XEQT vs ESG ETFs in Canada: Is Sustainable Investing Worth the Trade-Off?

A good friend of mine sat me down over coffee a couple of years ago and said, “I don’t want to own fossil fuel companies. I don’t want to own weapons manufacturers. I want my money to actually do good in the world.” She’d been researching ESG ETFs for weeks, comparing screening criteria and sustainability scores, and genuinely felt torn between investing according to her values and getting the best possible returns for her family.

I completely understood where she was coming from. The idea that your investment portfolio could help push the world in a better direction is genuinely appealing. Who wouldn’t want to grow their wealth and support responsible companies at the same time?

But here’s the thing: the question of ESG vs. broad-market investing like XEQT is more nuanced than the marketing materials suggest. After spending a lot of time digging into the data, I’ve come to a clear conclusion – but I want to walk you through the full picture so you can make your own informed decision.

Let’s break it all down.

1. What Is ESG Investing, Exactly?

ESG stands for Environmental, Social, and Governance – three categories that rating agencies use to evaluate how responsibly a company operates:

• Environmental: How does the company impact the planet? Carbon emissions, pollution, waste management, renewable energy usage, deforestation practices.
• Social: How does the company treat people? Labor practices, diversity, human rights in supply chains, community impact, product safety.
• Governance: How is the company run? Board diversity, executive compensation, transparency, shareholder rights, anti-corruption policies.

ESG ETFs use these criteria to screen out companies that don’t meet certain thresholds. Depending on the fund, that might mean excluding:

• Fossil fuel producers and heavy polluters
• Weapons and firearms manufacturers
• Tobacco and cannabis companies
• Gambling operations
• Companies with poor labor practices or human rights violations

Some ESG funds use negative screening (removing the worst offenders), while others use positive screening (actively selecting the highest-rated companies). Some do both.

The idea is straightforward: by directing capital toward “better” companies, you can earn competitive returns while making the world a little better. At least, that’s the promise.

2. The Most Popular ESG ETFs in Canada

If you’re a Canadian investor looking at ESG options, these are the funds you’ll encounter most often:

XESG – iShares ESG Aware MSCI Canada Index ETF

• MER: 0.15%
• Focus: Canadian equities screened for ESG criteria
• Holdings: ~90 stocks
• Provider: BlackRock (iShares)
• XESG tracks the MSCI Canada IMI Extended ESG Focus Index. It doesn’t fully exclude fossil fuels but tilts toward companies with higher ESG scores within each sector.

ESGA – BMO MSCI USA ESG Leaders Index ETF

• MER: 0.20%
• Focus: US equities with top ESG ratings
• Holdings: ~300 stocks
• Provider: BMO Global Asset Management
• ESGA selects companies in the top 50% of ESG ratings within each sector of the US market. It’s a “best-in-class” approach rather than a blanket exclusion strategy.

GESG – BMO MSCI Global ESG Leaders Index ETF

• MER: 0.25%
• Focus: Global equities with top ESG ratings
• Holdings: ~700 stocks
• Provider: BMO Global Asset Management
• GESG applies a similar best-in-class methodology as ESGA but across developed markets globally. The closest ESG equivalent to a global equity fund.

DRFG – Desjardins SRI Global Equity Fund ETF

• MER: 0.40%
• Focus: Global equities with strict SRI (socially responsible investing) criteria
• Holdings: ~200 stocks
• Provider: Desjardins
• DRFG applies some of the strictest screens in the Canadian ESG space. Higher fees reflect the more active management required for their screening process.

SUSL – iShares ESG MSCI USA Leaders ETF

• MER: 0.10%
• Focus: US equities with strong ESG profiles
• Holdings: ~350 stocks
• Provider: BlackRock (iShares)
• SUSL is the cheapest ESG option on this list, tracking the MSCI USA Extended ESG Leaders Index. Note that it’s listed in USD, which adds a currency consideration for Canadian investors.

Each of these funds takes a slightly different approach to ESG screening – which is itself part of the problem, as we’ll discuss later.

3. The Big Comparison: XEQT vs ESG ETFs

Here’s the head-to-head comparison every Canadian investor wants to see. I’ve laid out the key metrics so you can evaluate these funds side by side.

A few things jump out from this table:

1. XEQT is the only truly global, all-in-one solution. Every ESG fund on this list covers either a single country or requires you to build your own multi-fund portfolio to match XEQT’s geographic breadth.
2. MERs are all over the map. XESG and SUSL are cheaper than XEQT, but they cover far less of the market. DRFG charges double XEQT’s fee for stricter screening.
3. Holdings count is dramatically different. XEQT holds over 12,000 stocks, while the most diversified ESG option here (GESG) holds around 700. That’s a massive diversification gap.

4. Do ESG ETFs Actually Underperform?

This is the million-dollar question, and the honest answer is: it depends on the time period and which ESG fund you’re looking at.

Here’s what the data actually shows:

The Case That ESG Keeps Up

• US-focused ESG funds (ESGA, SUSL) have actually performed well over the last five years, largely because tech giants like Apple, Microsoft, and Nvidia score well on ESG metrics and have driven market returns. When your “sustainable” fund still holds all the mega-cap tech stocks, it’s going to look a lot like the broader market.
• During 2020-2021, many ESG funds outperformed their benchmarks because energy stocks were in the gutter and tech was booming.

The Case That ESG Costs You

• In 2022 and into 2023, energy stocks roared back. Funds that excluded or underweighted fossil fuels paid a real price. Some ESG funds trailed the broad market by 2-4% in years when oil and gas stocks surged.
• Globally diversified ESG funds (GESG, DRFG) have generally lagged XEQT, partly due to higher fees and partly due to the narrower investment universe.
• DRFG’s 0.40% MER creates a persistent drag. Over 25 years on a $500,000 portfolio, the difference between a 0.20% MER and a 0.40% MER compounds to roughly $50,000+ in lost growth.

The Bottom Line on Performance

There’s no consistent “ESG premium” or “ESG penalty.” ESG funds perform differently from the broad market – sometimes better, sometimes worse – depending on which sectors are leading. But the fee difference and reduced diversification create a structural headwind that’s hard to overcome over decades.

5. What ESG ETFs Leave Out (And Whether It Matters)

When you invest in an ESG fund, you’re consciously excluding certain segments of the economy. Here’s what you typically give up:

• Energy sector: Oil and gas companies represent roughly 4-5% of the global market. In Canada, energy is an even larger slice – about 17% of the TSX. ESG funds that exclude or underweight energy miss out when commodity prices rise.
• Defense and weapons: Companies like Lockheed Martin, Raytheon, and General Dynamics are typically excluded. These stocks have been strong performers over the past decade.
• Tobacco: Altria, Philip Morris, and British American Tobacco are perennial exclusions. These are traditionally high-dividend, defensive stocks.
• Gambling and alcohol: Some stricter ESG funds also screen out casinos and alcohol producers, further narrowing the investment universe.

In total, depending on the fund’s strictness, you might be excluding 5-20% of the global market. That’s significant.

Does it matter? In some years, these excluded sectors will underperform and you’ll feel vindicated. In other years, they’ll surge and you’ll watch from the sidelines. Over the very long term, you’re increasing your concentration risk by betting that certain industries will underperform – a bet that’s impossible to make with confidence over a 30-year horizon.

With XEQT’s broad sector exposure, you own everything – the good, the bad, and the controversial. That’s not a moral statement; it’s a diversification strategy.

6. The Greenwashing Problem

Here’s something that genuinely bothers me about the ESG space: ESG ratings aren’t standardized, and the label itself is increasingly meaningless.

Consider these problems:

1. Different agencies, different ratings. MSCI might give Tesla a high ESG score for its electric vehicles while Sustainalytics gives it a poor score for governance issues and labor practices. There’s no universally agreed-upon definition of what makes a company “sustainable.”

2. Many ESG funds still hold controversial companies. Look inside ESGA or GESG and you’ll find companies like Amazon and Meta – firms that face regular criticism for labor practices, data privacy, and other issues. The “ESG” label can create a false sense of ethical purity.

3. Best-in-class is a relative game. Some ESG funds don’t exclude sectors at all – they just pick the “least bad” company in each sector. That means an ESG fund might hold an oil company, as long as it’s the most responsible oil company. Is that really what values-driven investors expect?

4. The ESG rating industry is a business. Companies pay for ESG assessments and actively manage their ESG scores the way they manage their credit ratings. There’s a financial incentive to game the system rather than make substantive changes.

5. Scope keeps expanding. The definition of ESG has broadened so much that nearly any fund can slap the label on and attract capital. In 2023, the CFA Institute found that over 90% of new fund launches in Europe carried some form of ESG branding.

This isn’t to say ESG is all marketing spin – many funds are genuinely trying to allocate capital responsibly. But the inconsistency and lack of standardization mean you need to do your homework. The ticker “ESG” on a fund name doesn’t guarantee it aligns with your specific values.

7. The Diversification Trade-Off

This is where XEQT’s advantage becomes most clear.

XEQT holds over 12,000 individual stocks across every developed and emerging market on the planet. That level of diversification means:

• No single company, sector, or country can tank your portfolio
• You capture returns from every corner of the global economy
• You don’t need to predict which industries will win or lose over the next 30 years

Now compare that to the ESG alternatives:

Even the most diversified ESG fund on this list holds less than 6% of the stocks in XEQT. That’s not a minor trade-off – it’s a fundamentally different level of diversification.

Fewer holdings means more concentration risk, more tracking error relative to the global market, and a greater chance that your returns deviate significantly from the broad market average. Sometimes that deviation will be positive. But more often than not, greater concentration leads to higher volatility without a compensating return premium.

8. Can You Do Both? The Core-Plus-Tilt Approach

If you genuinely care about sustainable investing but don’t want to sacrifice diversification, there’s a middle ground: use XEQT as your core holding and add a small ESG tilt on top.

Here’s what that might look like:

• 80-90% XEQT – your core, globally diversified foundation
• 10-20% ESG ETF – a targeted allocation to satisfy your values-driven goals

For example, a $50,000 portfolio could be:

• $42,500 in XEQT (85%)
• $7,500 in GESG (15%)

This approach gives you:

1. Broad market diversification through XEQT
2. Values expression through your ESG allocation
3. Lower overall fees than going all-in on ESG
4. Simplicity – just two holdings to manage

The trade-off is added complexity. You’ll need to manually rebalance between the two funds, which means deciding on a rebalancing schedule and sticking to it. For many investors, this complexity is a real cost – not in dollars, but in decision fatigue and the temptation to tinker.

My honest take: if you’re going to tilt toward ESG, keep it small and don’t let it become a distraction from the more important habit of consistently investing over time. The difference between investing 85/15 XEQT/ESG and going 100% XEQT is far smaller than the difference between investing consistently and not investing at all.

9. Does ESG Investing Actually Change Corporate Behavior?

This is the philosophical question at the heart of the entire ESG debate, and both sides have legitimate points.

The Argument That It Does

• Capital flows send a signal. When millions of investors avoid a company, its cost of capital rises, making it more expensive to borrow and expand. In theory, this creates a financial incentive for companies to improve their practices.
• Shareholder engagement works. Many ESG fund managers actively engage with company management, pushing for better environmental and social policies through proxy voting and direct dialogue.
• Norms are shifting. The sheer growth of ESG investing has made companies more conscious of their environmental and social footprint, regardless of whether the capital flows directly impact their stock price.

The Argument That It Doesn’t

• Stock markets are secondary markets. When you sell a “bad” company’s stock, you’re selling it to another investor, not taking money away from the company. The company already received its capital during the IPO or secondary offering.
• Someone else fills the gap. If ESG investors sell fossil fuel stocks, non-ESG investors buy them at a discount, earning higher returns. The company’s operations continue unchanged.
• Real change comes from regulation, not portfolios. Carbon taxes, emissions standards, and environmental regulations have far more direct impact on corporate behavior than investor preferences in secondary markets.
• The divestment paradox. By divesting from “bad” companies, you lose your seat at the table. Shareholders who hold the stock can vote on proposals and push for change from within. Selling your shares means giving up that influence.

I find both sides compelling. The honest truth is that ESG investing is more effective as a personal values expression than as a mechanism for systemic change. If aligning your portfolio with your ethics gives you peace of mind and helps you stay invested through volatile markets, that has real value. But don’t overestimate the direct impact your ETF purchases have on corporate behavior.

If you want to drive real change, consider combining your investment strategy with:

• Supporting policy and regulatory efforts
• Making conscious consumer choices
• Donating to organizations doing direct advocacy work

These actions likely have far more impact on corporate behavior than your choice of ETF.

10. Who Should Consider ESG ETFs?

I want to be clear: ESG investing isn’t wrong. It’s a legitimate choice for certain investors. You might be a good candidate for ESG ETFs if:

1. Your values alignment is non-negotiable. If owning fossil fuel stocks would cause you genuine distress, the small performance trade-off may be worth it for your emotional well-being. An investment you can stick with through thick and thin is better than a theoretically “optimal” one you abandon during a downturn.

2. You understand the limitations. You know that ESG ratings are inconsistent, that your fund might still hold companies you disagree with, and that the impact on corporate behavior is indirect at best. You’re choosing ESG with eyes wide open.

3. You’ve done the holdings research. You’ve actually looked at the holdings list of your chosen ESG fund and confirmed it aligns with your specific values – not just the marketing copy.

4. You’re comfortable with less diversification. You understand that owning 300 stocks instead of 12,000 introduces more concentration risk, and you accept that trade-off.

5. You won’t second-guess the choice during underperformance. When energy stocks surge and your ESG fund trails the market by 3%, you’ll stay the course rather than panic-selling back into the broad market.

If all five of those apply to you, an ESG ETF could be a reasonable choice. But if you’re on the fence, XEQT is almost certainly the better default.

11. The Final Verdict: Why XEQT Remains the Default Recommendation

After examining ESG ETFs from every angle, here’s why I keep recommending XEQT as the core holding for most Canadian investors:

Cost Efficiency

XEQT’s 0.20% MER is competitive with or lower than most ESG alternatives, and significantly cheaper than stricter ESG funds like DRFG (0.40%). Over a multi-decade investing career, those fee savings compound into real money.

Maximum Diversification

With 12,000+ holdings across the globe, XEQT gives you exposure to every sector, country, and company size. No ESG fund comes close to this level of diversification. You’re not betting on which industries will lead over the next 30 years – you own all of them.

True All-in-One Simplicity

XEQT rebalances automatically across four underlying funds, covering US, Canadian, international, and emerging markets. There’s no need to build a multi-ETF portfolio, no manual rebalancing, and no decisions to agonize over. You buy one fund and you’re done.

No Sector Bets

ESG funds make implicit bets against certain sectors. Sometimes those bets pay off, sometimes they don’t. XEQT doesn’t make any sector bets. You capture the full market return, whatever that turns out to be.

Proven Track Record

XEQT has delivered strong, consistent returns since its inception, tracking the global equity market as designed. It does exactly what it promises: give you the global stock market in a single, low-cost Canadian ETF.

Going back to my friend’s dilemma: after we talked through all of this, she decided to go 90% XEQT and 10% GESG. She felt good about having some values expression in her portfolio while keeping the vast majority of her money in the broadest, lowest-cost option available. That felt like a fair compromise to me.

Your mileage may vary. What matters most isn’t whether you choose XEQT, an ESG ETF, or a combination of both. What matters is that you start investing consistently, keep your fees low, stay diversified, and don’t let the perfect become the enemy of the good.

If you want to invest responsibly, that’s admirable. Just make sure you’re doing it with a clear understanding of what you’re gaining, what you’re giving up, and whether the trade-off makes sense for your financial future.

For most Canadians, XEQT is still the answer.

Disclosure: This post contains referral links. I may receive compensation if you sign up through these links, but this doesn’t affect my honest assessment. I genuinely believe XEQT is the best default choice for most Canadian investors, regardless of referral programs.