The Two-ETF Portfolio: XEQT Plus Bonds for Every Risk Tolerance

I used to hold five different ETFs. Canadian equities, US equities, international equities, emerging markets, and bonds. Every quarter I would log into my brokerage, check my allocation percentages, calculate how much of each I needed to buy or sell, and execute the trades. It took about an hour each time, and I dreaded it.

Then one day a friend asked me: “Why don’t you just hold XEQT and a bond fund?” I stared at him. Five ETFs collapsed into two. Same global diversification. Same level of control over my stock-to-bond ratio. A fraction of the work.

That conversation changed my entire approach to investing. The two-ETF portfolio – XEQT for your equities and a single bond fund for your fixed income – is the sweet spot between the dead-simple all-in-one approach and the overly complicated multi-ETF model. You get customization where it matters (your risk level) without complexity where it does not (geographic allocation, sector weighting, rebalancing within equities).

Let me show you exactly how to build one.

1. Why Add Bonds to XEQT at All?

If you are young, have a long time horizon, and can stomach big drops without panicking, 100% XEQT is likely the right choice. Stocks have the highest expected returns over the long term, and XEQT gives you global diversification in a single purchase.

But there are legitimate reasons to add bonds:

• You are within 10-15 years of retirement and need to reduce portfolio volatility
• You have a lower risk tolerance and know you would panic sell during a 30-40% crash
• You need to access the money within 5-10 years for a major purchase
• You are already retired and drawing down your portfolio
• You want to sleep better at night knowing your portfolio will not drop as far in a crash

Bonds act as a shock absorber. When stocks crash, bonds typically hold steady or even increase in value. They reduce your portfolio’s total volatility, which means smaller drawdowns and a smoother ride.

The trade-off is lower long-term returns. Over the past century, a globally diversified stock portfolio has returned roughly 8-10% annually, while bonds have returned 3-5%. The more bonds you add, the more stable your ride, but the slower your growth.

2. Why Two ETFs Instead of Buying XGRO or XBAL?

iShares offers a family of all-in-one ETFs with different equity/bond splits:

So why not just buy XGRO or XBAL? They are excellent funds, and for many people they are the right choice. But the two-ETF approach has several advantages:

Custom allocation. XGRO is locked at 80/20 and XBAL at 60/40. What if you want 70/30? Or 85/15? Or 55/45? With two ETFs, you choose your exact ratio.

Flexible rebalancing. In a two-ETF portfolio, you can rebalance by simply directing new contributions to whichever ETF is underweight. No selling required. With a single all-in-one fund, the fund rebalances internally – which is convenient, but you cannot control the timing.

Tax-loss harvesting. In a non-registered account, you can sell one of your two ETFs at a loss to harvest the tax benefit, then replace it with an equivalent fund. You cannot do this with a single all-in-one ETF.

Lower MER on the bond side. ZAG (BMO Aggregate Bond Index ETF) has an MER of 0.09%. A two-ETF portfolio of XEQT + ZAG has a blended MER lower than XGRO or XBAL at the same allocation. More on this below.

Gradual transitions. As you age, you can slowly shift your ratio by buying more bonds and less XEQT. With all-in-one funds, you need to sell one and buy another, which can trigger capital gains in non-registered accounts.

3. Best Bond ETFs to Pair with XEQT

You only need one bond ETF. Here are the top options:

My recommendation: ZAG. It is the most popular Canadian bond ETF for good reason. Broad exposure, rock-bottom fees, and a good balance between yield and stability. Unless you have a specific reason to choose something else, ZAG is the default answer.

4. Sample Allocations by Risk Profile

Here is how to set your equity/bond split based on your situation:

Quick rule of thumb: If you cannot stomach the max expected drawdown for your allocation, move one row down. Your ability to stick with your plan through a crash matters more than squeezing out an extra percent of return.

5. Cost Comparison: Two-ETF Portfolio vs All-in-One

One underrated advantage of the two-ETF approach is the slightly lower cost:

The savings are modest – 0.02% to 0.04% – but they compound over decades. On a $500,000 portfolio held for 25 years, the lower MER of an 80/20 two-ETF portfolio saves roughly $3,000-$5,000 compared to XGRO.

Is that enough to justify the extra rebalancing effort? For some people, yes. For others, the convenience of a single all-in-one fund is worth the small premium. Both approaches are excellent.

6. How to Calculate Your Ideal Bond Allocation

There are several frameworks for determining how much to hold in bonds. None of them are perfect, but they give you a reasonable starting point:

The age-based rule

The classic rule is to hold your age in bonds – so a 30-year-old would hold 30% bonds and 70% equities. Most modern financial planners consider this too conservative. A more updated version:

Bond allocation = Your age minus 20

• Age 25: 5% bonds (basically all XEQT)
• Age 35: 15% bonds
• Age 45: 25% bonds
• Age 55: 35% bonds
• Age 65: 45% bonds

The timeline-based approach

This is simpler and arguably more practical:

• 15+ years to needing the money: 0-10% bonds
• 10-15 years: 10-20% bonds
• 5-10 years: 20-40% bonds
• Under 5 years: 40-60% bonds
• Currently withdrawing: 40-60% bonds

The sleep-at-night test

Forget the formulas. Ask yourself: “If my portfolio dropped X% tomorrow and stayed down for two years, would I sell?”

• If you would sell at a 20% drop: you need 40%+ bonds
• If you would sell at a 30% drop: you need 20-30% bonds
• If you would sell at a 40% drop: you need 10-20% bonds
• If you would not sell even at 50% down: 0-10% bonds is fine

The worst allocation is the one you abandon during a crash. A 70/30 portfolio you stick with will outperform a 100/0 portfolio you panic-sell out of every single time.

7. How to Rebalance Your Two-ETF Portfolio

Rebalancing means bringing your allocation back to your target when it drifts due to market movements. It is the one piece of active management required with a two-ETF portfolio.

The simplest approach: Rebalance with new money

Every time you invest, put the money into whichever ETF is below its target weight. If stocks have gone up and your portfolio is 85% XEQT instead of your target 80%, put your next few contributions entirely into ZAG until you are back to 80/20.

This approach requires no selling, triggers no taxable events, and works perfectly during the accumulation phase when you are regularly adding money.

Annual rebalancing

Once per year – I like doing it in January – check your allocation. If either position has drifted more than 5% from your target, sell the overweight position and buy the underweight one.

Example:

• Target: 80% XEQT / 20% ZAG
• Current: 86% XEQT / 14% ZAG
• Action: Sell enough XEQT to buy ZAG and get back to 80/20

When NOT to rebalance

• If your allocation has drifted less than 5% from target, leave it alone
• If rebalancing would trigger a large tax bill in a non-registered account, consider rebalancing with new contributions instead
• If you are emotionally rebalancing (selling stocks because you are scared), that is not rebalancing – that is panic selling

8. How to Set This Up on Wealthsimple

Here is a step-by-step guide:

Step 1: Open your account

If you do not have a Wealthsimple account, open one here and get $25 towards your first purchase. Choose the account type that fits your situation – TFSA, RRSP, or non-registered.

Step 2: Decide your allocation

Use the frameworks above to pick your equity/bond split. If you are unsure, 80/20 (XEQT/ZAG) is a great starting point for investors in their 30s and 40s.

Step 3: Make your initial purchase

Deposit your investment amount and split it according to your target:

• For an 80/20 portfolio with $10,000: Buy $8,000 of XEQT and $2,000 of ZAG
• Wealthsimple supports fractional shares, so you can invest exact dollar amounts

Step 4: Set up automatic contributions

Set up recurring deposits from your bank account. Then manually split your purchases between XEQT and ZAG according to your target allocation. Unfortunately, Wealthsimple’s auto-invest currently only supports one ETF per recurring buy, so you may want to:

• Set up two recurring buys (e.g., $400 to XEQT and $100 to ZAG for an 80/20 split)
• Or set up one recurring buy for the full amount into XEQT, and manually buy ZAG quarterly to maintain your target ratio

Step 5: Rebalance once per year

Set a calendar reminder. Check your allocation, rebalance if needed, and adjust your automatic contribution split if your target allocation has changed.

9. When to Just Buy XGRO or XBAL Instead

The two-ETF portfolio is great, but it is not for everyone. You should probably just buy an all-in-one fund if:

• You want absolute simplicity. One ETF, zero rebalancing, zero decisions. XGRO or XBAL handles everything automatically.
• You invest small amounts. If you are contributing $100-$200/month, splitting it between two ETFs creates more hassle than it is worth.
• You know you will not rebalance. If you are honest with yourself and know the annual rebalancing check will never happen, an all-in-one fund protects you from allocation drift.
• 80/20 or 60/40 fits your needs perfectly. If XGRO or XBAL is already your ideal allocation, there is no reason to replicate it manually.

There is no shame in choosing simplicity. The best portfolio is the one you stick with, and for many people that means the fewest possible decisions.

10. Common Mistakes to Avoid

Mistake 1: Overcomplicating your bond allocation

You do not need three different bond ETFs for “diversification.” One broad bond fund like ZAG gives you exposure to government and corporate bonds across all maturities. That is enough.

Mistake 2: Rebalancing too often

Checking your allocation monthly and rebalancing every time it drifts 1-2% is a waste of time and may trigger unnecessary taxable events. Once per year is plenty. Twice per year is the maximum.

Mistake 3: Using bonds as a trading vehicle

Some investors try to time interest rate movements by switching between short-term and long-term bond ETFs. This is active management dressed up as passive investing. Pick one bond fund and stick with it.

Mistake 4: Abandoning bonds when stocks are hot

In a bull market, bonds feel like dead weight. Your XEQT is up 20% and your ZAG is up 3%. You start thinking about going 100% equities. This is the exact wrong time to reduce your bond allocation – because the next bear market is when bonds prove their worth.

Mistake 5: Not accounting for your account type

In a non-registered account, rebalancing by selling triggers capital gains. In a TFSA or RRSP, it does not. Keep this in mind when setting up your rebalancing strategy. In non-registered accounts, strongly prefer rebalancing with new contributions.

The Bottom Line

The two-ETF portfolio is one of the best-kept secrets in Canadian investing. It is:

• Simpler than a multi-ETF portfolio – two funds instead of five or six
• More flexible than all-in-one funds – choose your exact equity/bond ratio
• Slightly cheaper – the blended MER is lower than XGRO or XBAL
• Easy to manage – rebalance once per year, or just direct new money to the underweight fund

Here is the whole strategy in one sentence: Buy XEQT for your stocks, buy ZAG for your bonds, and adjust the ratio as your life changes.

If you are young and aggressive, start at 100% XEQT and add bonds later. If you want a balanced portfolio now, pick your ratio and set it up today. Either way, you are building a globally diversified, low-cost portfolio that will serve you for decades.