Interest Rates and XEQT: What the Bank of Canada's Rate Cuts Mean for Your Portfolio

If you’ve been following financial news at all over the past couple of years, you’ve probably noticed that interest rates have been on quite a ride. The Bank of Canada hiked aggressively from 2022 to 2023, paused, and then started cutting in mid-2024. By early 2026, we’ve seen multiple rate cuts bring us well below the peak, with more potentially on the horizon.

Every time a rate decision drops, my inbox fills up with the same question: “What does this mean for my XEQT?”

I get it. When the financial landscape shifts, it’s natural to wonder whether your investment strategy needs to shift too. The short answer? It doesn’t. Keep buying XEQT. But since you’re here, let me explain exactly why – and what’s actually happening under the hood of your portfolio when rates change.

1. The Interest Rate Story So Far

Let’s quickly catch up on where we’ve been and where we’re heading.

After the fastest rate hiking cycle in decades, the Bank of Canada pivoted to cuts as inflation cooled and economic growth needed support. The trend in early 2026 is clearly toward lower rates, though the pace depends on inflation data, employment numbers, and global economic conditions.

For investors, this rate environment creates an important backdrop. But as we’ll see, it shouldn’t change your XEQT strategy one bit.

2. How Interest Rates Affect Different Parts of XEQT

XEQT holds over 12,000 stocks across four underlying ETFs spanning the globe. Different segments of this portfolio respond to interest rate changes in different ways.

Canadian stocks (~25% of XEQT)

Canadian banks, which make up a huge chunk of the TSX, tend to benefit from a steepening yield curve (short-term rates falling while long-term rates stay higher). Lower rates also help the Canadian housing market, which supports banks, real estate companies, and consumer spending.

However, lower rates can compress bank net interest margins if they fall too far. Energy companies in XEQT’s Canadian allocation are more sensitive to global oil prices than domestic interest rates.

US stocks (~45% of XEQT)

US equities, especially tech and growth stocks, tend to love lower rates. When rates fall:

• Growth stocks become more valuable because future earnings are discounted at a lower rate
• Tech companies can borrow more cheaply to fund expansion
• Consumer spending picks up as mortgages and auto loans get cheaper

The S&P 500 has historically performed well during rate-cutting cycles, which is good news for the largest allocation in your XEQT portfolio.

International developed stocks (~20% of XEQT)

European and Japanese companies in XEQT’s international allocation are affected by their own central banks (ECB, Bank of Japan) rather than the Bank of Canada. This is actually a diversification benefit – not all central banks move in sync.

Emerging markets (~10% of XEQT)

Emerging markets often benefit significantly from falling US and global rates. Lower rates in developed countries mean:

• Less pressure on emerging market currencies
• Cheaper dollar-denominated debt for emerging market companies
• More capital flows into higher-growth emerging economies

3. Historical Performance: What Happens to Stocks When Rates Fall

History gives us a pretty encouraging picture for equity investors during rate-cutting cycles.

The pattern is clear: in most rate-cutting cycles, equities perform well. The exception was the 2007-2009 financial crisis, where stocks fell sharply at first but then staged a massive recovery. Even investors who bought at the very peak of that cycle were in positive territory within a few years.

The key takeaway: falling rates create a tailwind for stocks. Companies borrow more cheaply, consumers spend more freely, and asset valuations rise. As an XEQT holder, this is generally good news.

4. The GIC vs XEQT Calculation Is Shifting

During the rate hiking cycle, GICs became genuinely attractive for the first time in years. When you could lock in 5%+ guaranteed, it made the risk-reward calculation interesting. I even wrote about XEQT vs GICs if you want the full comparison.

But as rates fall, that calculation shifts decisively back toward XEQT:

Here’s the fundamental issue: GIC rates move with the Bank of Canada rate. XEQT’s long-term expected returns don’t.

When GICs were paying 5.5%, the gap between “guaranteed 5.5%” and “expected 8-10% with volatility” was relatively narrow. But when GICs drop to 3.5% and falling, you’re leaving a lot more potential return on the table by staying in guaranteed products.

If you parked money in GICs waiting for the “right time” to invest in equities, that right time was yesterday. The second-best time is today.

5. What NOT to Do: Don’t Try to Time Rate Decisions

Every eight weeks, the Bank of Canada announces a rate decision. And every eight weeks, financial media turns it into a dramatic event with predictions, speculation, and breathless commentary.

I’ll let you in on a secret: trying to trade around rate decisions is a losing game.

Here’s why:

• Markets price in expected rate changes before they happen. By the time the BoC announces a cut, stocks have usually already adjusted.
• The “surprise” factor matters more than the actual decision. A 25 basis point cut when markets expected 50 can actually cause stocks to fall. It’s the deviation from expectations that moves markets, not the rate change itself.
• You can’t consistently predict rate decisions. Even professional economists get it wrong regularly. In 2024, market expectations for the Fed’s rate path changed dramatically multiple times throughout the year.
• Transaction costs and taxes eat into any timing gains. Every time you sell and buy back, you’re paying spreads and potentially triggering capital gains taxes.

I made this mistake once. Back in early 2024, I was convinced the Bank of Canada would cut rates sooner than the market expected. I was tempted to load up on rate-sensitive stocks before the announcement. I didn’t act on it (thankfully), and it turns out the BoC cut on schedule with exactly the amount the market expected. My “insight” would have generated zero alpha and cost me in transaction fees.

The lesson: set up your XEQT auto-invest and ignore rate announcements. Your portfolio doesn’t need you to react to them.

6. XEQT’s Built-In Diversification Protects You Either Way

This is the beauty of XEQT that I keep coming back to. You don’t need to predict whether rates will rise or fall because XEQT is designed to perform in any rate environment.

Here’s why:

• If rates fall: Growth stocks (tech, healthcare) benefit from lower discount rates. Consumer spending increases. Real estate companies do well. XEQT’s large US tech allocation catches this tailwind.
• If rates rise unexpectedly: Value stocks and financials tend to outperform. Canadian banks earn wider margins. Energy companies benefit from the inflation that drives rate hikes. XEQT’s Canadian allocation catches this.
• If rates stay flat: Companies continue growing earnings, dividends get paid, and long-term compounding does its thing. XEQT’s global diversification captures growth wherever it happens.

No matter which direction rates go, some portion of XEQT’s 12,000+ holdings will benefit. That’s the entire point of global diversification.

Compare this to someone who tries to position their portfolio based on rate predictions:

• “Rates are falling, so I’ll buy all tech stocks” – works great until it doesn’t
• “Rates are rising, so I’ll load up on bank stocks” – same problem
• “I’ll sit in cash until I figure out what rates will do” – guaranteed to miss returns

XEQT says: “I own everything, everywhere, all at once.” And that’s the right answer.

7. Sectors in XEQT That Benefit Most from Rate Cuts

While you shouldn’t try to overweight specific sectors based on rate expectations, it’s educational to understand which parts of your XEQT portfolio get the biggest tailwind from falling rates:

Technology (~20% of XEQT)

Tech companies, especially high-growth ones, benefit enormously from lower rates. Their valuations are based on future earnings, and lower discount rates make those future earnings worth more today. This is why the Nasdaq tends to rally hard during rate-cutting cycles.

Real Estate (~3% of XEQT)

REITs and real estate companies directly benefit from lower borrowing costs. Property values tend to rise when mortgage rates fall, and REITs can refinance debt more cheaply.

Utilities (~3% of XEQT)

Utility stocks are often seen as “bond proxies” because of their stable dividends. When bond yields fall (which happens when rates are cut), utilities become more attractive to income-seeking investors.

Consumer Discretionary (~10% of XEQT)

Lower rates mean cheaper car loans, mortgages, and credit card rates. Consumers spend more, and companies like Amazon, Home Depot, and Canadian consumer brands benefit.

Emerging Markets (~10% of XEQT)

As mentioned earlier, falling global rates are a significant positive for emerging market economies and companies. Capital flows into higher-yielding emerging market assets when developed market rates fall.

The beauty of XEQT is that you already own all of these sectors in appropriate proportions. You don’t need to make any changes to benefit from rate-sensitive rallies.

8. What About Bond ETFs? Should You Add Bonds as Rates Fall?

Falling rates are great for bond prices (bond prices move inversely to yields). So you might wonder: should you add a bond ETF alongside XEQT to capture the rate-cutting tailwind?

For most investors in their wealth-building years, the answer is no. Here’s why:

• XEQT is 100% equities by design – it’s built for long-term growth
• Adding bonds reduces your expected return over a 10+ year horizon
• If you want bonds, consider XBAL (iShares Core Balanced ETF Portfolio) which has a built-in 40% bond allocation
• Bonds made more sense at peak rates (5%+ yields). As rates fall, bonds become less attractive on a go-forward basis
• Trying to time bond purchases around rate decisions is the same timing mistake we discussed earlier

If you’re 10+ years from retirement, stick with XEQT. If you’re closer to retirement and want to reduce volatility, the appropriate move is gradually shifting from XEQT to XBAL – not trying to time bond markets based on rate predictions.

9. The Simple Playbook: Keep Buying Regardless

I know this might sound anticlimactic after all the analysis above. You came here wondering what to do about interest rates, and my advice is… do nothing different?

Yes. Exactly.

Here’s your rate-proof XEQT playbook:

1. Set up automatic contributions – weekly, biweekly, or monthly on Wealthsimple
2. Buy XEQT on every payday – regardless of what the Bank of Canada just announced
3. Ignore financial media predictions about the next rate decision
4. Don’t check your portfolio after rate announcements (or at all, ideally)
5. Reinvest dividends through DRIP or by buying more XEQT
6. Rebalance only when your life changes (approaching retirement, major life event), not when rates change

The investors who build the most wealth aren’t the ones who correctly predict rate movements. They’re the ones who consistently invest through every rate environment and let compounding do the heavy lifting.

I’ve been buying XEQT through 5% rates, through the first cut, through the fifth cut, and I’ll keep buying through whatever comes next. My automated weekly purchase doesn’t know or care what the Bank of Canada decided. And that’s exactly the point.

10. The Bottom Line

Interest rates make for exciting headlines but should make for boring portfolio decisions. Here’s what to remember:

• Falling rates are generally positive for XEQT – cheaper borrowing, higher valuations, more consumer spending
• XEQT is diversified across sectors and geographies that respond differently to rate changes, providing natural hedging
• GICs become less attractive as rates fall, making the case for XEQT stronger
• Timing rate decisions is a losing game – even professionals can’t do it consistently
• Your best strategy hasn’t changed: buy XEQT regularly, in any rate environment, and hold for the long term

The Bank of Canada will raise rates, cut rates, pause rates, and everything in between over the course of your investing career. Through all of it, XEQT will keep holding 12,000+ companies around the world, automatically rebalancing, and quietly compounding your wealth.

Don’t overthink this. Just keep buying XEQT.

Frequently Asked Questions

Should I wait for the next rate cut before buying XEQT?

No. Markets already price in expected rate cuts before they happen. By the time the announcement comes, the move has already occurred. Time in the market beats timing the market – start investing today.

Will XEQT go down if the Bank of Canada raises rates unexpectedly?

It might dip in the short term, but XEQT’s global diversification means Canadian rate decisions are just one factor among many. US rates, global growth, corporate earnings, and dozens of other factors also drive returns. A surprise rate hike wouldn’t derail a long-term XEQT strategy.

Should I move money from GICs to XEQT now that rates are falling?

If you have a 5+ year time horizon, equities like XEQT have historically outperformed GICs significantly. As GIC rates fall, the opportunity cost of staying in guaranteed products grows. Consider gradually moving GIC money into XEQT as GICs mature – no need to do it all at once.

Do interest rates affect XEQT’s dividend?

Indirectly, yes. Lower rates can reduce dividends from banks and financial companies, but they can boost earnings (and eventually dividends) from growth companies. XEQT’s diversification means its dividend is influenced by thousands of companies across many sectors and rate environments. Don’t worry about it.