XEQT Portfolio Turnover Explained: Why Low Turnover Means More Money in Your Pocket

A few years ago, I owned a Canadian equity mutual fund through one of the big banks. The MER was high – I knew that. But what I didn’t know was that the fund manager was buying and selling stocks like a day trader on espresso. The fund’s turnover rate was over 80%. That meant almost the entire portfolio was being replaced every single year.

I didn’t notice it at first. There’s no line item on your statement that says “hey, we churned your portfolio and it cost you money.” But it was there, buried in trading costs, bid-ask spreads, and capital gains distributions that showed up on my tax return like uninvited guests. When I finally did the math, I realized this silent drag was costing me hundreds of dollars a year on a modest portfolio – money that was essentially invisible.

Then I switched to XEQT, and portfolio turnover basically became a non-issue. XEQT’s turnover rate sits around 5-8% annually. Compare that to the 80%+ I was dealing with before, and you start to see why this is one of the most underappreciated advantages of passive index investing.

If you’ve never thought about portfolio turnover, you’re not alone. Most investors focus on MER (and they should – XEQT’s MER is impressively low). But turnover is the fee behind the fee, the hidden cost that nobody talks about at dinner parties. Let’s change that.

1. What Is Portfolio Turnover Rate? (The Simple Explanation)

Portfolio turnover rate measures how often the holdings inside a fund are bought and sold over a year. Think of it like this: if a fund holds 100 stocks and replaces 50 of them in a year, the turnover rate is 50%.

More precisely, turnover is calculated by taking the lesser of total purchases or total sales of securities, divided by the fund’s average net assets, expressed as a percentage.

Here’s what the numbers mean in plain English:

• 5% turnover – The fund barely trades. It buys and holds. Only about 1 in 20 holdings gets swapped out per year.
• 50% turnover – Half the portfolio is being replaced annually. The fund manager is actively making bets.
• 100% turnover – The entire portfolio has been replaced in a single year. That’s a lot of trading.
• 200%+ turnover – Yes, this exists. Some aggressive funds turn over their entire portfolio twice a year or more.

The key insight is simple: every trade costs money. When a fund manager buys or sells a stock, there are brokerage commissions, bid-ask spreads, and market impact costs. Those costs come directly out of the fund’s returns – your returns. And in a non-registered account, all that selling can trigger capital gains that get passed along to you, the investor, whether you wanted them or not.

2. XEQT’s Turnover Rate vs. Active Mutual Funds: A Massive Gap

Let’s put real numbers on the table. XEQT and its underlying index ETFs maintain a turnover rate of roughly 5-8% per year. That’s because XEQT tracks broad market indices, and indices don’t change much from year to year. A stock only enters or exits the index when it crosses certain market-cap thresholds, gets acquired, or goes bankrupt.

Now compare that to what the average actively managed Canadian mutual fund does:

That’s not a small difference. It’s a 10x to 20x difference. And every percentage point of turnover carries real costs.

The trading costs embedded in a high-turnover fund typically add 0.5% to 1.0% per year in drag on returns – costs that never show up in the MER. So when you see a mutual fund with a 2.0% MER and think “okay, that’s my total cost,” you’re wrong. Add another 0.5-1.0% for turnover-related costs, and your true all-in cost could be 2.5-3.0% annually.

With XEQT’s low turnover, these hidden trading costs are negligible – maybe 0.01-0.05% per year. Combined with its low MER, what you see is very close to what you get.

3. Why Low Turnover Saves You Real Money

Let’s break down the three ways high turnover quietly drains your portfolio:

Trading Costs

Every time a fund manager buys or sells a stock, the fund pays transaction costs. These include:

• Brokerage commissions – The fee paid to execute the trade.
• Bid-ask spreads – The difference between what buyers will pay and what sellers will accept. On large institutional trades, this can be significant.
• Market impact – When a large fund sells a big block of shares, it can actually push the price down, getting a worse execution price.

For a fund with $1 billion in assets and 80% turnover, that means $800 million in trades per year. Even at a conservative 0.1% cost per trade, that’s $800,000 per year in trading friction – paid by unitholders.

Capital Gains Distributions

This is the one that really stings in a taxable account. When a fund manager sells a stock for a profit, the fund realizes a capital gain. By law, the fund has to distribute those gains to unitholders at year-end. You receive a T3 slip, and you owe tax on gains you never chose to realize.

High-turnover funds generate capital gains distributions almost every year. Low-turnover funds like XEQT rarely do, because they rarely sell.

Opportunity Cost

Money spent on trading costs is money that isn’t compounding. Over decades, even tiny amounts of drag become enormous. A fund that loses 0.5% per year to turnover costs doesn’t just lose that 0.5% – it loses the compounding on that 0.5%, year after year after year.

4. The Compounding Cost of High Turnover Over 25+ Years

Let me show you exactly what turnover costs look like when you zoom out. We’ll compare two scenarios using a $100,000 initial investment growing at 8% annually before costs:

Scenario A: XEQT (Low Turnover)

• MER: 0.20%
• Hidden turnover costs: ~0.03%
• Total annual drag: 0.23%
• Effective annual return: 7.77%

Scenario B: Typical Bank Mutual Fund (High Turnover)

• MER: 2.00%
• Hidden turnover costs: ~0.70%
• Total annual drag: 2.70%
• Effective annual return: 5.30%

Here’s what $100,000 grows to over time:

Read that last line again. Over 30 years, the difference is $481,100 on a single $100,000 investment. And a meaningful chunk of that gap – roughly $100,000 to $150,000 of it – comes specifically from turnover-related costs, not just the MER difference.

Now imagine you’re also contributing $500 per month over those 30 years. The gap widens to well over a million dollars. That’s not a rounding error. That’s retirement money. That’s “do I work until 65 or 55” money.

The point isn’t that turnover alone accounts for all of this (the MER difference does heavy lifting too). The point is that turnover is the hidden partner-in-crime that most investors never notice. It takes the already-expensive mutual fund and makes it even more expensive than it appears.

5. How Turnover Affects Different Account Types

Not all accounts are created equal when it comes to turnover’s impact. The tax implications vary dramatically depending on where you hold your investments.

TFSA (Tax-Free Savings Account)

• Turnover impact: Low. Since all growth is tax-free, capital gains distributions from high-turnover funds don’t create a tax bill. You still pay trading costs embedded in the fund, but the tax drag disappears.
• Bottom line: Turnover still matters (trading costs are real), but the tax penalty is neutralized.

RRSP (Registered Retirement Savings Plan)

• Turnover impact: Low to moderate. Growth is tax-deferred, so capital gains distributions don’t trigger immediate taxes. However, when you eventually withdraw, everything is taxed as regular income – even gains that would have been taxed at the lower capital gains rate in a non-registered account. High turnover in an RRSP indirectly costs you by converting what could have been capital gains into fully taxable income.
• Bottom line: The tax deferral helps, but the embedded trading costs still drag on returns.

Non-Registered (Taxable) Account

• Turnover impact: High. This is where turnover really hurts. Every capital gains distribution is taxable in the year it’s received. A high-turnover fund can generate annual taxable events even if you never sell a single unit. You could owe hundreds or thousands in taxes every year on “gains” you didn’t choose to realize.
• Bottom line: In a taxable account, low turnover isn’t just nice to have – it’s essential. XEQT’s minimal turnover means minimal forced capital gains, which means you control when you pay tax.

For a deeper comparison of which account suits your situation, check out our guide on TFSA vs RRSP for holding XEQT.

Quick Reference: Turnover Cost Impact by Account Type

6. XEQT vs. Canadian Bank Mutual Funds vs. Actively Managed ETFs

Let’s do a head-to-head comparison across the metrics that matter most. I’m using representative data for common Canadian fund types:

A few things jump out:

• XEQT’s true all-in cost is roughly 10-12x lower than a typical bank mutual fund. That’s not a typo. When you account for MER plus turnover costs, XEQT costs about a quarter of a percent while bank funds cost 2.5-3.0%.
• Even actively managed ETFs, which are cheaper than mutual funds, still have significantly higher turnover and hidden costs than XEQT. The “smart beta” or “active ETF” space has lower MERs than mutual funds, but the turnover is still 5-10x higher than a passive index fund.
• Capital gains distributions are the sleeper issue. If you hold a high-turnover fund in a non-registered account, you’re getting surprise tax bills every December. With XEQT, that almost never happens.

7. Why Index Funds Naturally Have Low Turnover

This isn’t a coincidence or a lucky feature. Low turnover is baked into the DNA of how index funds work.

An index fund like XEQT doesn’t have a portfolio manager making calls about which stocks to buy and sell. It simply holds the stocks in its target indices (in XEQT’s case, through four underlying iShares ETFs covering Canadian, US, international, and emerging markets). The only reasons to trade are:

• A stock enters or exits the index – This happens when a company grows large enough to be included, shrinks below the threshold, gets acquired, merges, or goes bankrupt.
• Rebalancing between underlying funds – XEQT maintains target weights (roughly 25% Canada, 45% US, 25% international, and 5% emerging markets), so BlackRock occasionally rebalances to stay on target.
• Handling inflows and outflows – When investors buy or sell XEQT units, BlackRock’s authorized participants manage creation and redemption baskets, but this is done through an in-kind mechanism that minimizes actual trading.

There’s no “I think tech is overvalued, let me sell some Apple” happening here. No sector rotation, no market timing, no conviction bets. The index is the strategy, and the index barely changes.

This is a feature, not a bug. The less trading a fund does, the more of the market’s return you actually capture.

8. What Happens When Indices Rebalance (The Small Amount of Turnover XEQT Does Have)

XEQT isn’t zero turnover – no fund is. Here’s where its 5-8% turnover comes from:

Index Reconstitution

The major indices that XEQT’s underlying funds track (like the S&P/TSX Capped Composite, S&P 500, MSCI EAFE, and MSCI Emerging Markets) are reviewed and reconstituted on a regular schedule – typically quarterly or semi-annually.

During reconstitution:

• Companies that have grown large enough are added to the index.
• Companies that have shrunk below the threshold are removed.
• Companies involved in mergers or acquisitions are adjusted.
• IPOs of sufficient size may be added.

For a broad market index, this usually affects only a handful of stocks each review period. The S&P/TSX Composite might add or remove 5-10 stocks in a given quarter. Over a full year, that might account for 3-5% turnover.

Target Weight Rebalancing

XEQT maintains its geographic allocation – roughly 25/45/25/5 across Canada, US, international, and emerging markets. When one region outperforms the others significantly, BlackRock rebalances to bring the weights back in line. This happens gradually and adds perhaps 1-3% of additional turnover per year.

Corporate Actions

Stock splits, mergers, spin-offs, and delistings all require small adjustments. These are routine and add minimal turnover.

The key takeaway: XEQT’s turnover is driven by mechanical, rules-based events – not by someone’s opinion about where the market is headed. This kind of turnover is healthy and necessary. It keeps the fund aligned with its target index without the costs associated with active management.

9. How to Check Turnover Rate for Any Fund

Want to look up the turnover rate before you invest in any fund? Here’s how:

For ETFs (including XEQT)

1. Go to the fund provider’s website. For XEQT, that’s BlackRock Canada’s iShares page.
2. Find the “Fund Facts” or “ETF Facts” document. This is a standardized disclosure document required by Canadian securities regulators.
3. Look for “Portfolio Turnover Rate.” It’s usually listed as a percentage in the fund details or the annual financial statements.

For Mutual Funds

1. Check Fund Facts on the fund company’s website or on your brokerage’s fund screener.
2. Look in the Management Report of Fund Performance (MRFP). This annual report includes the turnover rate.
3. Use Morningstar.ca. Search for the fund and look under “Operations” or “Portfolio” for the turnover figure.

What to Look For

• Under 10% – Excellent. This is typical of broad market index funds.
• 10-30% – Moderate. Some strategic or smart beta ETFs fall here.
• 30-70% – High. Active management with significant trading.
• 70%+ – Very high. This fund is churning heavily, and you’re paying for it whether you see it or not.

Quick Tips

• Compare apples to apples. A bond fund will naturally have higher turnover than an equity fund because bonds mature and need to be replaced.
• Look at multiple years. A single year might be an outlier (e.g., a major index reconstitution). Look at the 3-year or 5-year average for a better picture.
• Don’t forget the underlying funds. For a fund-of-funds like XEQT, you should also check the turnover of the underlying ETFs (ITOT, XIC, XEF, IEMG) to get the full picture.

10. Why This Is One of the Most Overlooked Advantages of XEQT

Let me be direct: if you’re comparing XEQT to alternatives, turnover rate should be one of the first things you look at. Here’s why it’s so consistently ignored:

It’s invisible. Turnover costs don’t appear on your statement. They’re not deducted as a separate fee. They’re baked into the fund’s net asset value, silently reducing your return. You’d have to dig into financial statements and do your own math to quantify them.

It’s boring. Nobody writes clickbait headlines about portfolio turnover. “This fund’s 80% turnover rate is quietly costing you $50,000 over 20 years” doesn’t get the same engagement as “Top 10 stocks to buy right now.” But it should.

Fund companies don’t advertise it. Actively managed funds aren’t eager to tell you their high turnover is a cost. They’d rather talk about their “star manager” or their “disciplined process” or their latest quarterly outperformance.

It compounds quietly. A 0.5% annual drag from turnover costs doesn’t feel like much in any given year. But over 25 or 30 years, it’s the difference between a comfortable retirement and a tight one.

XEQT’s low turnover is part of a bigger picture: it’s a low-cost, tax-efficient, globally diversified, automatically rebalanced investment that does everything right. The low MER gets the headlines, and rightfully so. But turnover is the unsung hero – the quiet advantage that keeps compounding in your favour, year after year, without you having to think about it.

If you’re currently holding high-turnover funds, especially in a non-registered account, I’d encourage you to check their turnover rate today. You might be surprised. And then ask yourself: is this fund’s performance good enough to justify all that hidden friction? For most actively managed funds, the honest answer is no.

XEQT doesn’t try to be clever. It doesn’t try to time the market or pick winners. It just owns everything, holds everything, and lets compounding do the heavy lifting. That simplicity – including the low turnover that comes with it – is exactly why it works.

Related Reading

• What is XEQT? A Comprehensive Guide
• XEQT’s MER Explained
• XEQT Tax Implications for Canadian Investors
• XEQT in TFSA vs RRSP: Where Should You Hold It?