Every Downside of XEQT: An Honest Look at What This ETF Can't Do

I run a website literally called Just Buy XEQT. I’ve written over a hundred articles about it. I’ve convinced friends, family members, and complete strangers on the internet to buy it. I’ve sat at dinner tables and given unsolicited 20-minute monologues about why a single, boring ETF is the best thing most Canadians can do with their money. My girlfriend once told me she could “recite the XEQT pitch in her sleep.”

So you might think I believe it’s a perfect investment.

I don’t.

XEQT is, in my opinion, the best single-fund solution for the majority of Canadian investors. But “best” doesn’t mean “flawless.” There are real downsides, real limitations, and real tradeoffs baked into this ETF – and I think pretending they don’t exist would make me a worse advocate for it, not a better one.

This is the post where I lay every one of them out. No spin, no hedging, no “but actually.” Just an honest list of everything XEQT can’t do, everything it gets wrong, and everything that might matter to you depending on your situation.

Then, at the end, I’ll explain why I still buy it anyway.

1. No Bond Allocation – It’s 100% Equities, and That Means Real Volatility

This is the biggest structural limitation of XEQT, and it’s one that I think gets glossed over too often in the “just buy XEQT” discourse (including, admittedly, on this website).

XEQT is 100% equities. No bonds. No fixed income. No cash buffer. When the market drops 30%, your portfolio drops 30%. There’s no cushion.

For context, during the COVID crash of March 2020, global equities fell roughly 34% from peak to trough in about five weeks. If you had $100,000 in XEQT, you were looking at your account showing something in the range of $66,000. That’s not a typo. That’s not hypothetical. That’s what 100% equity exposure actually feels like in a real downturn.

Who this matters to:

• Retirees or near-retirees who are drawing down their portfolio. If you need to sell units to fund your living expenses and the market is down 30%, you’re selling at the worst possible time. This is called sequence-of-returns risk, and it can be devastating.
• Anyone with a time horizon under 5-7 years. Saving for a house down payment in 3 years? XEQT is the wrong tool. A high-interest savings account or GIC ladder is far more appropriate.
• Investors who can’t stomach volatility. This isn’t a character flaw. If a 30% drop would cause you to panic sell, you’d be better off in something like XGRO (80/20 equity/bond split) or VBAL (60/40).

I’ve written about this in more detail in my XEQT vs bond ETFs post, but the short version is: if you’re in the accumulation phase with a 10+ year horizon and you can genuinely hold through a crash without selling, 100% equities is historically optimal. If either of those conditions isn’t true, XEQT alone isn’t the right answer.

My take: This is a real limitation, but it’s also a feature. XEQT doesn’t pretend to be something it’s not. If you need bonds, add bonds. The problem isn’t XEQT – it’s using it in a situation it wasn’t designed for.

2. Foreign Withholding Tax Drag

This one is genuinely annoying, and it’s one of those things that most beginner investors don’t learn about until they’re deep into the weeds. Here’s the short version:

When U.S. companies pay dividends, the IRS withholds 15% of those dividends at the source. Because XEQT holds its U.S. equities through an underlying Canadian-domiciled fund rather than holding U.S. stocks directly, there’s no way to recover that withholding tax – even in an RRSP, which normally has a treaty exemption for directly held U.S.-listed ETFs.

The estimated drag from foreign withholding taxes on XEQT is roughly 0.15% to 0.30% per year, depending on dividend yields and your account type. That’s on top of the stated MER of 0.20%.

A DIY investor could avoid some of this drag by holding a U.S.-listed ETF like VTI directly in their RRSP and managing currency conversion through Norbert’s Gambit. That would save roughly 0.15-0.25% per year on the U.S. allocation.

My take: On a $100,000 portfolio, we’re talking about $150-$250 per year in lost dividends. Is it worth restructuring your entire approach, learning Norbert’s Gambit, and managing multiple ETFs to save that? For most people, no. For someone with $500K+ who enjoys optimization, maybe. I’ve covered this in my foreign withholding tax breakdown.

3. Overweight Canada – Home Country Bias Is Baked In

XEQT allocates roughly 25% to Canadian equities. Canada represents about 3% of global stock market capitalization. That means XEQT overweights Canada by about 8x relative to its actual share of the global economy.

This isn’t an accident – iShares does this intentionally because Canadian investors benefit from holding Canadian stocks in certain ways (no foreign withholding tax on domestic dividends, no currency risk, familiarity). But it does mean you’re making a concentrated bet on a relatively small, resource-heavy, financials-dominated market.

Canada’s stock market is heavily concentrated in just a few sectors:

• Financials (banks, insurance): ~30-35% of the TSX
• Energy (oil, gas): ~15-18%
• Materials (mining, forestry): ~10-12%

That means roughly 55-65% of your Canadian allocation is in just three sectors. You’re significantly underweight technology, healthcare, and consumer discretionary compared to a truly global portfolio.

The counterargument: Holding Canadian equities reduces currency risk on that portion, avoids foreign withholding taxes, and provides dividend tax credit eligibility in non-registered accounts. There are real, tangible benefits to the home bias. It’s not irrational – it’s just a tradeoff.

My take: I’d personally prefer something closer to 15% Canada rather than 25%, but I’m not going to lose sleep over it. The Canadian allocation serves a practical purpose, and the 10% difference isn’t going to make or break my retirement. If this bothers you and you want pure global market-cap weighting, you’d need to build your own portfolio – which brings us to downside #6.

4. No Small-Cap Tilt

XEQT is market-cap weighted, which means the biggest companies in the world get the biggest share of your portfolio. Apple, Microsoft, Nvidia, Amazon – these mega-caps dominate the index and, by extension, dominate XEQT.

The flip side is that small-cap stocks are significantly underrepresented. XEQT’s underlying U.S. fund tracks the S&P 500, which by definition only includes the 500 largest U.S. companies. The thousands of small-cap and micro-cap companies that make up the rest of the U.S. market? They’re barely there.

Why does this matter? Historically, small-cap stocks have delivered a return premium over large caps – the so-called “small-cap premium.” Academic research (Fama and French, most famously) has shown that small-cap stocks have outperformed large-cap stocks by roughly 1.5-2.5% per year over very long time periods, though this premium has been inconsistent in recent decades.

By holding XEQT, you’re essentially making a bet that the mega-cap and large-cap companies that dominate today’s indexes will continue to outperform – or at least match – the broader market. That’s been true recently (thanks largely to U.S. tech), but it’s not guaranteed to persist.

I’ve written more about this in my small cap exposure gap analysis.

My take: This is a real gap, but it’s a moderate one. XEQT’s international holdings do include some mid-cap exposure, and the Canadian allocation includes some smaller TSX-listed companies. If you believe strongly in the small-cap premium, you could add a small-cap ETF like XCS (iShares S&P/TSX SmallCap Index) or VBR (Vanguard Small-Cap Value, U.S.-listed) as a satellite holding. But for the vast majority of investors, the convenience of a single fund outweighs the potential incremental return from a small-cap tilt.

5. Currency Drag and Volatility

About 75% of XEQT is invested outside of Canada, which means 75% of your portfolio is exposed to foreign currency fluctuations. XEQT is unhedged, meaning it doesn’t use derivatives to neutralize the impact of currency movements on your returns.

This cuts both ways. When the Canadian dollar weakens, your foreign holdings are worth more in CAD terms – boosting returns. When the loonie strengthens, those same holdings are worth less in CAD – dragging on returns.

Over the last 20 years, the Canadian dollar has traded anywhere from roughly $0.62 USD to above parity ($1.00+ USD). That’s an enormous range. In any given year, currency movements can add or subtract 3-5% or more from your portfolio return, completely independent of how the underlying stocks actually performed.

I’ve gone deeper on this in my currency exposure article.

My take: Over very long periods (20+ years), currency effects tend to wash out. The Canadian dollar goes through cycles against the USD, and over a full investing lifetime, these movements tend to roughly cancel each other. Hedging isn’t free either – it costs money and introduces its own tracking errors. I’m comfortable being unhedged, but I understand why the short-term noise is unsettling. If you’re investing on a shorter timeline, this volatility can genuinely affect your outcome.

6. You Can’t Customize It

This is the fundamental tradeoff of any all-in-one fund. You get what you get, and you don’t get to tweak it.

Things you can’t do with XEQT:

• Tilt toward value stocks (which have historically outperformed growth over long periods)
• Add a small-cap overweight (see downside #4)
• Exclude specific sectors (no ESG screening, no way to avoid oil stocks or weapons manufacturers)
• Adjust geographic weighting (if you think the 25% Canada allocation is too high or too low, tough luck)
• Overweight or underweight specific regions (can’t go heavier on emerging markets even if you want to)
• Tax-loss harvest individual components (you can only sell the whole thing, not individual pieces)

A DIY investor with a 3-4 ETF portfolio could achieve similar diversification with more control. A common example:

My take: For maybe 5-10% of investors – the ones who genuinely enjoy portfolio construction, who will actually rebalance consistently, and who won’t be tempted to tinker at the worst possible time – a DIY portfolio makes sense. For the other 90%, the inability to customize XEQT isn’t a bug. It’s the entire point. The best portfolio is the one you actually stick with, and simplicity is the single most underrated factor in long-term investment success.

7. The MER Is Low, But It’s Not Zero

XEQT has a management expense ratio of 0.20%. That’s genuinely cheap compared to the vast majority of mutual funds sold in Canada (which often charge 1.5-2.5%), and it’s a fantastic deal for a fully diversified, automatically rebalanced global equity portfolio.

But it’s not as cheap as doing it yourself.

As shown in the table above, a DIY 3-ETF portfolio using individual iShares or Vanguard ETFs could get you to roughly 0.10-0.13% in weighted MER. That’s about 0.07-0.10% cheaper than XEQT per year.

On a $100,000 portfolio, that difference is $70-$100 per year. On a $500,000 portfolio, it’s $350-$500 per year. Over a 30-year investing career with a growing portfolio, the cumulative cost difference could add up to a few thousand dollars.

That’s real money. I won’t pretend it isn’t.

But here’s what that $70-$100 per year buys you with XEQT:

• Automatic rebalancing across four underlying funds
• No need to manually rebalance quarterly or annually
• No risk of behavioral mistakes during rebalancing (selling winners to buy losers is psychologically hard)
• Simplicity that makes it more likely you’ll actually stick with the plan
• One line in your portfolio instead of three or four

For a deeper dive on costs, check out my XEQT MER breakdown.

My take: The 0.20% MER is a convenience fee, and it’s one of the best deals in Canadian investing. I would happily pay $70-$100 a year for the peace of mind and time savings. If you’re at the point where you have a $500K+ portfolio and the cost difference is meaningful, you’re also probably at the point where a fee-only financial planner could help you optimize your structure.

8. No Income Focus – The Yield Is Low

If you’re an investor who wants regular cash flow from your portfolio – maybe you’re retired, maybe you like seeing dividends hit your account – XEQT is going to disappoint you.

XEQT’s distribution yield is roughly 1.5-2.0%, paid quarterly. Compare that to:

If your investing strategy revolves around generating income, XEQT is the wrong tool. It’s a growth-oriented fund. The total return will likely be higher over time than a high-dividend portfolio (because companies that reinvest profits rather than paying them out tend to grow faster), but the cash-in-hand yield is low.

My take: The obsession with dividend yield is one of the most persistent and harmful myths in Canadian retail investing. A dollar of capital gains and a dollar of dividends are worth the same amount. In fact, in a non-registered account, dividends are forced taxable events, while capital gains can be deferred until you sell. XEQT’s lower yield is arguably a feature in a TFSA or non-registered account. But I understand the psychological appeal of seeing cash hit your account every quarter, and if that’s what keeps you invested, I won’t argue with it.

9. It’s Boring – And That’s Harder Than It Sounds

I know, I know. “Boring is good” is basically the tagline of passive investing. And it’s true. The evidence overwhelmingly supports doing as little as possible with your portfolio.

But living it is harder than talking about it.

When Bitcoin is ripping 40% in a month and your co-worker won’t shut up about their gains, holding XEQT feels like standing in the corner at the party sipping water. When Nvidia triples in a year and AI stocks dominate every podcast and subreddit, buying a globally diversified index fund that returned 8% feels almost embarrassingly prudent.

This is the psychological cost of XEQT, and it’s real. Not because XEQT is wrong, but because human beings are social creatures who constantly compare themselves to others. FOMO isn’t a personality flaw – it’s hardwired into our brains. And the financial media, social media, and your buddy from university are all conspiring (inadvertently) to make you feel like you’re leaving money on the table.

The data says you’re not. The vast majority of stock pickers and crypto gamblers underperform a simple index fund over any meaningful time period. But the data doesn’t help you at Thanksgiving dinner when your cousin is showing everyone their portfolio.

My take: I’ve written before about why I quit day trading and bought XEQT. The boredom is the hardest part of this strategy. Not the MER, not the foreign withholding tax, not the Canadian overweight. The thing that will most likely derail your XEQT portfolio is you getting bored and doing something stupid. Know this going in, and plan for it. I personally allow myself to read about investing as much as I want – but I don’t allow myself to act on anything I read. The only action I take is buying more XEQT on schedule.

The Full Downside Summary

Here’s every downside in one place, with my honest severity rating and who should actually care about each one:

Notice something? Not a single one of those is rated “High.” Every downside of XEQT is either low or medium severity. None of them are deal-breakers for the typical long-term Canadian investor in the accumulation phase.

The worst items on the list – no bonds and the boredom factor – are both things you can manage without changing your fund selection. You manage the bond risk by only using XEQT when your time horizon is appropriate. You manage the boredom by having a plan and sticking to it.

10. Why I Still Buy XEQT Anyway

After everything I just wrote, here’s the honest truth: I still buy XEQT every single week.

Not because it’s perfect. Not because I’m unaware of the downsides. But because the alternative – building a custom portfolio from scratch, managing rebalancing, optimizing for tax drag, converting currency, tracking multiple ETFs across multiple account types – introduces a level of complexity that creates its own risks.

The biggest risk in investing isn’t a 0.08% MER differential. It isn’t foreign withholding tax drag. It isn’t Canadian home bias.

The biggest risk is you. It’s you panic-selling during a crash. It’s you chasing last year’s hot sector. It’s you leaving $50,000 in a savings account earning 2% while you “figure out the right allocation.”

XEQT eliminates almost all of those risks by being so simple that there’s nothing to overthink. One fund. One ticker. Buy it regularly. Don’t sell it. That’s the whole strategy.

Is it theoretically possible to do better? Yes. A perfectly executed, tax-optimized, multi-ETF portfolio with Norbert’s Gambit currency conversion and annual rebalancing could outperform XEQT by a small margin. But “perfectly executed” is doing a lot of heavy lifting in that sentence. The more complex your strategy, the more opportunities you have to make mistakes – and mistakes in investing are far more expensive than an extra 0.08% in MER.

I’ll take the boring, imperfect, 0.20% MER all-in-one fund that I’ll actually stick with for 30 years over the theoretically optimal portfolio that I’ll tinker with, second-guess, and eventually abandon.

XEQT isn’t perfect. But it’s perfect enough. And in investing, perfect enough – combined with consistency and time – beats perfect every single time.

If you’ve read this far and you still want to buy XEQT (and I hope you do), the easiest way to get started is through Wealthsimple. You can compare it against other options in my best platform to buy XEQT breakdown, or see how XEQT stacks up against VEQT if you’re still deciding between the two.