XEQT Home Country Bias Explained: Why 25% Canada Makes Sense

A few years back, I was sitting in a coffee shop scrolling through Reddit’s r/PersonalFinanceCanada when I stumbled across a comment that stopped me mid-sip. Someone had written: “XEQT has a massive home country bias — 25% in Canada when we’re only 3% of the world. You’re basically betting on banks and oil.” They had a bunch of upvotes, and the replies were full of people saying they’d rather build their own portfolio using VTI and VXUS to get a “true” global allocation. For a moment, I panicked. Had I been doing it wrong this whole time?

That comment sent me down a rabbit hole that lasted weeks. I read whitepapers from Vanguard, pored over BlackRock’s methodology documents, ran spreadsheet scenarios, and talked to a CPA friend about the tax implications. And what I found surprised me: XEQT’s 25% Canadian allocation isn’t a flaw — it’s a deliberate, well-reasoned design choice that actually benefits Canadian investors in several tangible ways. It’s the kind of decision that looks wrong on the surface but makes a lot of sense once you dig into the details.

Let me walk you through everything I learned.

1. What Is Home Country Bias — And How Does XEQT Implement It?

Home country bias is exactly what it sounds like: allocating a larger share of your portfolio to your home country’s stock market than that country’s share of global market capitalization would justify.

Here are the numbers that trip people up:

• Canada’s share of global stock market cap: roughly 3%
• XEQT’s allocation to Canadian stocks (via XIC): roughly 25%

That’s about 8x more than a pure market-cap weighted approach would give you. If you put $10,000 into XEQT, approximately $2,500 goes into Canadian stocks — but if you weighted purely by global market cap, only about $300 would go to Canada.

On the surface, that looks like a huge bias. And technically, it is. But “bias” doesn’t automatically mean “bad.” In this case, BlackRock (iShares) has very specific reasons for structuring XEQT this way — and they’ve published their methodology explaining why.

XEQT holds four underlying ETFs:

1. ITOT (iShares Core S&P Total U.S. Stock Market ETF) — ~45%
2. XIC (iShares Core S&P/TSX Capped Composite Index ETF) — ~25%
3. XEF (iShares Core MSCI EAFE IMI Index ETF) — ~25%
4. IEMG (iShares Core MSCI Emerging Markets ETF) — ~5%

That ~25% XIC allocation is the home country bias we’re talking about. And while it might look like a mistake to someone who only thinks in terms of market cap weights, it’s actually solving several real problems that Canadian investors face.

2. Why BlackRock Deliberately Overweights Canada: The 5 Reasons

This isn’t accidental. BlackRock’s asset allocation team has been designing multi-asset ETFs for decades, and the home country tilt in all-in-one funds is a deliberate feature, not a bug. Here are the five reasons it exists.

Reason 1: Currency Alignment

When you own Canadian stocks through XIC, those stocks trade in Canadian dollars. Their dividends are paid in Canadian dollars. Their prices are quoted in Canadian dollars.

This matters because you live in Canada. You pay rent or a mortgage in CAD. You buy groceries in CAD. Your salary is in CAD. When 25% of your portfolio is denominated in the same currency you spend, that portion of your portfolio has zero currency risk.

Compare that to the 75% that’s invested internationally. Those holdings are subject to fluctuations in the CAD/USD, CAD/EUR, CAD/JPY, and dozens of other exchange rates. When the loonie strengthens, those foreign holdings lose value in CAD terms — even if the underlying stocks haven’t moved. (I’ve written about this in detail on my XEQT currency exposure page.)

Having 25% in CAD-denominated assets gives your portfolio a stable anchor. It’s like ballast on a ship — it keeps things from rocking too violently when currency markets get choppy.

Reason 2: The Eligible Dividend Tax Credit

This is the one that really changed my thinking. In a non-registered (taxable) account, dividends from Canadian corporations receive preferential tax treatment through the eligible dividend tax credit.

Here’s how it works: Canadian companies pay “eligible dividends” that are grossed up by 38% on your tax return, but then you receive a federal tax credit of 15.02% of the grossed-up amount (plus a provincial credit that varies by province). The net result is that eligible dividends from Canadian companies are taxed at a significantly lower rate than foreign dividends.

For someone in Ontario earning $100,000, here’s the approximate tax comparison:

Foreign dividends — the kind you receive from US, international, and emerging market stocks — are taxed as ordinary income. That’s the highest rate. Canadian eligible dividends? Roughly half that rate.

So that 25% in XIC isn’t just giving you stock market exposure — it’s giving you the most tax-efficient type of dividend income available to Canadian investors. In a non-registered account, this advantage adds up significantly over time.

Reason 3: Withholding Tax Efficiency

Canadian stocks held by Canadian investors are not subject to any foreign withholding tax. Zero. When Royal Bank pays you a dividend inside XEQT, the full dividend flows through without any government taking a cut along the way.

Foreign stocks? Different story. US dividends face a 15% withholding tax. International developed market dividends face varying rates (10-30% depending on the country). Emerging market dividends can face double withholding — once by the local country, and again by the US since IEMG is a US-listed ETF. (I’ve broken down the full withholding tax picture on my XEQT foreign withholding tax page.)

By overweighting Canadian stocks, XEQT reduces the overall portfolio drag from foreign withholding taxes. That 25% in XIC is a withholding-tax-free zone.

Reason 4: Sector Diversification Away From US Tech Concentration

Here’s something that doesn’t get talked about enough: the US stock market has become incredibly concentrated in technology companies. As of early 2025, the top 10 US stocks (mostly tech giants) made up roughly 35% of the S&P 500.

If XEQT weighted Canada at only 3%, the portfolio would be roughly 55-60% US stocks. That means your portfolio would be heavily driven by the fortunes of Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, and Tesla. That’s not exactly “diversified.”

The Canadian market has a very different sector composition:

By giving Canada a 25% weight, XEQT adds meaningful exposure to financials, energy, and materials — sectors where Canada is a global leader — while keeping tech exposure at a more moderate level (around 22% of the total portfolio instead of 28%+).

This isn’t about thinking Canadian banks are “better” than US tech. It’s about not having all your eggs in one sector basket.

Reason 5: Familiarity and Behavioral Comfort

This reason is more psychological, but it’s no less important. Investors who hold a meaningful allocation to their home country are statistically less likely to panic-sell during downturns.

Why? Because they see companies they recognize. When your portfolio holds Royal Bank, Shopify, Canadian Natural Resources, and Brookfield — companies you interact with, see in the news, and understand — you’re less likely to lose your nerve when markets drop 30%. You’ve watched these companies survive previous downturns. You know they’re real businesses, not just ticker symbols on a screen.

Studies from Vanguard and Dimensional Fund Advisors have shown that investors with some home country tilt have better behavioral outcomes — they stick to their plan, contribute consistently, and avoid the buy-high-sell-low trap. And behavioral outcomes are worth far more than a few basis points of theoretical optimization.

3. XEQT vs Pure Market-Cap Weight vs Other All-in-One ETFs

Let’s see how XEQT’s geographic allocation compares to alternatives. This is the table I wish I’d seen when I was first researching this topic.

A few things jump out:

• Every major Canadian all-in-one ETF overweights Canada. VEQT actually gives Canada the biggest tilt at ~30%. If home country bias were a mistake, you’d expect at least one of these providers to go pure market-cap weight. None of them do.
• XEQT sits in the middle. At ~25%, XEQT’s Canadian allocation is less aggressive than VEQT’s but more than ZEQT’s. It’s a reasonable middle ground.
• Pure market-cap weight would mean ~62% US stocks. That’s a massive concentration in a single country. Most Canadian investors wouldn’t be comfortable with that — and the tax implications would be worse, too.
• All three have very similar MERs. The Canadian allocation decision doesn’t cost you extra in management fees.

The bottom line: BlackRock, Vanguard, and BMO all independently concluded that a 20-30% Canadian allocation is appropriate for Canadian investors. When three of the world’s largest asset managers agree, that’s worth paying attention to.

4. The Tax Advantage of Canadian Dividends in Detail

I touched on this above, but it’s worth going deeper because the tax benefit of Canadian dividends is one of the strongest arguments for the home country tilt — and it’s the one most people don’t fully appreciate.

How the Eligible Dividend Tax Credit Works

When a Canadian corporation pays you an eligible dividend, here’s what happens on your tax return:

1. You receive the dividend — say $1,000
2. It’s grossed up by 38% — so you report $1,380 on your return
3. You get a federal tax credit of 15.02% of $1,380 = $207.28
4. You also get a provincial tax credit (varies, but let’s use Ontario’s 10% = $138)
5. Net tax on a $1,000 Canadian dividend at a ~$100K income: roughly $250 (25% effective rate)

Compare that to a $1,000 foreign dividend:

1. It’s taxed as ordinary income — no gross-up, no special credit
2. Net tax at the same income level: roughly $430 (43% effective rate)

That’s a difference of $180 on every $1,000 in dividends. On a portfolio paying $2,000 per year in dividends, the portion that comes from Canadian stocks (roughly $700 from the 25% XIC allocation) saves you meaningful tax compared to if that same income came from foreign sources.

The Math Over 25 Years

Let me illustrate with a longer timeline. Assume you hold $100,000 in XEQT in a non-registered account, dividends yield 2% overall, and the Canadian portion (25%) yields 2.8%.

• Annual Canadian dividends: ~$700
• Tax on those dividends (eligible rate): ~$175
• If those same dividends were foreign: ~$301
• Annual tax savings from Canadian allocation: ~$126
• Over 25 years (assuming modest portfolio growth): several thousand dollars in cumulative tax savings

This isn’t going to make or break your retirement. But it’s a real, quantifiable benefit that pure market-cap weight advocates tend to ignore.

Important caveat: This advantage only applies in non-registered accounts. In a TFSA, there’s no tax on any dividends. In an RRSP, all dividends are taxed the same way when withdrawn. So if you only invest in registered accounts, this particular argument is less relevant to you.

5. Currency Risk Reduction: The Stability Benefit

I’ve written extensively about XEQT’s currency exposure, but let me frame it specifically through the home country bias lens.

When 25% of your portfolio is in Canadian stocks, that 25% has zero currency risk. It goes up and down based on the performance of Canadian companies — period. No exchange rate noise.

The other 75%? It’s all subject to currency fluctuations. When the Canadian dollar strengthens against the US dollar (as it did from ~$0.69 in early 2020 to ~$0.83 in mid-2021), your US holdings lose value in CAD terms even if the underlying stocks haven’t moved.

Here’s a simple way to think about the volatility impact:

XEQT’s 25% hits a sweet spot: enough Canadian content to provide stability and reduce the impact of currency swings, but not so much that you’re overly concentrated in a small market.

There’s also a natural hedging effect at play. Canada is a resource-exporting economy. When oil and commodity prices rise, the Canadian dollar tends to strengthen. But Canadian energy and materials stocks also tend to rise. So within your portfolio, the gains in XIC offset some of the currency-driven losses in your foreign holdings. It’s a built-in cushion that you don’t get with a 3% Canadian allocation.

6. The Counterargument: When Home Country Bias Goes Too Far

Now, here’s where I want to be fair to the critics. Home country bias can absolutely be a problem — just not at the level XEQT does it.

The real danger isn’t XEQT’s 25%. It’s what a lot of Canadian investors do on their own. Studies consistently show that the average Canadian investor holds 50-60% or more of their equity portfolio in Canadian stocks. Some hold 100% Canadian through bank mutual funds. That’s genuinely problematic.

Why 60%+ Canada Is a Real Problem

• Canada is only ~3% of the global economy. Holding 60% in a 3% market is an enormous concentration bet, whether you realize it or not.
• The Canadian market is dominated by two sectors. Financials (~31%) and energy (~17%) make up nearly half the TSX. If you hold 60% Canadian, roughly 30% of your total portfolio is in banks and oil companies.
• You miss entire industries. Canada has almost no major pharmaceutical companies, no global tech giants beyond Shopify, and no large consumer brands. Holding mostly Canadian stocks means you have minimal exposure to healthcare, semiconductors, and global consumer trends.
• Historical underperformance. From 2010 to 2020, the S&P/TSX Composite Index returned roughly 5.5% annually. The S&P 500 returned roughly 13.5% annually. That’s a massive gap. A Canadian investor with 60% in the TSX missed out on one of the greatest bull runs in history.

Note: These are simplified illustrative numbers using approximate 2010-2020 returns. Actual results vary by exact time period and include currency effects.

So yes, home country bias can hurt you — but XEQT’s 25% is a carefully calibrated overweight, not an excessive one. The difference between 25% and 60% is the difference between a thoughtful tilt and a blind bet.

7. Would You Be Better Off With a Pure Market-Cap Weighted Global ETF?

This is the question that lurks behind every home country bias discussion. What if you just bought VT (Vanguard Total World Stock ETF) or built a market-cap weighted portfolio yourself? Wouldn’t that be “more correct”?

In theory, maybe. In practice, probably not. Here’s why.

The Theory vs Reality Gap

In theory: Market-cap weighting is the most efficient allocation because it reflects the collective wisdom of all market participants. Any deviation is an “active bet” that you can’t consistently win.

In reality for Canadian investors:

1. Tax treatment differs by country of origin. A dollar of Canadian dividends is taxed very differently than a dollar of US dividends in a non-registered account. Market-cap weight theory ignores this.

2. Currency conversion has costs. If you buy VT (a US-listed ETF), you need to convert CAD to USD. Even using Norbert’s Gambit, there are frictional costs. XEQT handles all of this internally.

3. You actually need to maintain it. A DIY market-cap weighted portfolio using individual regional ETFs requires rebalancing. XEQT does this automatically. The behavioral advantage of a “just buy one thing” approach is enormous — it means you’ll actually stick with it.

4. Historical backtesting shows minimal difference. Over long periods (20+ years), the performance difference between a 25% home bias and a 3% market-cap weight allocation tends to be small and variable. Sometimes the home-bias version wins (when Canadian markets outperform), sometimes market-cap weight wins. Neither approach consistently dominates.

5. The Vanguard research supports home bias. Vanguard themselves published a paper called “The Role of Home Bias in Global Asset Allocation Decisions” that concluded a 20-40% home country allocation is reasonable for investors in countries with developed capital markets. Canada qualifies.

The Practical Test

Ask yourself this: if you built a pure market-cap weighted portfolio with only 3% in Canada, and Canadian stocks had a great year while US stocks dropped 20%, how would you feel watching your portfolio barely benefit from the Canadian rally while eating the full US decline?

Now flip it: if Canadian stocks crashed and your portfolio only had 3% exposure, you’d feel smart. But you’d also have zero exposure to the recovery.

The point is, there are emotional and practical costs to any allocation. XEQT’s 25% is designed to minimize regret on both sides. You’ll participate meaningfully in Canadian rallies and still get 75% exposure to global growth.

8. How to Think About It: XEQT’s 25% Is a Sweet Spot

After all my research, here’s the mental model I’ve settled on. XEQT’s home country bias isn’t about thinking Canada is special or that Canadian stocks will outperform. It’s about optimizing for the full picture of what it means to be a Canadian investor:

You earn in CAD. Having 25% in CAD-denominated assets makes sense.

You’re taxed by the CRA. Canadian dividends get preferential tax treatment.

You avoid withholding taxes. No foreign government touches your Canadian dividends.

You get sector diversification. Canadian markets complement rather than duplicate global markets.

You stay invested. Familiarity keeps you calm during downturns.

Think of it this way: if you were designing a portfolio from scratch for a Canadian investor, and you could only pick one number for the Canadian allocation, what would it be?

• 3% feels too low — you’d have almost nothing in the country where you live, work, and spend money
• 50%+ feels too high — you’re concentrating in a small market with sector gaps
• 20-30% feels like the Goldilocks zone — meaningful home exposure without excessive concentration

That’s exactly where XEQT lands. And it’s exactly where Vanguard (VEQT) and BMO (ZEQT) land too. Three independent investment firms converged on roughly the same answer.

I don’t think that’s a coincidence.

What If You’re Still Uncomfortable?

If you genuinely believe XEQT’s 25% Canadian allocation is too high, you have options:

• Buy ZEQT instead. BMO’s all-in-one equity ETF gives Canada about 20%, which is slightly less.
• Build a two-ETF portfolio. Buy XAW (iShares Core MSCI All Country World ex Canada) for your global exposure and XIC separately, choosing whatever Canadian weight you prefer. But you’ll need to rebalance periodically.
• Add VXC or XAW on the side. If you already own XEQT, you could add a small position in an ex-Canada global ETF to dilute the Canadian weight. But this adds complexity for a marginal change.

Honestly, for most people, the difference between 20% and 30% Canada isn’t worth losing sleep over. Pick one of the all-in-one ETFs, set up automatic contributions, and move on with your life. The biggest risk isn’t having 25% in Canada instead of 20% — it’s spending so long optimizing that you delay investing.

9. Final Thoughts

When I look back at that Reddit comment that kicked off my deep dive into XEQT’s home country bias, I realize the commenter wasn’t wrong about the facts — XEQT does allocate roughly 25% to Canada, and Canada is roughly 3% of global market cap. Those numbers are accurate.

But they were wrong about the conclusion. They assumed “deviation from market-cap weight = bad” without considering the tax benefits, currency alignment, withholding tax savings, sector diversification, and behavioral advantages that the Canadian tilt provides.

Here’s my honest take after years of holding XEQT:

• The 25% Canadian allocation has never bothered me in practice. I’ve never looked at my returns and thought “if only I had 3% in Canada instead of 25%, everything would be different.” The differences are small and inconsistent.
• The tax benefits are real and measurable. In my non-registered account, the eligible dividend tax credit on Canadian dividends has saved me meaningful amounts over the years.
• The simplicity is worth a lot. One ETF, automatic rebalancing, no currency conversion, no spreadsheet tracking. I’ve stuck with my plan because XEQT makes it effortless.
• The behavioral benefit is underrated. I’ve seen friends with “optimized” multi-ETF portfolios tinker constantly, second-guess their allocations, and trade at the worst possible times. My boring single-ETF approach has kept me invested through some ugly markets.

If you’re choosing between XEQT, VEQT, or ZEQT, the home country bias difference between them (20-30%) is far less important than actually starting and staying invested. All three are excellent choices. Pick one and commit to it.

And if someone on the internet tells you that XEQT’s 25% Canadian allocation is a fatal flaw, just smile and keep buying. You’ve got the facts on your side.