XEQT vs Canadian Bank Stocks: Why the Big Six Might Not Be Enough

My dad has owned Royal Bank since 1987. He brings it up at least twice a year — usually at Thanksgiving and again at Christmas, right around the time his quarterly dividend hits. “I paid seven dollars a share,” he will say, leaning back in his chair with the quiet confidence of a man who has been right about one thing for nearly forty years. “Seven dollars. You know what it pays me in dividends alone now? More than I paid for it.”

He is not wrong. That original investment has been a spectacular winner. And because of stories like his — passed down at kitchen tables across the country — Canadian bank stocks have become something close to a national religion. Your uncle owns TD. Your neighbour swears by BMO. Your coworker’s entire RRSP is split between Royal Bank and Scotiabank “because they have never cut the dividend.”

I get the appeal. I really do. I owned bank stocks myself for years. But here is the question I eventually had to ask myself: Is a handful of Canadian bank stocks actually the best way to build long-term wealth? Or is there a better, simpler, more diversified approach that still captures everything the banks offer — and then some?

That is what this post is about. I am going to put the Big Six Canadian bank stocks head-to-head against XEQT — iShares’ all-in-one global equity ETF — and show you exactly where each approach shines, where it falls short, and which one makes sense for your portfolio in 2026.

1. The Canadian Obsession with Bank Stocks

Before we get into the numbers, let’s talk about why Canadians love bank stocks so much. Because this is not just a financial preference — it is a cultural phenomenon.

Canada’s Big Six banks are:

1. Royal Bank of Canada (RY) — the largest by market cap
2. Toronto-Dominion Bank (TD) — the one that seems to own every second branch in North America
3. Bank of Nova Scotia (BNS) — the “international” bank with heavy Latin American exposure
4. Bank of Montreal (BMO) — the oldest of the bunch, founded in 1817
5. Canadian Imperial Bank of Commerce (CM) — often seen as the underdog
6. National Bank of Canada (NA) — Quebec’s favourite, and the smallest of the six

Together, these six banks make up roughly 20% of the entire S&P/TSX Composite Index. In other words, one-fifth of the entire Canadian stock market is just six banks. Let that sink in for a moment.

Why do Canadians love them so much?

• Decades of uninterrupted dividends. Most of the Big Six have paid dividends continuously for over 100 years. Royal Bank has not missed a dividend since 1870. That kind of track record builds generational loyalty.
• Oligopoly protection. Canada’s banking system is essentially a protected oligopoly. The federal government tightly regulates who can operate as a bank, which means the Big Six face very little domestic competition. This regulatory moat has kept profits fat for decades.
• Familiarity. You walk past their branches every day. You use their apps. Your mortgage is with one of them. Investing in something you interact with daily feels comfortable and safe.
• The dividend tax credit. Eligible Canadian dividends receive preferential tax treatment, making bank dividends particularly attractive in taxable accounts.
• Family tradition. This one is huge. Many Canadians were literally given bank shares as gifts from parents or grandparents. Selling them would feel like betraying the family legacy.

I am not here to say your dad was wrong to buy Royal Bank in 1987. He was right. But the question is not whether bank stocks have been good investments in the past. The question is whether they are the best foundation for your portfolio going forward.

2. Head-to-Head: Big Six Banks vs XEQT

Let’s lay it all out in a comparison table.

The Basics

Individual Bank Performance Snapshot

A few things to notice right away:

The banks are not all the same. Royal Bank and National Bank have been strong performers. TD and Scotiabank have significantly underperformed the global market over the past decade. If your bank stock portfolio happened to be overweight BNS and TD, you actually would have been better off in XEQT — by a wide margin.

Dividend yield is not the same as total return. Scotiabank has one of the highest yields of the Big Six, but its total return has been the worst. That high yield was partially compensating for a stock price that went sideways for years. More on this trap later.

XEQT’s total return is competitive with most banks — and it achieves that return with vastly less concentration risk.

3. The Home Country Bias Problem

Here is a statistic that should make every Canadian investor uncomfortable: Canada represents roughly 3% of the global stock market by market capitalization.

Three percent. That is it.

Yet the average Canadian investor holds between 50% and 70% of their equity portfolio in Canadian stocks. This is what finance researchers call home country bias — the tendency to massively overweight your own country’s stock market because it feels familiar and safe.

When your entire equity portfolio is six Canadian bank stocks, you are not just overweight Canada. You are 100% concentrated in a single sector within a single country that represents 3% of global opportunity. You are betting everything on the continued outperformance of Canadian financial services.

What are you missing? The US tech revolution (Apple, Microsoft, NVIDIA, Amazon), European pharmaceutical giants (Novo Nordisk, ASML), Asian semiconductor powerhouses (TSMC, Samsung), emerging market growth stories, and thousands of companies across healthcare, consumer goods, and industrials.

Over the past 15 years, the US stock market has dramatically outperformed the Canadian market. If you were 100% in Canadian banks during that period, you participated in none of that growth.

I am not saying Canada is a bad market. The Big Six have been solid. But limiting yourself to six stocks in one country’s financial sector is not a diversification strategy. It is a concentration bet.

4. The Concentration Risk of Bank Stocks

Let’s talk about what could go wrong — because this is the part that bank stock devotees tend to handwave away.

All six banks share the same risks:

• Same regulatory environment. A single policy change from OSFI affects all six banks simultaneously. New capital requirements, stress tests, or lending restrictions hit the entire sector at once.
• Same housing market exposure. Roughly 40-60% of their loan books are residential mortgages. A housing correction hits all six simultaneously.
• Same Canadian economy. A recession does not spare some banks and punish others. Rising unemployment and loan defaults affect all six at the same time.
• Same interest rate environment. Bank profits are heavily influenced by the rate spread. Bank of Canada policy changes flow through to all six.
• Same currency risk. All six banks report in Canadian dollars and are valued primarily by the health of the Canadian economy.

Here is the critical point: owning all six banks does not give you meaningful diversification. The correlation between the Big Six is extremely high — typically above 0.80. During the 2020 pandemic crash, all six fell between 30% and 45% in a matter of weeks.

Compare that to XEQT, which holds over 9,000 companies across 49 countries and all 11 market sectors. When Canadian banks struggle, your US tech stocks might be thriving. True diversification means owning assets that do not all move in the same direction at the same time. Six bank stocks moving in lockstep is the illusion of diversification.

5. What People Get Wrong About Bank Dividends

This is the section that tends to upset people. But I think it is important, so here it goes.

Mistake #1: Confusing dividend yield with total return

I touched on this earlier, but it is worth repeating because it is the single most common mistake Canadian bank stock investors make.

Scotiabank has a yield of roughly 6.5%. That sounds fantastic — until you realize the stock price has barely moved in a decade. Meanwhile, a company like Constellation Software pays almost no dividend but has delivered annualized returns above 30%. Which investor is actually wealthier?

Dividend yield is not return. Total return is return. And total return is price appreciation plus dividends. A high dividend yield with a flat or falling stock price can actually be a warning sign, not a reason to celebrate.

For a deeper dive into why total return matters more than yield, check out my full comparison of XEQT vs Canadian dividend ETFs.

Mistake #2: Believing dividends are “free money”

When a company pays a $1 dividend, the stock price drops by approximately $1 on the ex-dividend date. You are not receiving extra money — you are receiving your own money back. This does not mean dividends are bad. It just means they are not magic. The method of returning capital matters less than the total result.

Mistake #3: The “dividend safety” narrative

“Banks have never cut their dividend!” is a popular refrain. And for the Big Six, it is mostly true — Canadian banks survived 2008 and 2020 without cutting dividends, unlike many international banks.

But “never cut” does not mean “will never cut.” It also does not mean the dividend will keep growing at the same rate. There are scenarios — a severe Canadian housing crash, a prolonged recession, major regulatory changes — where even the Big Six could face pressure on their payouts. The fact that it has not happened does not mean it cannot happen.

More importantly, focusing on whether the dividend gets cut distracts you from the bigger picture. Even if the dividend holds steady, your total return can be poor if the stock price declines. Investors who held BNS for the past decade got every single dividend payment — and still underperformed a simple global index fund.

Mistake #4: Ignoring tax implications in the bigger picture

The Canadian dividend tax credit is real and meaningful, but it only applies in non-registered accounts. In a TFSA, all gains are tax-free regardless of source. In an RRSP, all withdrawals are taxed as regular income. The dividend tax credit is irrelevant in both — which is where most Canadians’ investments should be held.

In a taxable account, the dividend tax credit does help. But you lose the benefit of tax deferral on unrealized capital gains. With XEQT, more of your return comes from price appreciation that compounds untaxed until you sell. With bank stocks paying 4-6% dividends, you are forced to realize taxable income every quarter whether you want to or not.

For a comprehensive look, see my XEQT tax guide.

6. XEQT Already Holds All the Big Six Banks

Here is something that surprises a lot of people: if you own XEQT, you already own every single one of the Big Six banks.

XEQT allocates approximately 25% of its portfolio to Canadian equities through the iShares Core S&P/TSX Capped Composite Index ETF (XIC). Since the Big Six banks make up roughly 20% of the TSX, your XEQT holdings include meaningful positions in RY, TD, BNS, BMO, CM, and NA.

Your approximate bank exposure inside XEQT:

So on a $100,000 XEQT portfolio, you have roughly $6,200 invested in the Big Six Canadian banks. That is not nothing. You are participating in the Canadian banking story — you are just doing it as part of a globally diversified portfolio rather than making it your entire portfolio.

This is the key insight: XEQT does not ask you to give up bank stocks. It asks you to hold them in proportion to their actual weight in the global economy. Canada’s banks are important, but they are not 100% of the investable world. They are a piece of it. XEQT gives you that piece along with the other 9,000+ pieces.

To see everything else you own inside XEQT, check out my breakdown of XEQT holdings.

7. When Individual Bank Stocks Might Still Make Sense

I have been making a strong case for XEQT throughout this post, and I stand behind it for most investors. But I want to be honest about the situations where holding individual bank stocks can still be a reasonable choice.

You are a retiree focused on income

If you are already retired, the predictable quarterly dividends from bank stocks can provide real psychological comfort. A “homemade dividend” strategy with XEQT is mathematically equivalent or better, but if selling shares in retirement makes you anxious enough to make poor decisions, the behavioural benefit might be worth the tradeoff.

You have a large non-registered account and are in a low tax bracket

At lower income levels, the Canadian dividend tax credit can make eligible dividends extremely tax-efficient — in some cases, effectively tax-free. If you have already maxed your TFSA and RRSP, bank stocks in a taxable account have a legitimate tax advantage.

You genuinely understand and want the concentrated exposure

If you have done the research, understand the risks, and are making a deliberate bet rather than just following what your dad did — that is a valid choice. Just make sure it is not your entire portfolio.

You received bank stocks as a gift or inheritance

If you hold bank stocks with a very low cost base (like my dad’s $7 Royal Bank shares), selling creates a significant capital gains tax bill. In this case, hold the existing position and direct all new investments into XEQT. Over time, XEQT will naturally reduce your bank stock concentration.

8. The Hybrid Approach: XEQT Core with a Bank Stock Satellite

If you are reading this and thinking, “I see the case for XEQT, but I still want some extra bank exposure,” there is a middle ground that can work well.

The core-satellite approach uses XEQT as the foundation of your portfolio (the core) and adds a small allocation to individual bank stocks (the satellite).

A practical example:

This gives you global diversification through XEQT as your foundation, plus extra Canadian bank exposure and higher dividend income if you have conviction in the sector. The key is keeping the bank allocation small enough that a bad year does not derail your financial plan. If bank stocks are 10% of your portfolio and the sector drops 30%, your overall portfolio takes a 3% hit. Painful, but survivable. If bank stocks are 100% of your portfolio, that same drop is catastrophic.

For more on how to structure this kind of portfolio, see my post on core-satellite investing with XEQT.

Rules for the hybrid approach:

1. XEQT stays the core. It should be at least 80% of your equity portfolio. The bank stocks are the seasoning, not the meal.
2. Limit yourself to 2-3 banks. You do not need all six. Pick the ones you have the most conviction in.
3. Rebalance annually. If your bank stocks outperform and drift above 15%, trim them back. If they underperform, add more or just let XEQT contributions naturally rebalance.
4. Do not chase the highest yield. Pick banks based on quality and total return potential, not just dividend yield.

9. The Real Risk: Doing Nothing Because “Banks Are Safe”

The biggest danger of the bank stock mindset is not that Canadian banks are bad investments. They are not. The biggest danger is that the comfort of bank stocks prevents you from building a properly diversified portfolio.

I have met dozens of investors whose entire RRSP or TFSA is just a handful of bank stocks. When I ask why, the answer is always: “They are safe. They always go up. They pay great dividends.”

This is recency bias and familiarity bias working together. The banks have been good recently, so we assume they will be good forever. But no investment — not even the Big Six — is guaranteed to outperform forever.

Consider: the Canadian housing market is one of the most expensive in the world, technology is disrupting financial services globally, and regulatory changes can shift the landscape overnight. None of this means the banks are going to crash tomorrow. It means that concentrating your entire financial future in six companies within one sector of one country carries real risk — risk that is easy to ignore when everything has been going well.

XEQT is not immune to downturns either. But when you own 9,000+ companies across 49 countries, no single risk factor can dominate your outcome. That is the entire point of diversification.

10. Final Verdict: XEQT Wins for Most Canadians

Let me be direct about where I stand.

For the vast majority of Canadian investors — especially those in the accumulation phase who are building wealth over 10, 20, or 30+ years — XEQT is the better foundation for your portfolio than a collection of Big Six bank stocks.

Here is why:

• True diversification. 9,000+ companies across 49 countries and all market sectors, versus 6 companies in one sector and one country.
• Competitive total returns. XEQT has matched or outperformed most individual bank stocks when measured on total return, not just dividend yield.
• Far less concentration risk. No single company, sector, or country can sink your portfolio.
• Automatic rebalancing. XEQT rebalances itself across its four underlying funds. No manual adjustments needed.
• Simplicity. One fund. One purchase. Done. No monitoring six individual companies for earnings reports, dividend announcements, and regulatory news.
• You still own the banks. XEQT holds all six through its Canadian allocation. You are not giving up bank exposure — you are right-sizing it.

Bank stocks might still make sense if:

• You are retired and need the psychological comfort of regular dividend income
• You have a large non-registered account and benefit specifically from the dividend tax credit at a low tax bracket
• You hold bank stocks with a very low cost base and selling would trigger a large tax bill
• You want a small satellite position alongside an XEQT core

My dad’s Royal Bank shares have been a fantastic investment. I have told him that many times. But when he asks me what I would do if I were starting today with a fresh portfolio, my answer is always the same: I would buy XEQT, set up automatic contributions, and not look at it for thirty years.

The banks are great companies. But the world is bigger than Bay Street. And your portfolio should be too.

Related Reading

• What Is XEQT?
• XEQT vs Canadian Dividend ETFs: Why Total Return Beats Yield Chasing
• XEQT vs Individual Stocks: Which Strategy Actually Wins?
• XEQT Holdings: What You Actually Own
• Home Country Bias and XEQT
• XEQT Tax Implications: Canadian Investors Guide
• Core-Satellite Portfolio with XEQT
• Should I Sell My Stocks for XEQT?