Inside XEQT: How BlackRock Builds and Manages Your All-in-One ETF

I had a strange moment a few years ago. I was sitting at my kitchen table, staring at my Wealthsimple app, watching a number that represented a very large chunk of my life savings. That number was attached to five letters: XEQT. And it hit me – I had no idea what was actually happening behind those five letters.

I knew the basics, of course. I knew XEQT was a globally diversified all-equity ETF. I knew it held stocks from all over the world. I knew the MER was 0.20% and that it was managed by BlackRock, the largest asset manager on the planet. But I did not really understand how it worked. How does BlackRock decide what goes into this thing? Who decides the allocations? What happens when markets shift and things get out of balance? How does a single ticker symbol on the Toronto Stock Exchange give me exposure to over 9,000 companies across 40-plus countries?

I spent a few weeks digging into fund documents, prospectuses, methodology papers, and way too many iShares PDFs. What I found was genuinely fascinating. XEQT is not some mysterious black box. It is a carefully engineered machine with specific parts, clear rules, and deliberate design choices. Once I understood how the sausage was made, I actually felt more confident holding it. Not less.

This post is the “under the hood” tour I wish someone had given me. If you hold XEQT – or you are thinking about it – this is how your money is actually being managed.

1. XEQT Is a Fund of Funds – Not a Stock Picker

This is the first thing that surprises a lot of people. When you buy a share of XEQT, you are not buying individual stocks. You are not directly owning shares of Apple, or Royal Bank, or Toyota. Instead, you are buying a fund that holds four other ETFs. Each of those underlying ETFs, in turn, holds thousands of individual stocks.

This structure is called a fund of funds. Think of XEQT as a master portfolio manager who hires four specialist managers, each responsible for a different region of the world. The master manager (XEQT) decides how much money to give each specialist. The specialists (the underlying ETFs) handle the actual stock picking within their region.

Why does BlackRock build it this way instead of just buying 9,000 stocks directly? A few reasons:

• Efficiency. The underlying ETFs already exist, are already well-managed, and already have massive scale. Building on top of them avoids reinventing the wheel.
• Cost reduction. Running one fund that holds four ETFs is cheaper than running one fund that directly holds thousands of securities across dozens of countries with different settlement rules, currencies, and tax treaties.
• Simplicity for investors. You get one ticker, one price, one trade. The complexity is hidden beneath the surface, handled by professionals.

Think of it like ordering a combo meal at a restaurant. You get four dishes that were already on the menu, expertly portioned and served together.

2. The Four Underlying ETFs: Your Global Team

So what are these four underlying ETFs, and what exactly do they do? Here is the lineup, along with approximate target allocations:

Let me walk you through each one briefly.

ITOT is the American powerhouse. It tracks the S&P Total Market Index, which covers essentially every investable stock in the United States – large-cap giants like Apple and Microsoft, mid-cap growth companies, and small-cap names you have probably never heard of. When people talk about “the US stock market,” this is it. All of it. Not just the S&P 500, but the entire thing. ITOT getting roughly 45% of XEQT’s assets reflects the reality that the US is the world’s largest and most liquid equity market.

XIC is the Canadian component. It tracks the S&P/TSX Capped Composite Index, which is essentially the Canadian stock market in a box. This means the big banks (Royal Bank, TD, BMO), energy companies (Enbridge, Canadian Natural Resources), and Shopify. The “capped” part of the index name is important – it means no single company can exceed a certain weight in the index, which prevents one mega-cap name from dominating the whole fund. XIC getting about 25% of XEQT is a deliberate “home bias” that BlackRock builds in for Canadian investors. Canada makes up only about 3% of global stock market capitalization, so 25% is a meaningful overweight. This is intentional – it reduces currency risk, aligns your investments with the economy you live in, and accounts for the fact that many Canadian investors have expenses, tax obligations, and retirement plans denominated in Canadian dollars.

XEF covers the international developed world outside of North America. It tracks the MSCI EAFE IMI Index – that stands for Europe, Australasia, and the Far East, Investable Market Index. This is where you get exposure to Japanese automakers, Swiss pharmaceutical companies, British banks, German manufacturers, and Australian miners. The “IMI” part means it includes small-cap and mid-cap stocks too, not just the big names. This gives you a thorough cross-section of the developed world beyond the US and Canada.

IEMG is the emerging markets allocation. It tracks the MSCI Emerging Markets IMI Index and gives you exposure to companies in China, India, Taiwan, South Korea, Brazil, and dozens of other developing economies. This is the higher-growth, higher-volatility slice of your portfolio. These are economies that are still industrializing and urbanizing at a rapid pace. The allocation is smaller – roughly 5% – reflecting both the higher risk and the smaller share of global market cap these countries represent in XEQT’s target methodology. For a deeper look at this slice of XEQT, I wrote a full piece on XEQT’s emerging market exposure.

Together, these four ETFs give you exposure to over 9,000 companies across more than 40 countries. That is what a single share of XEQT gets you.

3. The Indexes Behind the ETFs: Where the Rules Live

Each of the four underlying ETFs tracks a specific index. And those indexes are where the real rules live – the rules that determine which stocks get in, which stocks get kicked out, and how much weight each stock receives.

Here is a summary of the four indexes:

All four indexes use market-capitalization weighting. This means larger companies get a larger share of the index. Apple is a bigger part of ITOT than, say, a regional US bank with a $2 billion market cap. Royal Bank is a bigger part of XIC than a small Canadian mining company. This is not an active decision by anyone – it is a mechanical, rules-based approach. The market itself determines the weights.

The index providers – S&P Dow Jones Indices and MSCI – review and reconstitute their indexes on a regular schedule. Companies that grow large enough to meet the inclusion criteria get added. Companies that shrink below the threshold get removed. Mergers, acquisitions, and IPOs are accounted for. This happens quarterly or semi-annually, depending on the index, and it all happens automatically. Neither you nor BlackRock needs to make a judgment call about whether Tesla should be in the fund. The index rules decide.

This is one of the things I find most reassuring about XEQT. There is no fund manager waking up and deciding which stocks to buy based on a gut feeling. The entire system runs on transparent, published rules. You can go to the S&P and MSCI websites and read the methodology documents yourself. It is a level of transparency that most actively managed funds cannot match.

4. How BlackRock Sets and Maintains the Target Allocation

Here is a question I had that took some digging to answer: who decides that the US gets 45% and Canada gets 25%? And could those numbers change?

The target allocation for XEQT is set by BlackRock’s Investment Strategy Group in conjunction with their Asset Allocation Committee. This is a team of senior portfolio managers and strategists who review the target weights periodically. Their goal is to build a strategic allocation that makes sense for the long term given:

• Global market capitalization – the US dominates the global equity market, so it gets the largest weight
• Home country bias for Canadian investors – Canada is deliberately overweighted relative to its global market cap share
• Diversification benefits – international developed and emerging markets provide exposure to different economic cycles and growth drivers
• Practical considerations – currency exposure, tax efficiency, and the investable universe available through existing iShares ETFs

These target allocations are not static forever. BlackRock reserves the right to adjust them through periodic reviews. But in practice, the targets have been remarkably stable since XEQT launched in 2019. The US, Canada, international, and emerging market weights have stayed in a tight range. This is not a fund that makes dramatic tactical bets. It is designed to be a strategic, long-term allocation that you can set and forget.

That stability is a feature, not a bug. The whole point of XEQT is that you do not need to worry about whether it is time to overweight Japan or reduce your Canadian exposure. The committee handles that thinking, and their track record suggests they favor slow, evidence-based adjustments over flashy market timing calls.

5. How Rebalancing Works in Practice

Over time, the four underlying ETFs will not grow at the same rate. If the US market rips higher while Canadian stocks lag, that 45/25/25/5 allocation will naturally drift. Maybe the US creeps up to 48% and Canada drops to 23%. If left unchecked, this drift would change the risk profile of the fund – you would end up with more US exposure and less Canadian exposure than intended.

This is where XEQT’s automatic rebalancing comes in, and it is one of the most valuable things BlackRock does for you.

BlackRock uses two primary methods to rebalance XEQT:

Cash flow rebalancing. This is the elegant, low-cost method. When new money flows into XEQT (because investors are buying shares), BlackRock does not distribute that cash proportionally to all four ETFs. Instead, they direct more of the new cash toward the underweight ETFs and less toward the overweight ones. This naturally pulls the allocation back toward target without needing to sell anything. Since XEQT is a popular, high-volume fund with steady daily inflows, cash flow rebalancing handles a large portion of the drift correction.

Periodic rebalancing trades. When cash flows alone are not enough to correct the drift – for example, during an extended period where one region massively outperforms the others – BlackRock will execute actual trades. They sell some of the overweight ETF and buy more of the underweight ones. This happens as needed, with the fund manager monitoring the drift and acting when it exceeds internal thresholds.

The beauty of this system is that you never have to think about it. If you were holding the four underlying ETFs yourself in a DIY portfolio, you would need to monitor the weights, calculate how far each one has drifted, decide when to rebalance, execute the trades, potentially trigger capital gains in a taxable account, and pay commissions. With XEQT, all of this happens automatically, invisibly, and tax-efficiently inside the fund wrapper. I have written a full deep-dive on how XEQT rebalancing works if you want the complete picture.

6. How XEQT Handles Currency: The Unhedged Approach

Here is something that catches some Canadian investors off guard: roughly 75% of XEQT is invested outside of Canada, and none of it is currency-hedged. That means when the Canadian dollar strengthens against the US dollar, the euro, or the yen, your XEQT returns in Canadian dollar terms will be lower than the returns of the underlying stocks in their local currencies. And when the loonie weakens, the opposite happens – you get a tailwind.

Why does BlackRock leave XEQT unhedged? A few reasons:

• Currency hedging is expensive. It involves rolling forward contracts that cost money, which would increase the effective MER of the fund. For a product designed to be low-cost, adding hedging drag runs counter to the whole philosophy.
• Currency movements tend to wash out over very long periods. Over 10, 20, or 30 years, the Canadian dollar will fluctuate up and down against foreign currencies. Research suggests that the long-term impact of currency movements on a diversified global equity portfolio is close to a wash. It adds short-term volatility but does not systematically help or hurt you over decades.
• Currency diversification is actually a feature. If the Canadian economy hits a rough patch and the loonie drops, your US and international holdings become worth more in Canadian dollar terms. This acts as a natural hedge against Canadian economic risk. You want some of your wealth denominated in other currencies.

I know this can feel unsettling when you see the loonie moving around. But I have come to view the currency exposure as a strength of XEQT, not a weakness. It means my wealth is not entirely tied to the fate of the Canadian dollar. For a deeper look at how currency affects your returns, check out my post on the impact of a weak Canadian dollar on XEQT.

7. Securities Lending: How BlackRock Earns Extra Revenue With Your Shares

This one surprised me when I first learned about it. BlackRock does not just hold the stocks inside XEQT’s underlying funds and let them sit there. They actively lend out those securities to other market participants – short sellers, market makers, and institutions – in exchange for a fee.

How does it work? In simple terms: a borrower asks to borrow shares from the fund. They post collateral worth at least 102% of the value of those shares. They pay a lending fee. When they are done, they return the shares, get their collateral back, and the fund pockets the fee. BlackRock keeps 37.5% of the revenue and returns 62.5% back to the fund, which slightly offsets the MER.

Should you worry about it? In short, no. The practice is heavily regulated, fully collateralized, and standard across the ETF industry. Vanguard does it. BMO does it. Every major ETF provider does it. The collateral requirements mean the fund is protected even if a borrower defaults. I was skeptical at first, but the more I researched it, the more I realized it is just another well-engineered piece of the XEQT machine that quietly works in your favor.

I wrote a full deep-dive on XEQT securities lending if you want to understand the mechanics, risks, and revenue in detail.

8. Tracking Error: Why Your Returns Are Not Exactly the Sum of the Parts

If XEQT holds four ETFs and those four ETFs track four indexes, you might expect XEQT’s return to be the exact weighted-average return of those four indexes. It will be very close, but it will never be exact. The small gap is called tracking difference, and the volatility of that gap over time is called tracking error.

There are several reasons this gap exists:

• The MER. XEQT’s 0.20% management expense ratio is deducted from the fund’s assets over the course of the year. This is the single biggest and most predictable source of tracking difference. If the weighted benchmark returns 10.00%, XEQT will return something in the neighborhood of 9.80%, all else being equal.
• Cash drag. XEQT needs to hold a small cash balance to handle daily creations, redemptions, and dividend payments. That cash earns close to nothing compared to equities, so it creates a tiny drag on returns.
• Trading costs. When BlackRock rebalances or processes inflows and outflows, there are bid-ask spreads and other transaction costs. These are small for a fund of XEQT’s size, but they are not zero.
• Securities lending revenue. This actually works in the other direction – it partially offsets the MER drag by adding a small amount of revenue back into the fund.
• Timing mismatches. Dividends from the underlying ETFs are received on specific dates but may not be reinvested immediately. Small timing gaps between when dividends are earned and when they are deployed create tiny performance differences.

In practice, XEQT’s tracking has been very tight. The fund has consistently delivered returns that are close to the weighted benchmark minus the MER, which is exactly what you would expect from a well-run index fund. I have a full analysis of this in my post on XEQT tracking error.

The key takeaway is that a small tracking difference is normal, expected, and not a sign that anything is wrong. It is simply the cost of having professionals manage a real-world portfolio on your behalf instead of investing in a hypothetical mathematical index.

9. Why Understanding All of This Should Make You More Confident

I started this post by describing the uneasy feeling of staring at a ticker symbol that represented a huge portion of my savings without really understanding what was happening underneath it. After doing the research, that unease is completely gone. And I think the same thing will happen for you.

Here is what we have learned:

• XEQT is built on a fund-of-funds structure that leverages four specialized, institutional-grade ETFs, each covering a major region of the global equity market.
• Those ETFs track transparent, rules-based indexes managed by S&P Dow Jones and MSCI – two of the most respected index providers in the world. No gut feelings, no star fund managers, no secret sauce. Just rules.
• The target allocation is set by a professional investment committee at the world’s largest asset manager, reviewed periodically, and designed for long-term strategic stability.
• Rebalancing happens automatically through a combination of smart cash-flow management and periodic trades, saving you time, money, and the mental burden of doing it yourself.
• The currency exposure is unhedged by design, which reduces costs and actually provides natural diversification against Canadian-specific economic risk.
• Securities lending is a fully collateralized, well-regulated practice that generates extra revenue to partially offset your costs.
• Tracking error is minimal and well within the range you would expect from a fund with a 0.20% MER.

Every piece of XEQT was designed by people whose careers depend on getting this right. BlackRock manages over $10 trillion in assets globally. Their reputation and business model depend on these products working as advertised. You are not trusting your savings to some fly-by-night operation. You are plugging into the largest asset management machine ever built.

The best part? You do not need to understand any of this for it to work. XEQT will do its job whether you have read this article or not. But knowing how it works is what helps you hold it when markets drop 20% and every fiber of your being is screaming to sell. That understanding is the foundation of conviction, and conviction is the single most important ingredient in long-term investing success.

I sleep better knowing exactly what my money is doing inside XEQT. I hope after reading this, you do too.

Related Reading

• What Is XEQT? A Complete Guide
• XEQT Holdings: What You Actually Own
• XEQT Automatic Rebalancing Explained
• XEQT Tracking Error Explained
• XEQT Securities Lending Explained
• XEQT MER: What You Pay and Why It Matters
• XEQT Emerging Market Exposure Explained