XEQT Currency Exposure Explained: How Foreign Exchange Affects Your Returns

When I first started investing in XEQT, I didn’t think much about currencies. I was buying an ETF that trades in Canadian dollars on the TSX — how complicated could it be? Then one quarter, my returns were noticeably higher than the underlying stock performance should have justified. A friend pointed out that the Canadian dollar had dropped against the US dollar, and suddenly I realized: currency movements were silently boosting (and sometimes dragging) my returns, and I had no idea how it worked.

If you own XEQT — or you’re thinking about buying it — understanding currency exposure is one of those things that sounds intimidating but is actually straightforward. And once you get it, you’ll realize it’s actually one of XEQT’s hidden strengths.

1. What Does “Currency Exposure” Mean for XEQT Holders?

When you buy a share of XEQT on the TSX, you pay in Canadian dollars. But about 75% of the companies inside XEQT operate outside of Canada. Their stocks trade in US dollars, euros, British pounds, Japanese yen, and dozens of other currencies.

Here’s the key: XEQT is unhedged. That means BlackRock (iShares) does not use financial instruments to neutralize the effect of currency movements. When you own XEQT, you’re exposed to the actual foreign currency values of the underlying stocks.

In practical terms:

• If the Canadian dollar weakens against the US dollar, your US holdings are worth more in CAD terms — boosting your returns
• If the Canadian dollar strengthens against the US dollar, your US holdings are worth less in CAD terms — dragging on your returns
• The same logic applies to every other currency in the fund

This means your XEQT returns are a combination of two things: (1) how the underlying stocks perform, and (2) how the Canadian dollar moves against foreign currencies.

2. XEQT’s Currency Breakdown: What You’re Actually Exposed To

Let’s look at approximately where XEQT’s currency exposure sits based on its geographic allocation:

The biggest currency relationship for Canadian XEQT holders is CAD/USD, since roughly 45% of the fund is in US stocks. This is the one that moves the needle most.

3. How a Weak or Strong Canadian Dollar Affects Your Returns

Let’s use a concrete example to make this real.

Scenario: The Canadian dollar drops 10% against the USD

Say you own $10,000 worth of XEQT, and the US stock portion ($4,500) doesn’t move at all in USD terms. But the CAD drops from $0.75 USD to $0.675 USD (a 10% decline).

That $4,500 USD portion is now worth roughly $4,950 in CAD — a $450 gain (10%) purely from the currency move. You didn’t do anything. The stocks didn’t go up. But your portfolio grew because the loonie weakened.

Scenario: The Canadian dollar rises 10% against the USD

Same situation in reverse. Your $4,500 USD portion would now be worth roughly $4,050 in CAD — a $450 loss purely from currency. The stocks performed fine, but the strong loonie dragged your Canadian-dollar returns down.

This is real and it happens constantly. Between 2013 and 2015, the Canadian dollar dropped from near parity with the USD to about $0.72 USD. Canadian investors holding US stocks saw massive currency tailwinds during this period. Conversely, from 2020 to mid-2021, the loonie strengthened from ~$0.69 to ~$0.83, which dampened USD-denominated returns for Canadian investors.

4. Why XEQT Is Unhedged (And Why That’s Actually a Good Thing)

When I first learned XEQT was unhedged, my instinct was: “Shouldn’t I protect myself from currency risk?” It sounds smart, right? Eliminate the uncertainty.

But here’s what I’ve learned: for long-term investors, staying unhedged is almost always the better choice. Here’s why:

Currency hedging costs money. Hedging requires financial instruments (forward contracts) that have real costs. These costs get baked into the fund’s returns, typically dragging performance by 0.2-0.5% per year. Over decades, that adds up significantly.

Currencies tend to mean-revert over long periods. The CAD/USD rate bounces around, but over 20-30 year periods, the ups and downs tend to roughly cancel out. You’re paying hedging costs to protect against something that washes out on its own.

Currency diversification is actually valuable. If the Canadian economy hits a rough patch — say oil prices crash, or there’s a domestic recession — the Canadian dollar typically weakens. In that exact scenario, your unhedged foreign holdings in XEQT go up in Canadian-dollar terms, providing a natural cushion. Hedging would eliminate this benefit.

Hedged funds are more complex and less tax-efficient. The derivatives used for hedging can create tracking errors and unexpected taxable events. Simpler is better.

5. XEQT vs Hedged Alternatives: The Comparison

Bottom line: If you’re investing for 5+ years (which you should be with XEQT), unhedged is the way to go. The research consistently shows that hedging costs hurt more than they help over long horizons.

6. Historical CAD/USD Trends and What They Mean

The CAD/USD exchange rate has gone through major cycles over the past 25 years:

• 2002-2007: CAD strengthened dramatically from ~$0.63 to near parity ($1.00), driven by the oil boom. Canadian investors holding US stocks saw currency drag during this period.
• 2008-2009: Financial crisis — CAD weakened sharply to ~$0.77 as investors fled to USD safety. US stock holdings got a currency boost.
• 2010-2013: CAD near parity again (~$0.95-$1.02), supported by strong commodity prices.
• 2014-2016: Oil price crash sent CAD tumbling to ~$0.72. US stocks got a massive currency tailwind for Canadian investors.
• 2017-2019: CAD stabilized around $0.75-$0.77.
• 2020-2021: COVID and recovery — CAD went from ~$0.69 to ~$0.83. Strong loonie was a headwind for foreign holdings.
• 2022-2026: CAD has fluctuated in the $0.70-$0.75 range, with trade tensions and interest rate differentials driving movements.

Here’s the important takeaway: over 25 years, these moves have roughly balanced out. The CAD/USD rate today is not dramatically different from where it was 20 years ago. The currency ups and downs created volatility along the way, but they didn’t fundamentally change the long-term return profile of global equities for Canadian investors.

This is exactly why hedging isn’t worth the cost for long-term holders.

7. Currency Diversification as Risk Reduction

Here’s something that might be counterintuitive: adding currency exposure actually reduces your overall portfolio risk as a Canadian investor.

Canada makes up only about 3% of global stock market capitalization. If all your investments are in Canadian dollars — Canadian stocks, GICs, savings accounts — you’re massively concentrated in a single currency and a single economy. If Canada has a bad decade (which has happened — think the mid-2010s oil crash), everything goes down together.

With XEQT, you’re spread across 20+ currencies. When the Canadian economy struggles and the loonie weakens, your foreign holdings cushion the blow. When Canada booms and the loonie strengthens, the underlying stock performance of your global holdings still drives returns.

This diversification means:

• Lower correlation between your investment returns and your employment income (most Canadians earn in CAD)
• Natural protection against Canadian-specific economic shocks
• Reduced overall portfolio volatility over long time periods
• Exposure to multiple monetary policies, not just the Bank of Canada’s decisions

Think of it this way: if you earn your salary in CAD, own a home in Canada, and have your emergency fund in CAD, you’re already massively exposed to the Canadian dollar. XEQT’s foreign currency exposure is the balance your finances need.

8. Common Currency Myths Debunked

Myth: “I should wait for a better exchange rate before buying XEQT.”

No. You’re buying XEQT in CAD on the TSX. The exchange rate is already baked into the unit price. You don’t need to convert currencies yourself. And trying to time currency movements is just as futile as trying to time the stock market.

Myth: “A strong Canadian dollar means XEQT is a bad buy.”

A strong CAD means you’re buying foreign assets at a relative discount. If the loonie is high and then weakens later, you’ll get a currency tailwind. There’s no bad time to buy — it’s just different timing of when the currency benefit shows up.

Myth: “I should buy a hedged version to be safe.”

Hedging eliminates the diversification benefit and adds costs. Academic research (including Vanguard’s own papers) suggests unhedged equity exposure is preferable for long-term investors. The only time hedging makes sense is for short-term holdings or fixed-income investments.

Myth: “Currency risk could wipe out my returns.”

Over any 10+ year period, currency movements have never come close to wiping out equity returns. Stocks historically return 8-10% annually. Currency fluctuations of 2-3% per year in either direction are noise compared to that.

Myth: “I need to understand forex to invest in XEQT.”

Absolutely not. The beauty of XEQT is that all of this happens automatically inside the fund. You buy in CAD, you sell in CAD, and BlackRock handles everything in between. You don’t need to trade currencies, open a USD account, or do Norbert’s Gambit.

9. What Should You Actually Do About Currency Exposure?

Here’s my honest advice after years of investing in XEQT: nothing. Seriously.

Don’t try to time your purchases based on where the loonie is headed. Don’t switch to hedged funds because someone on Reddit said the CAD is about to crash (or rally). Don’t lose sleep over quarterly returns that were boosted or dragged by currency moves.

Instead:

• Keep buying XEQT regularly through automatic contributions. Dollar-cost averaging smooths out currency fluctuations over time, just like it smooths out stock price fluctuations.
• Appreciate the diversification. You’re naturally hedged against a Canadian economic downturn. That’s a feature, not a risk.
• Focus on what you can control: your savings rate, your contribution consistency, and your time horizon. These matter infinitely more than the CAD/USD rate.
• Think in decades, not quarters. Over 20-30 years, currency movements wash out. Equity returns don’t.

The best currency strategy for an XEQT investor is the same as the best stock market strategy: stay the course, keep buying, and let time do the heavy lifting.

Final Thoughts

Currency exposure is one of those topics that sounds complicated but really boils down to something simple: by owning XEQT, you’re diversified across the world’s currencies, and that’s a good thing.

You don’t need to hedge. You don’t need to worry about the exchange rate. You don’t need a USD account. You just need to keep buying XEQT consistently and let the natural diversification work in your favour over the long run.

The Canadian dollar will go up. It’ll go down. It’ll go up again. Through all of it, the 9,000+ companies inside XEQT will keep earning revenue, raising prices, innovating, and growing. That’s what drives your returns over decades — not which way the loonie is trending this month.

Just buy XEQT. The currency stuff takes care of itself.