XEQT vs Factor ETFs in Canada: Should You Tilt Your Portfolio Toward Value, Momentum, or Quality?

A couple of years into my investing journey, I fell down the factor investing rabbit hole. Hard. It started innocently enough – a Reddit thread in r/PersonalFinanceCanada where someone mentioned that “value stocks have historically outperformed growth stocks by 3-4% per year.” That one sentence sent me spiraling into a two-week deep dive that included three academic papers, a dozen YouTube videos from portfolio theory channels, and a spreadsheet where I tried to back-test a multi-factor portfolio using free data I found online.

By the end of those two weeks, I had convinced myself that plain old market-cap-weighted XEQT was for beginners. The real investors, I told myself, were tilting their portfolios toward value, momentum, and quality. I was going to be one of them.

Then I actually tried to build the portfolio. I needed to figure out which factor ETFs were available in Canada. I had to decide how much to allocate to each factor. I had to decide whether to overlay the factor tilt on top of XEQT or replace it entirely. I had to understand whether factor ETFs held the same stocks as XEQT (spoiler: lots of overlap). And I had to come to terms with the fact that the “value premium” I was chasing had basically disappeared for the past 15 years before making a brief comeback.

After all of that, I bought XEQT. Just XEQT. And I have slept well ever since.

But I know the factor investing question keeps coming up – I see it in comment sections, on Reddit, and in emails from readers. So let me walk you through everything I learned during my deep dive, and explain why I ultimately decided that factor tilts are not worth the complexity for most Canadian investors.

1. What Is Factor Investing?

Factor investing is the idea that certain characteristics – called “factors” – can explain why some stocks earn higher returns than others over long periods of time. Instead of just buying the whole market (which is what XEQT does), you deliberately tilt your portfolio toward stocks that share these characteristics, hoping to earn a premium above the market return.

Think of it this way. If XEQT is a buffet where you eat a little of everything in proportion to what is available, factor investing is like going back for extra helpings of the dishes you believe will be the most rewarding. Maybe you load up on the value stocks or take extra servings of the high-quality companies.

The five most commonly discussed factors are:

Value

Value stocks are companies trading at low prices relative to their fundamentals – think low price-to-book ratios, low price-to-earnings ratios, or high dividend yields. The idea is that the market occasionally underprices solid companies, and patient investors can profit by buying them cheaply.

Classic value stocks tend to be mature, established businesses in sectors like financials, energy, and industrials. Think Canadian banks, pipeline companies, or older-economy manufacturers. The academic evidence for a “value premium” goes back decades and across dozens of countries.

Momentum

Momentum says that stocks that have been going up tend to keep going up (for a while), and stocks that have been going down tend to keep going down. This sounds like it contradicts efficient markets, and to some extent it does – momentum is one of the most robust anomalies in finance.

Momentum strategies typically buy stocks in the top 20-30% of recent performers (measured over the past 6-12 months) and avoid or underweight the bottom performers. It tends to work well most of the time, but it can crash spectacularly during sharp market reversals. Momentum investors got demolished during the 2009 recovery, for example, when last year’s losers became this year’s biggest winners.

Quality

Quality focuses on companies with strong balance sheets, high profitability, consistent earnings, and low debt. The idea is straightforward: well-run, financially healthy companies should deliver better risk-adjusted returns over time.

Quality is perhaps the most intuitive factor. When someone says “I only buy good companies,” they are essentially describing a quality tilt – though the formal definition uses specific financial metrics like return on equity, earnings stability, and debt-to-equity ratios.

Low Volatility

Low volatility, sometimes called “minimum variance,” targets stocks that fluctuate less than the overall market. The counterintuitive finding is that lower-risk stocks have historically delivered similar or better returns than higher-risk stocks, which completely violates the textbook idea that more risk equals more reward.

Low-volatility strategies appeal to investors who want equity-like returns with a smoother ride. The tradeoff is that these portfolios tend to lag badly during strong bull markets, because they are underweight the high-flying, volatile stocks leading the charge.

Size (Small Cap)

The size factor says that smaller companies tend to outperform larger ones over long periods. Small-cap stocks are riskier, less followed by analysts, and less liquid, which theoretically means investors get compensated with higher returns for bearing those extra risks.

This factor has weakened considerably in recent decades, especially in developed markets. Many researchers now believe the small-cap premium was largely a feature of the mid-20th century that has been arbitraged away.

2. Popular Factor ETFs Available in Canada

If you want to tilt your portfolio toward any of these factors, there are Canadian-listed ETFs that make it possible. Here are the main options:

A few things worth noting about this table:

Most factor ETFs are US-focused. If you want factor exposure to Canadian, international, or emerging market stocks, your options are much more limited. This already creates a problem if you are trying to build a globally diversified factor portfolio – you might end up with a strong US factor tilt and plain market-cap weighting everywhere else.

MERs are significantly higher than XEQT. XEQT charges 0.20% in management fees. Most single-factor ETFs charge 0.30-0.40%, and multi-factor ETFs can be even higher. That fee drag eats into any theoretical factor premium.

Holdings are concentrated. While XEQT holds over 9,000 stocks, most factor ETFs hold 50-150 stocks. That means you are making a much more concentrated bet, which increases your tracking error relative to the broad market.

Factor ETFs require you to make allocation decisions. How much do you put in value versus momentum? Do you tilt 10% of your portfolio or 50%? These decisions introduce complexity and the risk of getting the mix wrong.

3. The Academic Case FOR Factor Tilts

I want to be fair here. Factor investing is not some fringe theory cooked up by YouTube finance influencers. It has serious academic pedigree, and dismissing it entirely would be intellectually dishonest.

The Fama-French Three-Factor Model

In 1992, Eugene Fama and Kenneth French published research showing that two factors – value (high book-to-market ratio) and size (small market capitalization) – explained stock returns better than the traditional Capital Asset Pricing Model. Their work showed that value stocks outperformed growth stocks by roughly 3-5% per year, and small-cap stocks outperformed large-cap stocks by about 2-3% per year, looking at data going back to the 1920s.

This was not a minor finding. It challenged the entire foundation of how portfolio managers thought about risk and return. Fama won the Nobel Prize in Economics in 2013, and the Fama-French model became the standard framework in academic finance.

Extended Multi-Factor Models

Later research expanded the model to include additional factors. Mark Carhart added momentum in 1997. Fama and French themselves added profitability (quality) and investment aggressiveness in their 2015 five-factor model. Each factor showed a historically positive premium – meaning that, on average, over long periods and across multiple countries, tilting toward these factors would have earned you higher returns.

The Numbers Are Impressive (On Paper)

Here is what the historical data shows for US equity factor premiums, going back several decades:

Source: Academic research from Fama-French, Carhart, Novy-Marx, and others. Historical premiums are gross of fees and transaction costs.

If you could reliably capture even half of these premiums, factor tilts would be a no-brainer. A 2% annual edge compounded over 30 years would turn a $100,000 portfolio from $761,000 (at 7% market return) to $1,006,000 (at 9% with a factor premium). That is nearly $250,000 in extra wealth.

The academic case is real. The question is whether you can actually capture it in practice.

4. The Practical Case AGAINST Factor Tilts for Most Canadians

Here is where the story gets complicated. The academic evidence is one thing. The lived experience of actual investors trying to capture factor premiums is quite another.

Factor Premiums Can Disappear for Decades

The single most important thing to understand about factor investing is that factors go through extended periods of underperformance. Not months. Not years. Decades.

Value investing is the poster child for this problem. From roughly 2007 to 2020 – a full 13 years – value stocks underperformed growth stocks by a staggering margin. If you had tilted your portfolio toward value in 2007, you would have spent more than a decade watching your “smart” factor tilt drag down your returns while plain old market-cap-weighted index funds cruised ahead.

Here is a rough timeline of the value factor’s recent journey:

Could you have held through 13 years of underperformance? I am being serious. Imagine buying a value ETF in 2007, watching it lag the market every single year for over a decade, seeing your coworkers’ XEQT portfolios steadily outperform, and still maintaining conviction. Almost nobody does this in practice.

Higher Fees Eat Into the Premium

Even if a factor premium exists, you have to actually capture enough of it after fees to make the tilt worthwhile. Let’s do some quick math.

Say the long-run value premium is 2% per year (a conservative estimate based on the academic literature). Now subtract the extra cost:

• XVLU MER: 0.33% versus XEQT MER: 0.20%. Extra cost: 0.13% per year.
• Trading costs and bid-ask spreads on a less liquid factor ETF: roughly 0.05-0.10% per year.
• Tax inefficiency from higher turnover (factor ETFs rebalance more frequently): estimated 0.10-0.20% per year in a non-registered account.

Total extra drag: 0.28% to 0.43% per year. On a 2% gross premium, you might capture only 1.5-1.7% net. And that is assuming the premium actually shows up during your investing lifetime, which as we just discussed, is far from guaranteed.

Factor Timing Risk Is Real

When you buy XEQT, you are making a single, simple bet: that the global stock market will go up over the long run. That bet has paid off across every 20-year period in recorded market history.

When you add factor tilts, you are making additional bets. You are betting that value will outperform, or that momentum will persist, or that quality will be rewarded. Each of these bets has a reasonable theoretical basis, but each one can also go wrong for extended periods.

Worse, most investors do not commit to factor tilts at the right time. They discover value investing after value has already started outperforming (because that is when it gets media attention), and they buy in right before the premium disappears again. This is not a hypothetical concern – it is one of the most well-documented patterns in investor behavior. Money flows into factor funds after strong performance and out after weak performance, ensuring that the average investor captures far less than the theoretical premium.

Complexity Creates Opportunities to Make Mistakes

With XEQT, your entire investment process looks like this:

1. Deposit money
2. Buy XEQT
3. Repeat

With a factor-tilted portfolio, your process looks like this:

1. Decide which factors to target (value? momentum? quality? all three?)
2. Select specific factor ETFs for each (there are multiple options with different methodologies)
3. Decide how much to allocate to each factor (10%? 25%? 50%?)
4. Decide whether to apply the tilt globally or just to US stocks
5. Rebalance between factors periodically
6. Resist the urge to abandon underperforming factors and chase outperforming ones
7. Track your overall asset allocation across multiple funds
8. Handle the tax implications of more frequent rebalancing

Every one of those steps is a decision point where you can make a mistake. And the behavioral finance literature is crystal clear: the more decisions an investor has to make, the worse their outcomes tend to be.

I wrote about this in more detail in my article on analysis paralysis. The best investment plan is the one you can actually stick to, and the more complicated your plan, the less likely you are to follow it when times get tough.

The Replication Problem

Here is something most factor investing articles do not tell you: the factor premiums documented in academic research are based on theoretical portfolios that are impossible for retail investors to replicate.

Academic factor portfolios:

• Rebalance monthly or even daily with zero transaction costs
• Have no MER or fund management fees
• Use precise, systematic factor definitions applied consistently
• Include micro-cap stocks that are practically untradeable for individual investors
• Are constructed using data that was not available to investors at the time (look-ahead bias)

Real-world factor ETFs:

• Charge management fees (0.30-0.40%)
• Rebalance quarterly or semi-annually
• Use imperfect approximations of academic factor definitions
• Exclude the smallest, most illiquid stocks
• Suffer from capacity constraints (large factor funds move prices when they rebalance)

The gap between the academic factor premium and the factor premium you can actually earn in a low-cost ETF is significant. Some researchers estimate that real-world implementation captures only 50-70% of the theoretical premium. If the theoretical premium was already borderline after your particular factor goes through a rough decade, capturing only half of it is not going to change your financial life.

5. Head-to-Head Comparison: XEQT vs Factor Approaches

Let’s put the full picture side by side so you can see exactly what you are choosing between.

The pattern here should be clear. Factor tilts offer a possibility of higher returns in exchange for guaranteed higher costs, higher complexity, and higher behavioral risk. XEQT offers a near-certainty of capturing the global market return in exchange for accepting that you will never beat the market.

For most Canadian investors – especially those using TFSAs, RRSPs, or FHSAs for long-term wealth building – the tradeoffs heavily favor XEQT.

6. When Factor Tilts MIGHT Make Sense

I have spent most of this article arguing against factor tilts, and I stand by that for the vast majority of Canadian investors. But I want to be honest: there are a few narrow scenarios where a modest factor tilt could be reasonable.

You Have a Very Long Time Horizon and Genuine Conviction

If you are in your twenties, investing for retirement 35-40 years away, and you have genuinely read the academic literature (not just a Reddit summary), a small value or multi-factor tilt might pay off over that extended horizon. The longer your time frame, the more likely you are to capture a factor premium even if it goes through multi-year droughts along the way.

The key word is “small.” I am talking about putting 10-20% of your equity allocation into a diversified factor ETF, not rebuilding your entire portfolio around factor investing. And you need to commit to holding through the inevitable periods of underperformance without second-guessing yourself.

You Want to Complement XEQT, Not Replace It

Some investors use a “core-satellite” approach: 80-90% of their portfolio in XEQT as the core, and 10-20% in a factor ETF as the satellite. This lets you maintain the simplicity and broad diversification of XEQT while scratching the itch to do something a little more active.

For example, you might hold:

• 85% XEQT – your global market-cap-weighted core
• 10% XVLU – a small value tilt because you believe value will make a comeback
• 5% ZLB – a low-volatility tilt to reduce overall portfolio risk

This is not an unreasonable approach, as long as you understand that you are adding complexity and that the satellite positions might underperform for years. But at least with XEQT as your anchor, your overall portfolio will never deviate too far from the global market return.

You Have Specific Tax Optimization Needs

In certain situations, holding a factor ETF in a specific account type might offer minor tax advantages. For instance, low-turnover quality ETFs might generate fewer capital gains distributions in a non-registered account compared to high-turnover momentum ETFs. But these are marginal considerations that most investors should not build a strategy around.

You Are Genuinely Interested in Factor Research and Accept the Risks

Let’s be honest – some people find factor investing intellectually interesting, and investing in what interests you can help you stay engaged with your portfolio. If exploring factor tilts keeps you invested and contributing regularly rather than getting bored with a single-ETF strategy, the slight additional complexity might be worth it for you personally.

Just make sure the intellectual curiosity does not turn into performance chasing. The moment you start swapping factors based on last year’s returns, you have lost the plot.

7. The Verdict: Why XEQT’s Market-Cap Weighting Is the Right Default

Let me bring this all together.

Factor investing is not a scam. It is not snake oil. It is grounded in legitimate academic research that has stood up to decades of scrutiny. The value premium, the momentum effect, the quality premium – these are real phenomena that have been documented across countries and time periods.

But there is a massive gap between “this factor has historically existed in academic data” and “I, a regular Canadian investor, will successfully capture this premium in my actual portfolio over my actual investing lifetime.”

That gap is filled with:

• Higher fees that eat into the premium before you ever see it
• Extended periods of underperformance that test your resolve in ways you cannot fully appreciate until you live through them
• Implementation challenges that reduce the premium from its theoretical level to something much smaller
• Behavioral traps that cause most investors to buy high and sell low within their factor allocations
• Complexity that creates more decision points and more opportunities for error

Meanwhile, XEQT gives you:

• Exposure to over 9,000 stocks across 49 countries
• Every factor naturally included – XEQT already holds value stocks, momentum winners, quality companies, and small caps, just in market-cap proportions
• A rock-bottom MER of 0.20% that keeps more of your money working for you
• Automatic rebalancing handled by BlackRock, so you never need to make allocation decisions
• One decision per contribution: how many shares to buy
• A strategy you can explain in one sentence: “I own the entire global stock market”

Here is something I keep coming back to. When Ben Felix – one of the most well-known advocates of factor investing in Canada – talks about factor tilts, he frequently emphasizes that you need a very long time horizon, very low costs, broad factor diversification, and the discipline to never abandon the strategy. He’s right. But how many Canadian investors actually meet all four of those criteria?

In my experience, the answer is very few. Most people who start experimenting with factor tilts end up abandoning them after a few years of underperformance, locking in the worst possible outcome: they paid higher fees, experienced tracking error, and then gave up before the premium (if it was going to arrive) actually showed up.

XEQT is not the most intellectually exciting approach to investing. It will never make you feel like the smartest person at a dinner party. Nobody has ever posted a viral Reddit thread titled “I bought XEQT every month for 20 years and just let it sit.” But it works. It has worked for decades. And it will almost certainly continue to work, because owning the global stock market means owning every future winning stock, every future winning sector, and every future winning factor – whatever they turn out to be.

You do not need to predict which factor will outperform next. You do not need to rebalance between value and momentum. You do not need to worry about whether the quality premium will persist or disappear.

You just need to buy XEQT regularly, keep your costs low, and let compounding do the heavy lifting.

That is the entire strategy. And honestly? It is more than enough.

Frequently Asked Questions

Is factor investing better than index investing?

Factor investing is a form of index investing – factor ETFs track rules-based indices, just with different construction rules than market-cap-weighted indices. The question is whether the additional complexity and cost of factor-weighted indices leads to better outcomes than simple market-cap-weighted indices like those inside XEQT. The historical evidence says factor premiums exist but are unreliable over shorter periods, and real-world implementation reduces the premium significantly. For most Canadian investors, a simple market-cap-weighted approach with XEQT is the better choice.

Can I add a factor ETF on top of XEQT?

Yes, you can use a core-satellite approach where XEQT makes up 80-90% of your portfolio and a factor ETF like XVLU or ZLB makes up the remaining 10-20%. Just understand that you are adding complexity and that your factor satellite might underperform for years. If you go this route, commit to it for the long term and resist the urge to swap factors based on recent performance.

What is the best factor ETF in Canada?

There is no single “best” factor ETF because different factors perform well in different market environments. If forced to choose one, many evidence-based investors lean toward multi-factor ETFs like XFC or QUS.TO that blend several factors together, reducing the risk of any single factor going through a prolonged drought. But even multi-factor ETFs have higher fees than XEQT and no guarantee of outperformance.

Why do factor premiums disappear?

Factor premiums can disappear for several reasons. Once a factor is widely known and published, institutional investors pile into it, driving up prices and reducing future expected returns – this is called “crowding.” Market regimes also shift: value did well when interest rates were high and inflation was moderate, but struggled during the low-rate, tech-driven bull market of 2010-2020. Some researchers argue that certain factor premiums were partially a statistical artifact of data mining and were never as large as initially reported.

Does XEQT already include factor exposure?

Yes, XEQT inherently includes exposure to every factor because it holds the entire market. It owns value stocks, momentum winners, quality companies, small caps, and low-volatility names – just in proportion to their market capitalization, not overweighted. A factor tilt is about deliberately overweighting certain types of stocks relative to their market-cap weight, which XEQT does not do.

Is smart beta the same as factor investing?

Smart beta is the marketing term that the ETF industry uses for factor investing. “Smart beta” sounds more appealing than “alternatively weighted index fund,” which is really all it is. Whether you call it smart beta, factor investing, or strategic beta, the underlying concept is the same: weighting stocks by something other than market capitalization (value, momentum, quality, volatility, etc.) in hopes of earning a premium over the broad market.

Disclosure: I may receive a referral bonus if you sign up through links on this page. I personally hold XEQT as my core equity position. This is not financial advice – talk to a qualified advisor about your specific situation.