XEQT vs Structured Notes and Principal-Protected Notes in Canada: Why Simple Always Wins

A few years ago, I was sitting in a wood-panelled office at my bank. I had just rolled over a maturing GIC, and my “financial advisor” — the same person who processes my mortgage payments — leaned forward and said, “Have you ever considered a principal-protected note? You get exposure to the stock market, but your principal is guaranteed. You literally can’t lose money.”

I remember feeling a jolt of excitement. Market returns with no downside risk? That sounded like the holy grail of investing. He slid a glossy brochure across the desk. It had phrases like “100% principal protection,” “linked to the S&P/TSX 60,” and “participate in market growth.” It looked amazing.

Then I went home and spent about four hours reading the fine print.

What I found made my stomach turn. The “guaranteed” return came with a participation rate that capped my upside at roughly 60% of the index’s gains. There were embedded fees north of 3% annually that appeared nowhere on the brochure. The note was locked up for six years with a punitive early redemption penalty. And the “principal protection” only kicked in if I held to maturity — in nominal terms, which means inflation was quietly eating my money the entire time.

I closed the brochure, opened my Wealthsimple account, and bought more XEQT.

That decision, over time, will likely be worth tens of thousands of dollars. And this post is going to show you exactly why.

1. What Are Structured Notes?

Let me explain these products in plain language, because the banks certainly do not.

A structured note is a debt instrument issued by a bank that bundles a bond (or deposit) with a derivative — usually an option contract linked to some stock market index. The bank packages these two things together and sells them to retail investors as a single product.

Think of it like ordering a combo meal at a restaurant, except the restaurant marks up each item by 300%, removes half the fries, and tells you the meal is “specially curated for your palate.”

Here is what is actually inside a typical structured note:

• A zero-coupon bond: The bank buys a bond that will mature at your principal amount (say, $50,000) in 5-7 years. This bond costs significantly less than $50,000 today — maybe $42,000-$45,000 depending on interest rates. This is what provides your “principal protection.”
• A call option on an index: With the remaining money ($5,000-$8,000), the bank buys a call option on the S&P/TSX 60, S&P 500, or some other index. This is what provides your “market participation.”
• The bank’s profit: A healthy chunk of your investment goes straight to the bank as a structuring fee, distribution fee, and profit margin. This is the part they really do not want you to think about.

The bank then staples these two things together, wraps them in a glossy brochure, and calls it “innovative” or “sophisticated.”

It is neither. It is a simple bond plus a simple option, packaged in a way that obscures the true cost and makes it nearly impossible for a retail investor to comparison-shop.

2. What Are Principal-Protected Notes (PPNs)?

A principal-protected note (PPN) is a specific type of structured note where the issuing bank guarantees that you will get back at least 100% of your original investment at maturity. The “protection” is simply the zero-coupon bond component I described above.

Here is the thing that nobody tells you: that protection is not free.

In order to guarantee your principal, the bank has to set aside a large portion of your money in a safe, low-yielding bond. That leaves only a small amount to invest in the options that give you market exposure. The result is that your “participation rate” — the percentage of the index’s gains you actually receive — is often between 50% and 80%.

So if the S&P/TSX 60 returns 50% over six years, and your participation rate is 60%, you get 30%. Sounds okay, except when you calculate the annualized return, you are earning roughly 4.5% per year on your money — and you had it locked up for six years to get it.

Meanwhile, your friend who bought XEQT on Day 1 earned the full market return, could sell at any time, and paid 0.20% in fees instead of 3%.

Common PPNs you might encounter in Canada include:

• Bank-issued PPNs from TD, RBC, BMO, CIBC, and Scotiabank — these are the most common and are typically sold through the branch advisory channel
• Insurance-linked PPNs (sometimes called segregated fund guarantees) that wrap a maturity guarantee around a mutual fund
• Market-linked GICs — technically a type of PPN where a GIC’s interest payment is tied to market performance

All of these products share the same core problem: the cost of the guarantee eats your returns.

3. How Banks Actually Profit from Structured Notes (The Part They Don’t Show You)

Look, I get it. When your advisor slides that brochure across the desk, they seem like they are doing you a favour. “I’m recommending this because it’s right for you.” But let me walk you through the economics that make banks love these products.

When a bank issues a $50,000 structured note, here is roughly how the money flows:

That means on Day 1, roughly 5-7% of your money goes to the bank. Not over 6 years. On Day 1.

But it gets worse. That $2,500-$3,500 in fees does not appear on any statement. There is no line item that says “structuring fee: $3,000.” The fees are embedded in the product’s pricing. You would need a Bloomberg terminal and a derivatives pricing model to figure out what you actually paid.

Compare this to XEQT, where the MER is 0.20% and is clearly disclosed in every fund fact sheet and on every financial website. On $50,000, that is $100 per year. Transparent, visible, and roughly 25-35 times cheaper than the embedded cost of a structured note.

Here is why banks push these products so aggressively:

1. Massive margins. A bank might earn 0.10-0.30% on a GIC or savings account. On a structured note, they earn 5-7% of the notional upfront, plus ongoing profit from the spread between the bond yield they receive and the bond cost in the structure. The margins are not even in the same universe.

2. Advisor incentives. The branch advisor who sells you a structured note typically receives a trailing commission or upfront compensation that is multiples of what they would earn recommending an index ETF. In many cases, the bank’s advisors are literally not compensated for recommending low-cost ETFs. The incentive structure is not aligned with your best interest.

3. Client lock-in. A 5-7 year term with early redemption penalties means you are stuck. You are not going to move your account to Wealthsimple or Questrade while your money is locked in a note. The bank keeps your assets — and your relationship — for the duration.

4. Information asymmetry. Most retail investors simply cannot evaluate whether a structured note is fairly priced. The bank has a team of quantitative analysts who design these products to be maximally profitable while sounding maximally appealing. You are bringing a butter knife to a gunfight.

Here is the thing that nobody tells you about the financial advice industry: the most profitable products for the bank are almost never the best products for you. If a product is simple, transparent, and cheap, the bank cannot make money on it. If a product is complex, opaque, and locked-up, the bank makes a fortune.

Guess which category structured notes fall into.

4. The Full Comparison: XEQT vs Structured Notes vs PPNs

Let me put this all on one table so you can see the differences clearly.

That table should be framed and hung on the wall of every bank branch in Canada.

5. The Math: $50,000 Invested Over 10 Years

Let me show you what really happens to your money. This is the comparison that structured note brochures never include.

Assumptions:

• Starting investment: $50,000
• Time horizon: 10 years
• Equity market average annual return: 8% (reasonable long-term historical average for a global equity portfolio)
• No additional contributions (to keep it simple)

Scenario A: XEQT

• Fee drag: 0.20% per year
• Net annual return: 7.80%
• Market participation: 100%
• After 10 years: $50,000 x (1.078)^10 = $105,845
• Total gain: $55,845
• Fees paid over 10 years: ~$1,400

Scenario B: Structured Note (No Principal Protection)

• Embedded fee drag: ~3% per year
• Market participation rate: 75%
• Effective annual return: (8% x 75%) - 0% explicit fee = 6%, but embedded costs reduce net to ~5%
• After 10 years: $50,000 x (1.05)^10 = $81,445
• Total gain: $31,445
• Fees paid (embedded): ~$15,000-$20,000

Scenario C: Principal-Protected Note (PPN)

• Embedded fee drag: ~3.5% per year
• Market participation rate: 60%
• Effective annual return: (8% x 60%) - 0% explicit fee = 4.8%, but embedded costs further reduce net to ~3.5%
• Return cap: Often capped, so in strong years you miss even more
• After 10 years: $50,000 x (1.035)^10 = $70,530
• Total gain: $20,530
• Fees paid (embedded): ~$18,000-$22,000
• “Principal protection” value: You got your $50,000 back guaranteed, but inflation at 2.5% means your $50,000 is worth only ~$39,000 in today’s dollars. The “protection” protected your nominal dollars while inflation ate your purchasing power.

The Comparison Table

Read that last row again. The PPN cost you $35,315 over 10 years compared to XEQT. That is not a rounding error. That is a car. That is a year of retirement spending. That is the price of “guaranteed” safety.

And remember — this is with no additional contributions. If you were adding $500/month, the gap would be even larger because every monthly contribution into the structured note also gets hit with the same embedded fee structure.

6. The Psychology of “Guaranteed” Returns

Here is something I have had to reconcile with myself, and I think most investors struggle with it too: principal protection feels incredible. The idea that you literally cannot lose your original investment is deeply, powerfully appealing. It activates something primal in our brains — the fear of loss.

Psychologists call this loss aversion. Research by Kahneman and Tversky showed that the pain of losing $1,000 is roughly twice as intense as the pleasure of gaining $1,000. We are wired to avoid losses, even when avoiding those losses costs us dearly.

Banks know this. They have entire marketing departments built around exploiting loss aversion. “Sleep well at night knowing your principal is protected” is not financial advice — it is emotional manipulation.

Look, I get it. I have felt that fear. In March 2020, when my XEQT position was down 27%, a part of my brain was screaming at me to sell everything and hide in cash. The idea that I could have had my money in something “guaranteed” was genuinely tempting in that moment.

But here is what actually happened: XEQT recovered to new highs within months. Had I been locked into a PPN, I would have been sitting there for another four years waiting for maturity, earning a fraction of the recovery, and paying hidden fees the entire time.

The “safety” of a PPN is an illusion that costs you real money. You are not eliminating risk — you are converting one type of risk (short-term market volatility) into another type of risk (insufficient returns, inflation erosion, and opportunity cost). The second type of risk is less visible, less dramatic, and far more expensive.

Some hard truths about “guaranteed” investments:

• A nominal guarantee is not a real guarantee. If inflation runs at 2.5% per year and your money is locked up for 7 years, your $50,000 “guarantee” gives you back purchasing power equivalent to about $41,000. You lost nearly $9,000 in real terms and called it “safe.”
• The guarantee is only as good as the issuer. A PPN is a promise from the bank. If the bank fails, so does your guarantee. Yes, CDIC covers some notes up to $100,000, but not all structured products qualify. In the 2008 financial crisis, investors in Lehman Brothers-issued structured notes in the US lost everything despite their “guarantees.”
• You are paying for insurance you probably do not need. If your time horizon is 10+ years, the probability of a globally diversified equity portfolio losing money is historically very low. You are paying a massive premium to insure against an event that almost never happens at your time horizon.

7. What About Market-Linked GICs?

I want to address these specifically because they are the most common “gateway” structured product that Canadian banks push.

A market-linked GIC guarantees your principal (like a regular GIC) but ties your interest payment to the performance of a stock market index. Sounds like the best of both worlds, right?

Here is the catch — there are actually several:

1. Participation rates are low. A typical market-linked GIC might offer a 50-70% participation rate in the S&P/TSX 60. If the index goes up 30% over 3 years, you get 15-21%.

2. Returns are often capped. Many market-linked GICs cap your maximum return at something like 10-20% over the term. So even if the market goes up 50%, you get 20%.

3. No dividends. A regular GIC pays interest. A market-linked GIC ties your return to the price return of the index, not the total return. This means you miss out on dividends, which historically account for roughly 2-3% per year of equity returns. Over a 5-year GIC, missing dividends alone costs you 10-15%.

4. Worst case: you earn zero. If the market goes down over the GIC’s term, you get your principal back but zero interest. A regular GIC at 3.5% would have given you $8,750 on $50,000 over 5 years. The market-linked GIC gives you $0.

5. Opportunity cost. While your money is locked in the GIC, it could have been in XEQT earning full market returns. Over a 5-year term in a normal market environment, that opportunity cost can easily exceed $10,000-$15,000 on a $50,000 investment.

Market-linked GICs are structured products wearing a GIC costume. They look safe and familiar, but they deliver substantially worse outcomes than either a regular GIC (in bad markets) or XEQT (in good markets).

8. Why Your Bank Advisor Will Never Recommend XEQT

I do not want to be cynical here, but I do want to be honest.

The vast majority of bank-employed financial advisors in Canada are not compensated for recommending low-cost index ETFs. Their compensation structures are built around selling the bank’s own products: mutual funds, structured notes, PPNs, and insurance products.

A bank advisor who sells you a $50,000 structured note might earn $1,500-$2,500 in compensation. That same advisor who tells you to buy XEQT on Wealthsimple earns $0 — and potentially loses your account entirely.

I am not saying bank advisors are bad people. Most of them genuinely believe they are helping you. But the system they operate within is designed to prioritize the bank’s revenue over your returns. When a product is profitable for the bank and sounds appealing to the client, it gets pushed. Hard.

This is why you hear the pitch about “principal protection” and “market participation” and “designed for conservative investors.” Those are not objective financial assessments — they are sales talking points engineered to overcome your objections and close the sale.

Here is what a truly objective advisor would say: “You are 35 years old with a 25-year time horizon. The most cost-effective way to grow your wealth is a globally diversified, low-cost equity ETF like XEQT. It costs 0.20% per year, you can buy it commission-free, and over your time horizon, the probability of losing money is historically very low. You do not need principal protection. You need time in the market.”

But that advice does not generate revenue. So you will not hear it at a bank branch.

9. When Structured Notes or PPNs Might Actually Make Sense

I want to be fair. There is a narrow set of circumstances where a principal-protected product might be reasonable:

• You are within 2-3 years of retirement and you have a specific, non-negotiable expense (like paying off your mortgage) that requires capital preservation above all else.
• You have a genuine, diagnosed anxiety disorder related to financial losses and the psychological cost of market volatility is seriously affecting your health and quality of life. (In this case, please also talk to a mental health professional — a structured note is not therapy.)
• You fully understand the costs, have done the math comparing it to alternatives, and you are making a conscious, informed decision to pay for the guarantee.

Notice I did not say “you are a conservative investor” or “you want to sleep well at night.” Those are marketing phrases, not financial situations. A conservative investor with a 15-year time horizon should still own equities — just potentially with a bond allocation to reduce volatility. XEQT for growth with a bond ETF like XBB for stability is a vastly superior approach to a structured note in almost every scenario.

For the vast majority of Canadian investors under 55 who are building wealth? Structured notes and PPNs are an expensive detour from the straightforward path to financial independence.

10. The Simplicity Advantage: Why XEQT Wins

Let me close by talking about something that does not get enough attention in investing discussions: the value of simplicity itself.

A structured note requires you to:

• Trust that the bank priced it fairly (you cannot verify this)
• Understand participation rates, caps, barriers, averaging periods, and conditional protection clauses
• Accept a 5-7 year lockup with no liquidity
• Monitor the issuing bank’s credit quality (counterparty risk)
• Navigate complex tax treatment at maturity
• Read a 30-50 page prospectus written in deliberately impenetrable legal language

XEQT requires you to:

• Buy it
• Hold it
• Add to it when you can

That is it. One ticker. 0.20% in fees. Exposure to over 9,000 stocks across 49 countries. Automatic rebalancing. Full market participation. Complete liquidity. Total transparency. You can see every single holding in the fund on BlackRock’s website right now.

The complexity of structured notes is not a feature — it is a bug that benefits the bank, not you. Every layer of complexity is an opportunity for the bank to extract profit in a way that is invisible to the investor. Strip away the marketing language, and a structured note is just a bond plus an option sold at a massive markup.

XEQT strips away the layers. There is nothing to hide behind. No participation rates, no caps, no embedded fees, no lockup periods. Just broad, diversified, low-cost equity ownership.

Here is my honest belief after years of investing and studying these products: the best investment strategy is the one that is so simple you cannot mess it up. XEQT is that strategy. You buy it when you have money. You hold it when markets are scary. You let compound growth do the heavy lifting over decades. And you never, ever sit in a bank office listening to a pitch about a product that exists primarily to generate revenue for the bank.

The boring path is the profitable path. It almost always is.

The Bottom Line

Structured notes and principal-protected notes are not scams. They are legal, regulated financial products issued by Canada’s largest banks. But they are expensive, opaque, illiquid, and designed to maximize the bank’s profit rather than your returns.

The math is not ambiguous:

• XEQT turns $50,000 into roughly $105,845 over 10 years at an estimated net return of 7.80%. You pay approximately $1,400 in fees and have full liquidity the entire time.
• A structured note turns $50,000 into roughly $81,445 over 10 years. You pay approximately $17,500 in embedded fees and are locked in for the duration.
• A PPN turns $50,000 into roughly $70,530 over 10 years. You pay approximately $20,000 in embedded fees and receive “principal protection” that does not protect you from inflation.

The difference between XEQT and a PPN over 10 years is over $35,000. That is the price of the word “guaranteed.”

Next time someone in a wood-panelled office slides a glossy brochure across the desk and tells you about a product that sounds too good to be true, remember this post. Ask them to show you the embedded fees. Ask them what their compensation is for recommending it. Ask them why they are not recommending a 0.20% MER index ETF instead.

And if they cannot answer those questions clearly and honestly, walk out, open your phone, and buy XEQT.

Simple wins. It always does.

Disclaimer: This post is for informational purposes only and does not constitute financial advice. I am not a financial advisor. XEQT and the financial products mentioned are real; do your own research before investing. Returns mentioned are approximate and based on historical data, which does not guarantee future results. I may earn a referral bonus if you sign up for Wealthsimple using the links in this post.