XEQT vs Equal-Weight ETFs in Canada: Cap-Weighted vs Equal-Weighted Investing Explained

Last fall I was at a Thanksgiving dinner – the kind where the conversation inevitably drifts from turkey to real estate to investing once someone’s uncle brings up how much his house is worth. This year, the debate took an unusual turn. My cousin, who had recently discovered financial YouTube, pulled me aside and said, “You keep telling everyone to buy XEQT, but isn’t it dumb that Apple and Microsoft get so much weight? An equal-weight ETF treats every company the same. That’s actually diversified.”

He had clearly been watching some convincing content. And honestly? I understood the appeal. The first time I encountered the equal-weight argument, I thought it made perfect sense too. Why should the biggest companies automatically get the biggest slice of your portfolio? Isn’t that just rewarding size for the sake of size? Wouldn’t it be “fairer” – and safer – to give every company the same weight?

It took me a solid weekend of digging into the data, reading academic papers, and comparing actual fund performance to realize that equal-weighting is one of those ideas that sounds brilliant in theory and falls apart in practice. The extra costs, the constant rebalancing, the tax drag, and the historical underperformance all add up to a strategy that makes investors feel clever while quietly costing them money.

In this post, I am going to break down exactly why XEQT’s cap-weighted approach beats equal-weighting for the vast majority of Canadian investors – and when equal-weight might actually make sense.

1. What Is Cap-Weighting and How Does XEQT Use It?

Before we can compare the two approaches, let’s make sure you understand what each one actually does.

Market-cap weighting means each company gets a weight in the fund proportional to its total market value. If Apple is worth $3.5 trillion and a small industrial company is worth $5 billion, Apple gets roughly 700 times more weight in the index. The market’s collective opinion about what a company is worth determines its slice of the pie.

This is exactly how XEQT works. It holds four underlying iShares ETFs – ITOT (US), XIC (Canada), XEF (international developed), and IEMG (emerging markets) – and within each of those funds, every stock is weighted by its market capitalization. I have written a deep dive into how this weighting works if you want the full picture.

The result? XEQT’s top holdings look something like this:

The top 10 holdings make up roughly 17-18% of the fund. The remaining 9,000+ stocks share the other 82-83%. That’s important context for the concentration debate we’ll get to shortly.

2. What Is Equal-Weighting and Why Does It Sound So Appealing?

Equal-weighting does exactly what the name suggests: every stock in the index gets the same weight, regardless of size. In an equal-weight version of the S&P 500, for example, Apple gets 0.2% (1/500th) and the smallest company in the index also gets 0.2%. Every company is treated identically.

In Canada, the most well-known equal-weight ETFs include:

• EQL.TO – ALPS Equal Sector Weight Canada ETF (tracks an equal-sector-weighted approach to the Canadian market)
• ZEB.TO – BMO Equal Weight Banks Index ETF (equal-weights the Big Six Canadian banks)
• ZEO.TO – BMO Equal Weight Oil & Gas Index ETF
• EWS.TO and similar BMO equal-weight sector ETFs

There is no single all-in-one globally diversified equal-weight ETF equivalent to XEQT. That, in itself, tells you something about the challenges of the strategy at scale.

Here is why equal-weighting sounds appealing:

• It reduces mega-cap concentration. Instead of Apple being 3.5% of your portfolio, it becomes a tiny fraction, equal to every other holding. No single company dominates.
• It gives more weight to smaller companies. In a cap-weighted index, small-cap and mid-cap stocks are almost invisible. Equal-weighting dramatically boosts their influence.
• It feels “fairer.” There is something intuitively satisfying about treating every company equally. It feels like true diversification – not a portfolio dominated by a handful of tech giants.
• It has a built-in contrarian tilt. Equal-weight funds regularly rebalance back to equal weights, which means they systematically sell winners and buy losers. This is a form of mean reversion – the idea that overvalued stocks will come back down and undervalued ones will rise.

On paper, this all sounds reasonable. So why don’t I recommend it? Because the real world has costs, taxes, and decades of performance data that tell a very different story.

3. XEQT (Cap-Weighted) vs Equal-Weight: A Side-by-Side Comparison

Let’s put the two approaches next to each other. Since there is no perfect equal-weight equivalent to XEQT, this comparison uses XEQT’s actual characteristics alongside what a hypothetical globally diversified equal-weight approach would look like, informed by actual equal-weight fund data from Canada and the US.

The MER difference might look small – maybe 0.10% to 0.20% higher for equal-weight. But that gap significantly understates the true cost difference, because it does not include the higher trading costs from constant rebalancing, the tax drag from more frequent capital gains realizations, or the liquidity costs of regularly trading smaller, less liquid stocks.

4. The Hidden Costs of Equal-Weighting That Nobody Talks About

This is where the equal-weight argument really starts to unravel. The sticker price – the MER – is only part of the story. Equal-weight strategies carry several embedded costs that eat into your returns over time.

The rebalancing problem

A cap-weighted index like the ones inside XEQT is essentially self-rebalancing. When Apple’s stock price goes up, its weight in the index goes up automatically. No trades needed. The index just reflects reality.

An equal-weight index has to fight this natural process. Every quarter (or sometimes monthly), the fund manager must:

1. Sell stocks that have gone up (to bring them back down to equal weight)
2. Buy stocks that have gone down (to bring them back up to equal weight)
3. Execute thousands of trades across every holding in the portfolio

Each of those trades costs money – bid-ask spreads, market impact, commissions. For a fund holding hundreds of stocks across global markets, quarterly rebalancing generates enormous trading volume. XEQT’s underlying funds might turn over 5-8% of the portfolio in a year. An equal-weight fund can easily turn over 20-30%.

If you want to understand why XEQT’s automatic rebalancing is such an advantage, I have written about it in detail. The short version: less trading means lower costs and better after-tax returns.

The tax drag problem

Every time an equal-weight fund sells a winning stock to rebalance back to equal weight, it realizes a capital gain. In a taxable (non-registered) account, those gains flow through to you as the investor. You owe tax on gains you never chose to realize, from trades you never asked to make.

Over 20 or 30 years, this tax drag compounds into a meaningful drag on returns. A cap-weighted fund like XEQT generates far fewer taxable events because it rarely needs to sell. Winners just naturally grow in weight – no selling required.

The liquidity cost problem

Equal-weighting forces a fund to hold the same dollar amount in Apple ($3.5 trillion market cap) and some micro-cap company with a $500 million market cap. For the micro-cap, the fund’s position might represent a significant portion of the stock’s daily trading volume, making it expensive to buy and sell without moving the price.

This is why equal-weight strategies struggle at scale. The more money flowing into an equal-weight fund, the harder it becomes to maintain equal weights in smaller, less liquid stocks without incurring massive trading costs.

5. How Top Holdings Differ: Cap-Weight vs Equal-Weight

One of the most concrete ways to see the difference between the two approaches is to look at how individual holdings would be treated. Here is what happens to the same set of companies under each methodology:

The pattern is obvious. Equal-weighting dramatically reduces your exposure to the world’s largest and most profitable companies – the ones that have actually driven most of global stock market returns over the past two decades – and dramatically increases your exposure to small, unproven companies.

Is that diversification? Technically, yes. But it is a very specific bet: a bet that smaller companies will outperform larger ones going forward. And that bet has not paid off consistently.

6. The Magnificent Seven Concentration Concern

I know what you are thinking, because I thought it too: “But what about the Magnificent Seven? Aren’t XEQT investors dangerously concentrated in a few tech stocks?”

The Magnificent Seven – Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, and Tesla – collectively represent a significant chunk of the US stock market and, by extension, a meaningful portion of XEQT. I have written a detailed analysis of this concentration concern that I would encourage you to read.

But here is the short version: yes, these companies are large. And no, that is not the same as being dangerously concentrated.

Cap-weighting reflects reality. The Magnificent Seven are not large in XEQT because a portfolio manager decided to overweight them. They are large because the global market – millions of investors, analysts, and institutions – collectively values them at trillions of dollars. Their weight reflects their actual economic significance.

XEQT dilutes the concentration. Because XEQT is globally diversified across 9,000+ stocks in 40+ countries, the Magnificent Seven’s combined weight is spread across a much broader base than if you just held a US-only fund. In the S&P 500, the Mag Seven might be 28-30% of the index. In XEQT, their combined weight is closer to 13-15% – still significant, but much more diluted.

Cap-weighting is self-correcting. If any of these companies stumble – if NVIDIA’s AI revenue disappoints, if Apple’s iPhone sales stall – their stock prices fall and their weight in the index automatically shrinks. You do not need to predict the decline. The index handles it for you. I explained this self-cleansing mechanism in detail in the cap-weighting deep dive.

Compare this to equal-weighting, where you would be forced to buy more of a declining tech giant during each rebalance, maintaining its equal weight even as the market is telling you the company is worth less. Equal-weighting does not protect you from concentration – it just replaces market-driven concentration with an arbitrary equal allocation that ignores economic reality.

7. The Performance Record: Cap-Weight vs Equal-Weight Over Time

Now for the part that matters most to your actual wealth: which approach has delivered better returns?

The answer depends on the time period, but the overall picture favours cap-weighting – especially after accounting for costs and taxes.

When cap-weighting wins (most of the time):

• During periods of mega-cap outperformance. When large companies lead the market – as they have for much of the 2010s and 2020s – cap-weighted indexes capture that outperformance fully. Equal-weight indexes systematically sell the winners.
• In bull markets driven by innovation. Major technological shifts tend to create a few dominant winners (think the smartphone era, cloud computing, AI). Cap-weighting rides these waves. Equal-weighting fights them.
• After accounting for all costs. Even in periods where the gross returns of equal-weight and cap-weight indexes are similar, the higher MER, trading costs, and tax drag of equal-weighting tend to erase any raw performance advantage.

When equal-weighting wins (some of the time):

• During mean-reversion periods. When overvalued large-caps correct and smaller, cheaper stocks catch up, equal-weight can outperform. This happened in parts of 2000-2007, after the dot-com bubble burst and mega-cap tech lagged.
• In value-led recoveries. Equal-weight has a natural tilt toward value and small-cap stocks, so it benefits when these factors outperform.
• In narrow markets that broaden out. When market breadth expands – meaning more stocks participate in a rally rather than just the largest – equal-weight benefits.

The challenge is that you need to predict when these conditions will occur. And if you could reliably predict factor rotations, you would not need an indexing strategy at all – you would be running a hedge fund.

The US equal-weight S&P 500 (RSP) has trailed the cap-weighted S&P 500 (SPY) over most rolling 10-year periods since 2010. After fees and taxes, the gap widens further. In Canada, the limited selection of equal-weight products and their higher costs make the case even weaker.

8. The Rebalancing Cost Problem in a Canadian Context

This deserves its own section because the rebalancing issue is particularly painful for Canadian investors.

In a TFSA or RRSP, the tax drag from rebalancing does not matter because those accounts are tax-sheltered. But you still pay for the higher MER and the embedded trading costs – costs that come directly out of your returns whether you see them or not.

In a non-registered (taxable) account, the situation is worse. Every quarterly rebalance of an equal-weight fund can trigger capital gains distributions. You receive a T3 slip showing gains you need to report and pay tax on, even though you did not sell a single share yourself. Over 20 or 30 years, this tax drag can cost you tens of thousands of dollars compared to a low-turnover cap-weighted fund like XEQT.

Let’s put rough numbers on this. Suppose you invest $100,000 in each approach, both earning 8% gross annually over 25 years:

That is roughly $61,000 in lost wealth over 25 years – on a $100,000 investment – from costs that are mostly invisible. The equal-weight fund’s fact sheet will never show you the full picture. You would need to do the math yourself, and most investors never do.

9. When Equal-Weight Might Actually Make Sense

I do not want to be completely dismissive. There are specific scenarios where equal-weighting can be a reasonable choice:

• Sector-specific equal-weight ETFs. Products like ZEB (equal-weight Big Six banks) make a certain kind of sense. If you want exposure to all six major Canadian banks without overweighting Royal Bank and TD, equal-weighting within a narrow, homogeneous sector is defensible. You are comparing six similar companies, not trying to equalize Apple and a micro-cap miner.

• As a tactical tilt, not a core holding. If you have strong conviction that smaller companies will outperform mega-caps over a specific period, a small equal-weight position alongside XEQT could serve as a factor tilt. But this is an active bet, and you should recognize it as one.

• For investors who genuinely cannot sleep with Mag Seven concentration. If the psychological discomfort of seeing Apple as your biggest holding is causing you to panic-sell during downturns, then a less concentrated approach – even if it costs more – might be worth the behavioural benefit. The best portfolio is the one you actually stick with.

But for the vast majority of Canadian investors who want a simple, low-cost, globally diversified portfolio they can hold for decades? Cap-weighting – and specifically XEQT – is the better choice.

10. Why XEQT’s Cap-Weighted Approach Is Better for Most Canadian Investors

Let me bring this all together. Here is why I keep coming back to XEQT’s cap-weighted approach, and why it is what I recommend to friends, family, and anyone who will listen:

1. It is the lowest-cost approach. XEQT’s 0.20% MER, combined with minimal turnover and low embedded trading costs, means more of your money stays invested and compounds over time. Equal-weighting costs more at every level – management fees, trading costs, and tax drag.

2. It is self-maintaining. You do not need to think about rebalancing, factor tilts, or when to rotate between strategies. XEQT’s cap-weighted methodology automatically adjusts to reflect the market’s current state. Winners grow, losers shrink, and you do not lift a finger. I wrote about this automatic rebalancing in detail.

3. It captures the winners automatically. The companies that drive the market’s returns tend to be the ones that grow the largest. In a cap-weighted index, you ride those winners all the way up. In an equal-weight index, you are forced to sell them every quarter and buy more of the laggards. Over long periods, this systematic selling of winners is costly.

4. It is available as a single, all-in-one ETF. You can build a globally diversified, cap-weighted portfolio by buying one ticker – XEQT – in one account. There is no equivalent equal-weight all-in-one product in Canada. To replicate XEQT’s diversification with equal-weighting, you would need multiple ETFs, manual rebalancing, and significantly more time and attention.

5. It has the strongest long-term track record. The data from SPIVA and decades of academic research consistently show that cap-weighted indexing delivers top-tier returns over long horizons. Not because it is perfect in every single year, but because its low costs and structural efficiency compound relentlessly.

6. It is simple enough to actually stick with. Investing success is not about finding the theoretically optimal strategy. It is about finding a strategy that is good enough and then sticking with it for decades. XEQT is simple enough that you can set up automatic purchases on Wealthsimple and never think about index weighting methodologies again. That simplicity has real value.

11. The Bottom Line: Do Not Overthink the Weighting

Here is what I told my cousin at that Thanksgiving dinner, and what I will tell you now: the equal-weight vs cap-weight debate is interesting academically, but it should not change your investing strategy.

If you are a Canadian investor who wants to build long-term wealth with minimal effort and minimal cost, XEQT’s cap-weighted approach is the better choice. It is cheaper, simpler, more tax-efficient, and has a longer and more consistent track record of delivering strong returns.

Equal-weighting is not a bad idea in the abstract. But in practice – after fees, after taxes, after trading costs, after the complexity of managing multiple ETFs – it is a more expensive way to achieve a goal that cap-weighting already accomplishes.

Buy XEQT. Set up automatic contributions. Go live your life. The weighting methodology will take care of itself.

To understand exactly what you own inside XEQT and the industries your money is spread across, check out those deep dives. But do not let the weighting debate become a reason to delay investing. The best time to start was yesterday. The second best time is today.

Related Reading

• How XEQT Uses Market-Cap Weighting: What It Means for Your Portfolio
• XEQT Holdings: What You Actually Own
• Magnificent 7 Concentration Risk and XEQT Diversification
• XEQT Automatic Rebalancing Explained
• What Is XEQT? The Complete Guide
• XEQT Sector Breakdown: Industries and Allocation