XEQT vs HEQT: Should You Hedge Currency Risk in Your All-Equity ETF?

A few months ago, a coworker pulled me aside after a team meeting. She had recently opened a self-directed TFSA on Wealthsimple, bought XEQT based on my recommendation, and was feeling good about her plan – until she read a Reddit thread that shook her confidence. “Someone said I’m losing money because the Canadian dollar is going up,” she told me. “They said I should buy HEQT instead because it hedges the currency risk. Is that true? Am I in the wrong ETF?”

I could tell she was genuinely worried. And honestly, it’s a fair question. When you own XEQT, roughly 75% of your portfolio is invested in companies that trade in foreign currencies – US dollars, euros, yen, and more. If the Canadian dollar strengthens against those currencies, your returns shrink when converted back to CAD. That feels like a problem that has an obvious solution: just hedge the currency, right?

Not so fast. The XEQT vs HEQT debate has real nuance underneath the surface simplicity. After digging into the data and thinking about my own portfolio, I’ve landed on a clear answer – but the reasoning matters more than the conclusion.

Let’s walk through everything you need to know.

1. What Is HEQT?

HEQT (iShares Core Equity ETF Portfolio – CAD-Hedged) is BlackRock Canada’s currency-hedged version of XEQT. It launched in February 2022 and is designed for Canadian investors who want broad global equity exposure – the same basket of over 9,000 stocks across 40+ countries – but without the foreign currency fluctuations affecting their Canadian-dollar returns.

Think of it this way: XEQT and HEQT hold the exact same underlying stocks. The only difference is that HEQT uses forward currency contracts to neutralize the impact of exchange rate movements between the Canadian dollar and foreign currencies (primarily the US dollar, euro, Japanese yen, and British pound).

Here are the basics:

• Ticker: HEQT (TSX)
• Full name: iShares Core Equity ETF Portfolio (CAD-Hedged)
• MER: 0.22%
• Asset allocation: 100% equities (same as XEQT)
• Underlying holdings: Same four iShares funds as XEQT – XIC, ITOT, XEF, IEMG
• Currency hedging: Yes – hedges foreign currency exposure back to CAD
• Inception date: February 2022

If you’re already familiar with the iShares all-in-one ETF lineup, HEQT slots in as the hedged sibling of XEQT, just as HGRO is the hedged version of XGRO and HBAL is the hedged version of XBAL.

2. How Currency Hedging Works (In Plain English)

Before we can decide whether hedging is worth it, we need to understand what it actually does. I’ll keep this straightforward – no finance degree required.

When XEQT holds US stocks through ITOT, those stocks are priced in US dollars. If the S&P 500 goes up 10% in USD terms, but the Canadian dollar also strengthens by 5% against the US dollar during the same period, your return as a Canadian investor is only about 5% in CAD terms. The currency movement ate into your gains.

The reverse is also true. If the Canadian dollar weakens by 5% while US stocks rise 10%, your CAD return would be closer to 15%. Currency can work for you or against you – it’s a two-way street.

Currency hedging eliminates this variability. HEQT uses financial contracts called forward currency contracts to lock in exchange rates. The fund essentially enters into agreements to buy and sell currencies at predetermined rates in the future. This way, regardless of what happens to the CAD/USD exchange rate (or CAD/EUR, CAD/JPY, etc.), your returns in Canadian dollars should closely mirror what the underlying stocks actually did in their local currencies.

Here’s a simplified example:

• Scenario: US stocks rise 10% in USD
• CAD strengthens 5% vs USD
• XEQT return (unhedged): ~5% in CAD (stock gains minus currency loss)
• HEQT return (hedged): ~10% in CAD (stock gains only, currency impact neutralized)

Looks great for HEQT in this scenario, right? But flip the script:

• Scenario: US stocks rise 10% in USD
• CAD weakens 5% vs USD
• XEQT return (unhedged): ~15% in CAD (stock gains plus currency boost)
• HEQT return (hedged): ~10% in CAD (stock gains only, no currency bonus)

In this scenario, XEQT investors come out ahead because the weakening Canadian dollar amplified their returns. Hedging doesn’t just protect you from currency losses – it also removes currency gains. This is the fundamental tradeoff that many investors miss.

For a deeper dive into how currency movements affect XEQT specifically, check out my guide on XEQT’s currency exposure explained.

3. The True Cost of Currency Hedging

Here’s something that doesn’t show up in the headline MER number: currency hedging is not free. The MER difference between XEQT (0.20%) and HEQT (0.22%) is only 0.02%, which seems trivial. But the real cost of hedging goes well beyond that two-basis-point gap.

The hidden costs of hedging

Rolling forward contracts: HEQT must continuously roll its forward currency contracts – typically monthly. Each time a contract expires, a new one must be entered into. The cost of these contracts depends on the interest rate differential between Canada and the foreign country. When Canadian interest rates are higher than US rates, hedging the USD actually generates a small gain. When Canadian rates are lower (which has historically been more common), hedging creates a drag.

Tracking error: Because the hedge is reset periodically (not continuously), the fund can’t perfectly neutralize every currency movement in real time. This creates small discrepancies that compound over time.

Transaction costs: Every time the fund rolls its contracts, there are bid-ask spreads and transaction costs embedded in the fund’s NAV that reduce your returns.

Rebalancing drag: As the underlying stock values change, the hedge ratios need adjusting, creating additional trading costs that don’t exist in the unhedged version.

The total all-in cost of hedging is estimated to be somewhere between 0.10% and 0.40% per year, depending on market conditions and interest rate differentials. That’s on top of the base MER. So while HEQT’s stated MER is only 0.02% more than XEQT, the actual drag from hedging activity is meaningfully higher.

For a long-term investor with a $200,000 portfolio, even a 0.20% annual hedging drag translates to $400 per year – or roughly $12,000 over 20 years when you factor in compounding. That’s real money, and it’s the price of admission for removing currency volatility.

4. XEQT vs HEQT: The Full Comparison

Let’s put these two funds side by side across every dimension that matters:

Two things jump out. First, XEQT has dramatically more assets under management and trading volume, which means tighter bid-ask spreads and lower risk of the fund being shut down. Second, HEQT only launched in 2022, giving us a shorter track record – and that track record coincides with a period of significant Canadian dollar weakness, which has made HEQT look relatively less attractive.

5. Historical Performance: What the Numbers Actually Show

Let’s look at how XEQT and HEQT have performed since HEQT’s inception in February 2022.

Over this period, the Canadian dollar weakened meaningfully against the US dollar, falling from roughly 0.79 USD to the mid-0.72 range. This is exactly the scenario where an unhedged fund benefits and a hedged fund misses out.

The result: XEQT has outperformed HEQT by a meaningful margin since HEQT’s inception. The unhedged currency exposure acted as a tailwind for XEQT investors, while HEQT investors saw none of that benefit because their currency exposure was neutralized.

But here’s the critical nuance: this doesn’t mean XEQT will always outperform HEQT. If the Canadian dollar had strengthened over the same period, the story would be reversed. Currency movements are essentially unpredictable over the short and medium term, and there have been multi-year stretches where the Canadian dollar appreciated significantly against the greenback (2003-2007, 2009-2011). During those periods, a hedged fund would have protected investors from real losses.

The academic research is fairly clear: over very long periods (20+ years), currency movements tend to wash out. The Canadian dollar goes through cycles of strength and weakness, sometimes lasting years. But over a full investing lifetime, the net impact of currency fluctuations tends to be relatively small compared to the long-term returns of the underlying equities.

What doesn’t wash out? The cost of hedging. That 0.10-0.40% annual drag compounds relentlessly year after year, regardless of which direction currencies move. Over 25 or 30 years, this creates a meaningful performance gap in favour of the unhedged fund.

6. When Currency Hedging Actually Makes Sense

I’ve been building the case for unhedged investing, but I want to be fair: there are legitimate scenarios where HEQT could be the better choice. Currency hedging isn’t a scam – it solves a real problem for certain investors.

You have a short time horizon (under 5 years)

If you’re investing money that you’ll need in Canadian dollars within the next 3-5 years, currency risk is a genuine concern. Over short periods, the CAD can move 10-15% against the USD, which could meaningfully impact your returns right when you need the money. Hedging removes that uncertainty.

That said, if your time horizon is that short, the bigger question is whether you should be in a 100% equity ETF at all. An all-in-one balanced fund like XBAL or even a GIC might be more appropriate.

You have specific CAD-denominated liabilities

If you’re saving for a Canadian home purchase, a known future expense in Canadian dollars, or drawing down a portfolio for Canadian retirement spending, hedging ensures that a sudden currency shift doesn’t blow a hole in your plan. Your liabilities are in CAD, so locking your returns to CAD makes intuitive sense.

You are extremely risk-averse about volatility

Currency fluctuations add an extra layer of volatility to your portfolio. If seeing a -15% portfolio swing (where 5% of it came from currency) versus a -10% swing (pure stock movement) would cause you to panic sell, then hedging might help you stay invested. The best investment plan is the one you’ll actually stick with.

You have a strong conviction that the CAD will strengthen

If you have a genuine, informed view that the Canadian dollar is undervalued and likely to appreciate, hedging protects you from that appreciation eroding your foreign returns.

Fair warning: currency forecasting is notoriously difficult. Even central banks and professional traders get it wrong regularly. I wouldn’t recommend building a core investment strategy around a currency call.

7. When Currency Hedging Doesn’t Make Sense

For the majority of Canadian investors, here’s why staying unhedged with XEQT is the stronger choice:

Long time horizons favour unhedged investing

If you’re investing for 10, 20, or 30+ years – which is the typical profile of someone buying an all-equity ETF – currency fluctuations tend to cancel out over time. You’ll experience periods where the CAD strengthens and periods where it weakens. The net effect over a full investing lifetime is usually modest. But the hedging costs are permanent, compounding against you every single year.

Currency diversification is a feature, not a bug

Here’s something that gets overlooked: holding assets in multiple currencies is actually a form of diversification. If Canada experiences an economic downturn that weakens the Canadian dollar, your unhedged foreign holdings become more valuable in CAD terms – providing a natural offset. This is a genuine benefit that hedging eliminates.

Think about it this way: if you earn your salary in CAD, own a home in Canada, and then hedge all your equity exposure to CAD – your entire financial life is denominated in a single currency. That’s concentration risk. Leaving your foreign equity unhedged diversifies your currency exposure, which can actually reduce overall portfolio volatility over long periods.

For more on this diversification benefit, see my full breakdown of XEQT’s currency exposure.

The hedging cost is a guaranteed drag

Currency movements are uncertain – sometimes they help you, sometimes they hurt you. But the cost of hedging is certain and always negative. Over decades of investing, that guaranteed annual drag of 0.10-0.40% compounds into a significant amount of lost wealth. It’s like paying an insurance premium every year for a risk that tends to wash out on its own over your investing timeframe.

Canada is a commodity currency

The Canadian dollar is heavily influenced by commodity prices, particularly oil. When the global economy is booming, commodity prices tend to rise, the CAD strengthens, and foreign stock returns may be modestly reduced for Canadian investors. But when the global economy weakens, commodity prices fall, the CAD weakens, and your unhedged foreign holdings get a currency boost – right when your portfolio needs it most. There’s a natural negative correlation that provides a built-in stabilizer. Hedging removes this benefit.

8. Which Account Type Is Best for Each ETF?

The account where you hold XEQT or HEQT doesn’t change the fundamental hedging math, but it does interact with tax efficiency in interesting ways. For a deep dive on foreign withholding tax and XEQT, check out my guide on foreign withholding tax on XEQT.

TFSA

Either XEQT or HEQT works fine in a TFSA. Since all gains are tax-free, you don’t need to worry about the tax treatment of currency gains or losses. The decision comes down purely to whether you want currency exposure or not. For most long-term TFSA investors, XEQT is the better default because the TFSA’s unlimited time horizon (you can hold until you die) plays to the strengths of unhedged investing.

RRSP

In an RRSP, withdrawals are taxed as income. Currency hedging doesn’t provide any special tax advantage here. The same long-term logic applies: XEQT is generally the better choice for an RRSP that you won’t touch for 10+ years.

One thing to note: if you’re retired and drawing down your RRSP to fund living expenses denominated in Canadian dollars, you might value the more predictable CAD returns that HEQT offers. But even then, the hedging cost drag works against you.

FHSA

The First Home Savings Account is interesting because it has a defined time horizon – you’re saving for a home purchase that will happen in Canadian dollars within 5-15 years. This is one scenario where HEQT’s hedging could be genuinely useful, especially if your purchase timeline is on the shorter end (under 5 years). But if you have 10+ years before you plan to buy, XEQT’s cost advantage likely wins out.

Non-registered (taxable) account

In a non-registered account, currency gains and losses on foreign property are treated as capital gains or losses for tax purposes. Hedging can simplify your tax reporting somewhat, since there are fewer currency-related adjustments. However, this administrative convenience doesn’t justify the ongoing hedging cost for most investors. XEQT remains the better choice for long-term holdings in taxable accounts.

9. Common Myths About Currency Hedging

Let me address a few misconceptions that come up regularly in Canadian investing forums:

Myth: “Hedging protects you from losing money”

Reality: Hedging only protects you from currency-related losses. If the stock market drops 30%, HEQT drops roughly 30% too. Currency hedging does nothing to protect against equity market risk – which is the far larger risk in an all-equity portfolio.

Myth: “The Canadian dollar always goes down, so hedging is pointless”

Reality: The CAD has also experienced prolonged periods of strength. From 2002 to 2007, it rose from about $0.62 USD to above parity ($1.00 USD). If you’d held unhedged US equity during that period, currency movements would have significantly eroded your returns. The direction of the Canadian dollar is not a one-way street.

Myth: “Hedging is free because the MER difference is tiny”

Reality: As discussed in section 3, the MER difference of 0.02% dramatically understates the true cost of hedging. Forward contract rollovers, tracking error, transaction costs, and rebalancing drag add up to 0.10-0.40% per year in total hedging cost. Over decades, this is not trivial.

Myth: “You should hedge bonds but not equities”

Reality: This one is actually a reasonable rule of thumb. Bonds are held for stability, and currency fluctuations can overwhelm their modest returns. Equities generate much higher returns, so currency noise is a smaller proportion of total returns. This is why most experts recommend unhedged equity-only funds for long-term investors.

10. My Personal Take: Why I Choose XEQT Over HEQT

I’ll be direct: I hold XEQT, and I have no plans to switch to HEQT.

Here’s my reasoning, boiled down to its simplest form:

1. My time horizon is 20+ years. Currency fluctuations will wash out. Hedging costs won’t.
2. I value currency diversification. Having 75% of my equity portfolio in foreign currencies is a feature. My salary, my home, my pension – everything else is in CAD. My investments should provide balance.
3. I don’t want to pay for insurance I don’t need. The 0.10-0.40% annual hedging drag is a real cost that compounds over decades. I’d rather keep that money working for me.
4. I’ve made my peace with currency volatility. Yes, there will be years where a strengthening Canadian dollar hurts my returns. There will also be years where a weakening dollar boosts them. I’m okay with that tradeoff because I’m playing the long game.
5. Simplicity and liquidity. XEQT has vastly more assets under management and trading volume, which means tighter bid-ask spreads and greater confidence in the fund’s long-term viability.

That said, I respect investors who choose HEQT. If you have a shorter time horizon, a specific need for CAD-denominated returns, or if currency volatility would cause you to sell at the worst possible time – HEQT is a perfectly reasonable choice. Both are excellent funds. The hedging question is a second-order decision compared to simply investing consistently in a globally diversified equity portfolio.

11. The Bottom Line: XEQT vs HEQT for Canadian Investors

If you’ve read this far, here’s the summary:

For most long-term Canadian investors, XEQT is the better choice. The combination of lower all-in costs, natural currency diversification, the commodity-currency stabilizer effect, and the historical tendency of currency fluctuations to wash out over long periods all tilt the scales toward staying unhedged.

HEQT makes sense in specific situations: short time horizons (under 5 years), specific CAD liabilities you’re saving for, or if currency volatility would genuinely shake your conviction and cause you to abandon your plan.

The decision is less important than the action. Whether you pick XEQT or HEQT, you’re getting a globally diversified, low-cost, all-equity portfolio that will serve you well. Don’t let the hedging question become analysis paralysis. Pick the one that fits your situation, set up automatic contributions, and focus on what actually moves the needle: saving more, investing consistently, and staying the course.

My coworker, by the way? After I walked her through all of this, she stuck with XEQT. “I’m not touching this money for 25 years,” she said. “I’ll take the free currency diversification.” Smart move.