How XEQT Survives a Market Crash: The ETF Mechanics That Protect Your Investment

I still remember sitting on my couch on March 16, 2020, refreshing my Wealthsimple app every thirty seconds like it was going to change the outcome. The S&P 500 had just dropped 12% in a single day – the worst since 1987. My XEQT position was down over 30% from where I’d bought in just weeks earlier. My palms were actually sweating.

But it wasn’t the losses that scared me the most. It was the question I couldn’t answer: What’s actually happening inside my ETF right now?

I imagined some kind of digital warehouse where all my stocks were stored, and I pictured that warehouse on fire. I didn’t understand the plumbing – the mechanical infrastructure that keeps an ETF like XEQT functioning even when markets are in full panic mode. And because I didn’t understand it, my brain filled in the blanks with worst-case scenarios.

Turns out, the plumbing is remarkable. XEQT isn’t just a basket of stocks with a ticker symbol slapped on it. It’s an elegantly engineered financial machine with multiple redundant safety systems – systems that were stress-tested during that exact March 2020 crash and performed exactly as designed.

This post is the deep dive I wish I’d had back then. If you’ve ever wondered what actually happens inside XEQT when markets are falling apart, this is for you.

1. The Scary Headlines vs. Reality

Every market crash comes with its own flavour of apocalyptic headlines:

• “Markets in freefall – worst day since the Great Depression”
• “Trillions in value wiped out”
• “Is this the beginning of the end?”

These headlines are designed to generate clicks, not to inform you. And they work – because our brains are wired to respond to threats with urgency. When you see “trillions wiped out,” your lizard brain doesn’t think about market mechanics. It thinks: run.

But here’s what those headlines never tell you: the ETF infrastructure is doing its job in the background, quietly and efficiently, even during the worst days in market history.

During the March 2020 crash, XEQT and ETFs like it continued to trade normally on the TSX. Prices updated in real time. Buyers and sellers were matched. The creation and redemption mechanism – which we’ll get into shortly – kept working. The system bent under pressure, but it didn’t break.

Compare that to what happened during the 1987 crash, before ETFs existed. Individual investors couldn’t get through to their brokers on the phone. Orders went unexecuted for hours. People had no idea what their portfolios were worth. The modern ETF ecosystem is a massive upgrade in transparency, liquidity, and resilience.

The reality is that ETFs like XEQT are specifically built to survive market crashes. Not just survive them – to function normally during them. The mechanisms that make this possible are genuinely fascinating, and understanding them will transform how you think about your investment.

2. The Creation/Redemption Process: XEQT’s Secret Immune System

This is the single most important concept in ETF mechanics, and it’s the one that almost nobody outside the financial industry understands. Once you get it, you’ll never worry about ETF safety during a crash again.

Here’s the core idea: XEQT units can be created and destroyed on any given trading day to match supply and demand.

Think of it like a thermostat in your house. When demand heats up (lots of people want to buy XEQT), the system creates new units to cool things down and keep the price aligned with the value of the underlying stocks. When demand drops (lots of people want to sell), the system destroys units to prevent the price from falling too far below the actual value of what’s inside the fund.

How It Works Step by Step

1. Too many buyers: When lots of investors want to buy XEQT and the price starts creeping above the value of its underlying holdings (the NAV), an Authorized Participant – we’ll talk about who these are in a moment – steps in. They buy the underlying stocks on the open market, deliver them to BlackRock Canada, and receive brand-new XEQT units in return. These new units hit the market, increasing supply and pushing the price back down toward NAV.

2. Too many sellers: When a wave of selling pushes XEQT’s price below its NAV, the Authorized Participant does the reverse. They buy the “cheap” XEQT units on the TSX, deliver them back to BlackRock, and receive the underlying stocks in return. They then sell those stocks on the open market for a small profit. This process removes XEQT units from the market, reducing supply and pushing the price back up toward NAV.

This is happening all day, every trading day, automatically driven by profit incentives. Nobody needs to flip a switch. The arbitrage opportunity itself is the mechanism – it’s self-correcting by design.

Why This Matters During a Crash

During a crash, selling pressure is enormous. Without the creation/redemption mechanism, XEQT’s price could spiral far below the actual value of its holdings. Investors would be selling at deeply discounted prices, taking losses that don’t reflect reality.

But because Authorized Participants can step in and redeem units for the underlying stocks, there’s a natural floor. The bigger the discount gets, the more profitable the arbitrage becomes, and the more aggressively APs will step in to close the gap.

It’s like a pressure valve on a steam pipe. When pressure builds up (selling pressure during a crash), the valve opens to release it. The pipe doesn’t explode. The system is designed for exactly this kind of stress.

3. Authorized Participants: The Unsung Heroes of Your Portfolio

You’ve heard me mention Authorized Participants (APs) a few times now. Let’s talk about who these people actually are, because they’re doing more to protect your XEQT investment than you probably realize.

Authorized Participants are large financial institutions – typically big banks and specialized trading firms – that have a formal agreement with BlackRock to create and redeem ETF units. In Canada, XEQT’s APs include major players like RBC Capital Markets, TD Securities, National Bank Financial, and other institutional market makers.

These aren’t small operations. These are some of the largest, most well-capitalized financial institutions in the country.

Why They Do It

APs aren’t acting out of altruism. They’re in it for the arbitrage profit – and that’s exactly why the system works so well. Their greed is your protection.

Here’s the math: If XEQT is trading at $27.50 on the TSX but the underlying holdings are worth $27.75 per unit, an AP can:

1. Buy XEQT units on the TSX at $27.50
2. Redeem them with BlackRock for the underlying stocks worth $27.75
3. Sell those stocks on the open market
4. Pocket the $0.25 per unit difference (minus transaction costs)

On a trade of 50,000 units, that’s a $12,500 profit. Multiply that across dozens of trades per day, and you see why APs are highly motivated to keep prices in line.

Do APs Disappear During Crashes?

This is the fear that keeps some investors up at night: what if the APs just… stop? What if the chaos gets so bad that even the big banks step back and let the mechanism break down?

It’s a legitimate question, and the honest answer is: APs can reduce their activity during extreme volatility, but they don’t disappear entirely. Here’s why:

• The wider the gap, the bigger the profit. If XEQT trades at a 3% discount to NAV during a crash, the arbitrage opportunity is massive. The AP doesn’t need to be brave – they just need to be greedy. A 3% risk-free spread on a large trade is enormously profitable.
• Multiple APs compete. XEQT doesn’t rely on a single AP. Multiple institutions are authorized to create and redeem units. Even if one pulls back, others will step in to capture the opportunity.
• Regulatory expectations. Market makers and APs have obligations and reputational incentives to continue providing liquidity. Pulling out completely during a crisis would damage their relationships with exchanges and issuers.

During the March 2020 crash, APs remained active across the Canadian ETF market. Bid-ask spreads widened (which is normal and expected during volatility), but the creation/redemption mechanism kept functioning. The system held.

4. What Happens When XEQT Trades at a Discount or Premium

Even with APs working around the clock, XEQT’s market price can temporarily deviate from its NAV. During calm markets, the gap is typically tiny – a few cents at most. During crashes, it can widen. Understanding why this happens and why it self-corrects is key to staying calm when you see it.

NAV vs. Market Price: A Quick Primer

• NAV (Net Asset Value): The actual value of all the holdings inside XEQT, divided by the number of units outstanding. This is what your XEQT is “really” worth based on the underlying stocks.
• Market Price: What XEQT is currently trading for on the TSX. This is set by supply and demand from buyers and sellers.

In a perfect world, these two numbers would always match. In reality, they’re usually very close but not identical. The difference is called the premium (market price > NAV) or discount (market price < NAV).

Historical Discount/Premium Data During Major Market Events

A few things to notice from this table:

• Even during the worst crash in recent memory (COVID), the discount was temporary. Within a few trading days, APs had closed the gap back to normal levels.
• The discounts have gotten smaller over time. As the Canadian ETF market has matured and more APs participate, the mechanism has become more efficient.
• During normal conditions, you’d never notice the gap. It’s fractions of a percent, corrected within minutes.

Why Discounts Appear During Crashes

Temporary discounts during crashes are usually caused by:

• Timing mismatches. XEQT holds international securities that trade in different time zones. If the TSX is open but Asian markets are closed, it’s harder to calculate the exact real-time NAV. APs factor in this uncertainty with wider spreads.
• Elevated selling pressure. When everyone is hitting “sell” simultaneously, supply of XEQT units temporarily outpaces the APs’ ability to redeem them.
• Risk premium. APs charge a wider spread during volatile periods to compensate for the risk of prices moving against them while they execute the arbitrage trade.

Why You Shouldn’t Panic About Discounts

Here’s the key insight: a temporary discount is not a loss. If XEQT trades at a 2% discount to NAV during a crash, you’re only “losing” that 2% if you sell at that moment. If you hold (which you should), the discount closes within days and you’re back to owning shares at NAV.

In fact, if you’re buying XEQT during a crash through your automatic contributions, a temporary discount means you’re getting your units at a bargain – below the actual value of the underlying stocks. That’s a good thing.

5. Circuit Breakers and Trading Halts: The Safety Net You Didn’t Know About

Beyond the creation/redemption mechanism, there’s another layer of crash protection that most retail investors don’t know about: circuit breakers.

Circuit breakers are automatic trading halts built into stock exchanges to prevent panic-driven freefall. Think of them as the emergency brakes on a runaway train. They don’t stop the train permanently – they just slow it down enough for everyone to catch their breath.

How TSX Circuit Breakers Work

The Toronto Stock Exchange (and most major exchanges worldwide) uses a tiered circuit breaker system:

Market-Wide Circuit Breakers (based on the S&P/TSX Composite Index):

Single-Stock Circuit Breakers (Single Stock Circuit Breaker – SSCB):

Individual securities, including ETFs like XEQT, also have their own circuit breakers. If XEQT’s price moves more than a specified percentage within a short time window (typically 5-10% within 5 minutes), trading is automatically paused for 5 minutes to allow prices to stabilize.

Why Circuit Breakers Help XEQT Specifically

During a flash crash – a sudden, sharp decline caused by algorithmic trading or a cascade of stop-loss orders – circuit breakers give the creation/redemption mechanism time to catch up. Here’s why that matters:

• APs need time to execute trades. Arbitrage isn’t instant. APs need to buy or sell underlying securities across multiple markets. A 5-minute pause gives them time to calculate NAV, hedge positions, and submit creation/redemption orders.
• Price discovery resets. When trading resumes after a halt, the order book rebuilds from scratch. This eliminates stale orders and gives the market a chance to find the “real” price.
• Panic is interrupted. Behavioural finance research shows that even a brief pause can break the cascade of panic selling. When the halt lifts, some sellers reconsider. This reduces the downward pressure that causes discounts.

Real-World Example: March 2020

On March 12, 2020, market-wide circuit breakers were triggered on both the NYSE and the TSX when indexes fell more than 7% shortly after the open. Trading halted for 15 minutes.

When trading resumed, the decline continued – but at a slower pace. The circuit breakers gave institutional traders time to reassess, and the APs used the pause to catch up on creation/redemption activity. By the end of the week, XEQT’s discount to NAV had largely normalized, even though the broader market was still falling.

Circuit breakers didn’t prevent the crash – they were never designed to. What they did was prevent the disorderly, cascading type of crash where prices disconnect from reality entirely. They kept the market functional, which is all you need as an XEQT holder.

6. The “Wrapper” Advantage: Why XEQT as a Fund-of-Funds Is Extra Protected

Here’s something unique about XEQT that gives it an extra layer of price integrity compared to regular ETFs: XEQT is a fund-of-funds.

XEQT doesn’t hold individual stocks directly. Instead, it holds four underlying iShares ETFs:

Why the Fund-of-Funds Structure Helps During Crashes

Each of those underlying ETFs has its own set of Authorized Participants, its own creation/redemption mechanism, and its own price discovery process. This means XEQT benefits from two layers of arbitrage:

1. At the underlying ETF level: APs for ITOT, XIC, XEF, and XEC are constantly working to keep those ETFs priced correctly relative to their underlying stocks.
2. At the XEQT level: APs for XEQT are working to keep XEQT priced correctly relative to those underlying ETFs.

It’s like having two sets of immune systems working simultaneously. Even if one underlying ETF temporarily trades at a discount (say, XEC has issues because emerging market exchanges are closed), the other three ETFs provide anchoring prices that help the XEQT-level APs calculate fair value.

This double-layer mechanism makes XEQT more resilient to pricing errors than a single ETF that holds individual stocks directly. It’s one of the underappreciated benefits of the fund-of-funds structure that BlackRock uses.

A Practical Example

Imagine it’s 10:00 AM Eastern during a market crash. Asian markets are closed, so XEC (emerging markets) is harder to price accurately. But ITOT (U.S. stocks) is trading on the NYSE right now with full, real-time pricing. XIC (Canadian stocks) is trading on the TSX with full pricing. XEF (international developed) has some time-zone issues but European markets have been trading for hours.

An AP looking at XEQT can use the live pricing from ITOT and XIC – which represent about 73% of XEQT – to anchor their fair value estimate. The uncertainty from XEC only affects about 6% of the total. This means XEQT’s fair value is largely knowable even when some components are harder to price.

Compare this to an ETF that holds, say, 3,000 individual stocks across 49 countries. Price discovery for that ETF would be much harder during a cross-timezone crash. XEQT’s wrapper structure simplifies the problem enormously.

7. Historical Crash Performance: How XEQT Has Actually Done

Theory is great, but let’s look at the actual numbers. How has XEQT (and its equivalent portfolio allocation, for periods before XEQT launched in August 2019) performed during real market crashes?

*Pre-XEQT data based on equivalent global equity portfolio with similar geographic weights.

Key Takeaways from This Table

• Every crash has ended. Every single one. The maximum drawdown has varied from about 10% to 45%, but the outcome has always been the same: recovery, followed by new highs.
• Recovery times have ranged from 2 months to 5 years. There’s no way to predict how long recovery will take while you’re in the middle of it. This is why your time horizon matters more than anything else.
• Forward returns from crash bottoms are spectacular. Investors who held through the COVID crash saw 42% returns in just one year. Those who panic-sold locked in their losses and missed the rebound.
• XEQT’s drawdowns have been less severe than pure U.S. equity. During COVID, the S&P 500 dropped 34%, while XEQT dropped about 22%. The Canadian allocation and international diversification provided a cushion. This is geographic diversification doing exactly what it’s supposed to do.

The Crucial Detail Most People Miss

During every one of these crashes, the ETF mechanics we’ve discussed in this post kept working. XEQT continued trading. APs continued creating and redeeming units. Circuit breakers activated when needed and reset when appropriate. Discounts appeared briefly and closed within days.

The system wasn’t designed for calm weather. It was designed for exactly these storms.

8. What XEQT Can’t Protect You From (And the One Thing That Can)

I want to be honest here. The ETF mechanics we’ve discussed are genuinely impressive, but they’re not magic. There are things XEQT’s structure can protect you from and things it can’t.

What XEQT’s Mechanics DO Protect You From

• Permanent capital loss due to structural failure. The creation/redemption mechanism, custodian separation, and regulatory framework mean your investment doesn’t disappear if something goes wrong with BlackRock or the ETF structure. We’ve covered this in depth before.
• Pricing disconnects. APs and circuit breakers keep XEQT’s market price closely tethered to its actual value, even during extreme volatility.
• Concentration risk. XEQT holds over 9,000 stocks across 49 countries. No single company, sector, or country can take your portfolio to zero.
• Counterparty risk. Because XEQT is a trust with segregated assets and an independent custodian, you’re not exposed to BlackRock’s balance sheet risk.
• Liquidity risk. The creation/redemption mechanism ensures that XEQT remains liquid even when trading volume is low, because APs can always create or redeem units against the underlying securities.

What XEQT Can’t Protect You From

• Market risk. If global stock markets drop 30%, XEQT will drop roughly 30%. That’s not a flaw – it’s the fundamental bargain of equity investing. You accept short-term volatility in exchange for long-term growth.
• Your own behaviour. No ETF structure can protect you from panic selling at the bottom. The creation/redemption mechanism keeps prices fair, but it can’t stop you from clicking “sell” at the worst possible moment.
• Prolonged bear markets. XEQT held through the 2008 crisis would have taken about 5 years to recover. That’s a long time to watch your portfolio sit below your purchase price. The mechanics kept the ETF functioning, but they couldn’t speed up the recovery.

The One Thing That Truly Protects You: Time

Here’s the data that matters most:

Over every rolling 15-year period in the history of diversified global stock markets, returns have been positive. Not most of the time. Every single time.

The ETF mechanics we’ve discussed in this post keep the plumbing working. They ensure fair pricing, prevent structural failures, and maintain liquidity. But the real protection – the thing that turns temporary crashes into irrelevant blips on a long-term chart – is simply holding for long enough.

Time is the only guaranteed crash protection. Everything else is just infrastructure that keeps the system running smoothly while time does its work.

9. Putting It All Together

Let’s recap the full stack of protections that kick in when XEQT faces a market crash:

That’s eight layers of protection working simultaneously. You don’t need to understand every detail of how each one works. You just need to know they’re there, doing their jobs, every single trading day.

The Boring Truth

I’ll tell you what I wish someone had told me during those sweaty-palmed days in March 2020: XEQT is designed to survive exactly the scenario you’re worried about.

Not through hope or luck or good vibes – through mechanics. Through incentive structures that make it profitable for institutions to keep the system working. Through regulatory frameworks built by people who studied every previous market failure. Through diversification that ensures no single catastrophe can wipe you out.

The boring truth about XEQT during a crash is that… it works. The price drops because the underlying stocks drop, and that’s fine – that’s what’s supposed to happen. But the structure holds. The plumbing keeps flowing. The system does its job.

And when the crash ends – as every crash in history has – you’re still holding the same 9,000+ stocks across 49 countries, still earning dividends, still participating in the global economy’s long-term growth.

The investors who come out ahead aren’t the ones who understood every nuance of the creation/redemption mechanism. They’re the ones who trusted that the system worked, kept buying through the chaos, and gave time the chance to do what it always does.

That’s the whole game. That’s how XEQT survives a crash. And that’s why the best thing you can do as an investor is set up your automatic contributions, understand that the plumbing is solid, and go live your life.

Just Buy XEQT is for educational purposes only and is not financial advice. Always do your own research before making investment decisions.