

For most Canadian investors, XEQT’s all-in-one convenience and global diversification make it a more practical choice, especially if you’re just starting your investment journey.

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