XEQT vs HXT: Swap-Based vs Traditional ETFs for Canadian Investors

A few months ago, a friend sent me a screenshot of a Reddit thread titled “Why am I paying tax on XEQT distributions when HXT pays nothing?” The comments were a mix of people confidently explaining swap-based ETFs and others saying they sounded “too good to be true.” My friend’s question was simple: “Should I just switch everything to HXT?”

It is a fair question. On the surface, an ETF that tracks the same Canadian market but generates zero taxable distributions sounds like a no-brainer, especially in a non-registered account. But the reality is more nuanced than that Reddit thread let on, and making the wrong choice could mean taking on risks you do not fully understand or missing out on diversification that matters far more than a small tax edge.

In this guide, I am going to break down the XEQT vs HXT debate in plain language. We will cover exactly how swap-based ETFs work, where HXT shines, where it falls short, and why most Canadian investors are still better off with XEQT as their core holding.

1. What Is XEQT? A Quick Refresher

If you are reading this blog, you probably already know XEQT well, but here is the short version.

XEQT is the iShares Core Equity ETF Portfolio, managed by BlackRock. It is an all-in-one, 100% equity ETF that holds over 9,000 stocks across 49 countries. When you buy a single share of XEQT, you get exposure to:

• ~50% US stocks (Apple, Microsoft, Amazon, and thousands more)
• ~25% Canadian stocks (banks, energy, mining)
• ~20% international developed markets (Europe, Japan, Australia)
• ~5% emerging markets (China, India, Brazil)

XEQT has an MER of 0.20%, pays quarterly distributions, and is structured as a traditional ETF that actually holds the underlying stocks (through its sub-funds). It is straightforward, transparent, and has become the default recommendation in Canadian personal finance communities for good reason.

2. What Is HXT? Understanding Canada’s Most Popular Swap-Based ETF

HXT is the Global X S&P/TSX 60 Index ETF (formerly the Horizons S&P/TSX 60 Index ETF before Global X acquired Horizons in 2023). It tracks the S&P/TSX 60 Index, which is made up of the 60 largest companies on the Toronto Stock Exchange.

On paper, that sounds like a standard Canadian equity ETF. But HXT is fundamentally different from a traditional ETF because of how it achieves its returns.

Instead of actually buying and holding the 60 stocks in the index, HXT uses a total return swap with a counterparty bank – in this case, National Bank of Canada. The ETF enters into a contract where National Bank agrees to pay HXT the total return of the S&P/TSX 60 (including dividends), and HXT pays National Bank a fee in return.

The result? HXT’s unit price goes up to reflect both price appreciation and dividends, but no actual dividend cash gets distributed to you. The dividends are baked into the price.

HXT has an extremely low MER of roughly 0.03% to 0.07%, making it one of the cheapest ETFs available in Canada.

3. How Swap-Based ETFs Actually Work (In Plain Language)

I know “total return swap” sounds like something from a derivatives textbook, so let me explain it the way I wish someone had explained it to me.

Think of it like this: instead of HXT going to the grocery store and buying 60 different ingredients (stocks) to make a meal (returns), it makes a deal with a chef (National Bank). The chef says, “I will cook you the exact meal you want. You just pay me a small fee.” HXT never touches the ingredients. It just gets the finished meal delivered.

Here is what happens mechanically:

1. You buy HXT. Your money goes into the fund.
2. HXT enters a swap contract with National Bank. The contract says: “National Bank will pay HXT the total return of the S&P/TSX 60, including all dividends.”
3. National Bank delivers the returns. If the TSX 60 goes up 10% (including dividends), HXT’s net asset value goes up by roughly 10% minus the small swap fee.
4. No distributions are paid out. Because the dividends are embedded in the swap return, nothing gets distributed to you as a taxable event.

The key insight is that you get the same economic exposure to the index, but the returns show up as capital gains when you sell, not as annual dividend distributions. And in Canada, capital gains are taxed at a lower rate than dividends from a non-registered account – plus you get to defer the tax until you actually sell.

4. XEQT vs HXT: Head-to-Head Comparison

Here is a side-by-side look at the two ETFs:

A few things jump out immediately. XEQT and HXT are not really apples-to-apples competitors. XEQT is a globally diversified all-in-one portfolio. HXT is a single-country, large-cap Canadian equity fund. Comparing them directly is a bit like comparing a full meal to a side dish – they serve different purposes.

That said, many investors wonder whether they should replace the Canadian equity portion of their portfolio with HXT for tax efficiency, or whether HXT alone could replace XEQT entirely. Let us dig into the details.

5. The Tax Advantage of Swap-Based ETFs

This is the main reason people get excited about HXT, so let us walk through exactly how the tax benefit works.

With a traditional ETF like XEQT (in a non-registered/taxable account):

• XEQT receives dividends from its underlying holdings throughout the year.
• XEQT distributes those dividends to you quarterly.
• You owe tax on those distributions in the year you receive them, even if you reinvest them through DRIP.
• When you eventually sell, you also pay capital gains tax on any price appreciation.

With a swap-based ETF like HXT (in a non-registered/taxable account):

• HXT does not receive actual dividends. The swap contract rolls the dividend return into the unit price.
• You receive no distributions (or very minimal ones), so you owe little to no annual tax.
• When you sell, the entire gain – including what would have been dividends – is taxed as a capital gain.
• Capital gains are taxed at a lower inclusion rate than eligible dividends for most tax brackets.

The bottom line: In a taxable account, HXT lets you defer taxes and potentially pay a lower effective tax rate. Over a long holding period, this tax deferral compounds in your favour. The money that would have gone to the CRA each year stays invested and keeps growing.

How much does this actually save? It depends on your tax bracket, holding period, and the dividend yield of the index. For someone in a high tax bracket holding six figures in a non-registered account for 15+ years, the tax deferral benefit could amount to thousands of dollars. For someone investing $5,000 in a TFSA, the benefit is exactly zero (since TFSAs are already tax-sheltered).

6. The 2019 CRA Rule Change That Shook Swap ETFs

If swap-based ETFs sound too good to be true from a tax perspective, the CRA eventually agreed.

In September 2019, the Department of Finance proposed new tax rules that targeted the structure many Horizons swap ETFs used. The concern was that these ETFs were converting what would normally be fully taxable income (like dividends and interest) into deferred capital gains, costing the government significant tax revenue.

The proposed rules, which took effect in 2020, essentially required swap-based ETFs to allocate and distribute income that “economically” accrued to unitholders, even if no actual cash distribution was made.

What Horizons had to do:

• Several of its swap-based ETFs were restructured. Some began holding a small portion of actual securities alongside the swap contract.
• HXT specifically began making small distributions in some years, reducing (but not eliminating) its tax advantage.
• The ultra-clean “zero distribution” pitch of swap ETFs became murkier.

What this means for you today:

HXT still offers meaningful tax deferral compared to a traditional ETF, but it is no longer the perfect tax shelter it once was. The structure now sits in a grey area – more tax-efficient than a traditional ETF, but not completely distribution-free. And there is always the risk that future regulatory changes could erode the remaining advantage further.

I think of it this way: do not build your entire investment strategy around a tax loophole that has already been partially closed and could be closed further. Use the tax advantage if it makes sense for your situation, but do not let it be the deciding factor.

7. Counterparty Risk: The Hidden Cost of Swap-Based ETFs

This is the part that most Reddit threads gloss over, and it is the part I want you to really understand.

When you own XEQT, you own actual stocks. BlackRock is holding real shares of Apple, Royal Bank, Toyota, and thousands of other companies on your behalf. If BlackRock went bankrupt tomorrow, you would still own those underlying assets. They are held in trust, separate from BlackRock’s own finances.

When you own HXT, you own a contract. Specifically, you own a promise from National Bank of Canada that they will pay you the total return of the S&P/TSX 60. If National Bank were to default on that promise, you would not be holding actual stocks as a fallback – you would be a creditor in a bankruptcy proceeding.

How likely is this? Realistically, extremely unlikely. National Bank is one of Canada’s Big Six banks, is heavily regulated by OSFI, and has operated continuously since 1859. Canadian banks did not fail during the 2008 financial crisis, and our banking system is considered one of the most stable in the world.

But “extremely unlikely” is not “impossible.” The entire point of diversification is protecting against unlikely-but-catastrophic events. Counterparty risk with swap-based ETFs is a low-probability, high-impact risk. You are probably fine 99.9% of the time, but the 0.1% scenario is meaningfully worse than what you face with a traditional ETF.

Global X does mitigate this risk by requiring National Bank to post collateral, and the swap is reset periodically so the exposure does not grow indefinitely. But these are risk-reduction measures, not risk-elimination measures.

For me personally, this is the reason I keep XEQT as my core holding. I want to own actual businesses around the world, not a bank’s promise to simulate owning them.

8. Why XEQT Is Better for Most Investors

Despite HXT’s tax edge, here is why I believe XEQT is the better choice for the majority of Canadian investors:

Diversification that actually matters. XEQT holds over 9,000 stocks across 49 countries. HXT holds exposure to 60 Canadian companies. Canada represents roughly 3% of global stock market capitalization. Betting your portfolio on 60 Canadian large-caps – no matter how tax-efficient – is a massive concentration bet on a single small economy heavily weighted toward banks, energy, and mining.

No counterparty risk. You own the actual underlying stocks. Period. No swap contracts, no reliance on a single bank’s creditworthiness.

Simplicity. One ETF, one buy, done. No need to think about swap mechanics, regulatory changes, or counterparty collateral requirements. You buy XEQT and go live your life.

Works in every account type. XEQT performs identically whether it is in your TFSA, RRSP, FHSA, or non-registered account (structurally speaking). HXT’s tax advantage only matters in a non-registered account – in a TFSA or RRSP, the swap structure provides zero benefit.

Proven and massive. XEQT has over $12 billion in assets under management and is backed by BlackRock, the world’s largest asset manager. This means tight bid-ask spreads, deep liquidity, and minimal tracking error. HXT is much smaller and more niche.

Regulatory certainty. The CRA already came for swap ETFs once. There is no guarantee they will not tighten the rules further. With XEQT, you do not need to worry about whether your ETF’s structure will survive the next federal budget.

9. When HXT Actually Makes Sense

I am not here to tell you HXT is a bad ETF. It is not. It is a well-designed product that serves a specific purpose. Here is when it genuinely makes sense:

You have a large non-registered account and want tax-efficient Canadian equity exposure. If you have already maxed out your TFSA, RRSP, and FHSA, and you are investing significant sums in a taxable account, the tax deferral from HXT can be meaningful. In this case, HXT might serve as the Canadian equity sleeve of a broader portfolio.

You are pairing it with other ETFs, not using it as your only holding. A reasonable approach for a sophisticated investor might look like: XEQT in your TFSA and RRSP for simplicity, and then in your non-registered account, replace the Canadian equity portion with HXT for tax efficiency while using other ETFs for US and international exposure.

You understand and accept the counterparty risk. If you have done your homework on how total return swaps work, you know the collateral requirements, and you are comfortable with the risk profile, then HXT can be a smart tool in your toolkit.

You are in a high marginal tax bracket. The tax deferral benefit scales with your tax rate. If you are in the top bracket in Ontario (53.53% marginal rate), the annual tax drag from XEQT’s distributions in a non-registered account is more painful than it is for someone in a lower bracket.

10. When XEQT Is the Clear Winner

There are many situations where XEQT is the obvious choice, and it is not even close:

Your investments are in a TFSA. Since TFSAs are completely tax-free, HXT’s swap structure provides zero benefit. You are taking on counterparty risk for nothing. Stick with XEQT.

Your investments are in an RRSP or FHSA. Same logic. These accounts defer or eliminate tax anyway, so the swap structure adds complexity and risk with no upside.

You want a single-ETF portfolio. XEQT gives you the whole world in one fund. HXT gives you 60 Canadian stocks. If you are only going to own one ETF, XEQT wins by a landslide. You cannot build a diversified portfolio with HXT alone.

You are a newer investor. If you are still learning the ropes, the last thing you need is to worry about swap mechanics, counterparty exposure, and CRA rule changes. Buy XEQT, set up automatic contributions on Wealthsimple, and focus your energy on earning more income and saving more money.

You value simplicity. Even experienced investors benefit from keeping things simple. Every layer of complexity you add to your portfolio is another thing to manage, monitor, and potentially get wrong. XEQT lets you automate and forget.

Your non-registered account is relatively small. If you are investing $10,000 or $20,000 in a taxable account, the annual tax savings from HXT might amount to $50-$150. That is real money, but probably not enough to justify the added complexity, counterparty risk, and loss of global diversification.

11. Can You Use Both XEQT and HXT Together?

Yes, and some investors do. Here is what a combined approach might look like:

TFSA: 100% XEQT. No benefit from swap structure in a tax-free account.

RRSP: 100% XEQT. Same reasoning. Some advanced investors might use US-listed ETFs for withholding tax efficiency here, but that is a separate topic.

Non-registered account: This is where it gets interesting. You could hold:

• HXT for your Canadian equity allocation (tax-efficient)
• XUU or VUN for US equity exposure
• XEF for international developed markets
• XEC for emerging markets

But notice what just happened – you went from one simple XEQT holding to four separate ETFs that you need to rebalance manually. For many people, the modest tax savings do not justify this complexity.

My honest take? Unless your non-registered account is north of $100,000 and you are in a high tax bracket, the juice is probably not worth the squeeze. XEQT across all your accounts keeps things clean and simple, and the long-term performance difference after taxes will be marginal for most people.

12. The Bottom Line

HXT is a clever product. The swap-based structure offers a real tax advantage in non-registered accounts, the MER is rock-bottom, and Global X has maintained the fund well through regulatory changes. If you understand what you are buying and it fits your specific situation, it can be a useful tool.

But XEQT is a better choice for most Canadian investors, and it is not particularly close. The combination of global diversification across 9,000+ stocks, zero counterparty risk, simplicity, and effectiveness in every account type makes it the clear winner as a core portfolio holding.

The tax advantage of HXT is real but narrow. It only matters in non-registered accounts, it has been partially eroded by CRA rule changes, and it comes with counterparty risk and zero geographic diversification. Those are significant trade-offs for what amounts to a modest annual tax deferral.

Which Should You Choose? A Decision Framework

Choose XEQT if:

• You are investing in a TFSA, RRSP, or FHSA
• You want a single-ETF, globally diversified portfolio
• You are a beginner or intermediate investor
• You prioritize simplicity over marginal tax optimization
• Your non-registered investments are under $100,000

Choose HXT if:

• You have a large non-registered account and are in a high tax bracket
• You are using it alongside other ETFs for a complete portfolio (not as your only holding)
• You understand and accept counterparty risk
• You are comfortable with a Canada-only, 60-stock exposure for this portion of your portfolio

Consider both if:

• You have maxed out your TFSA and RRSP and are building a substantial non-registered portfolio
• You want XEQT in registered accounts for simplicity and HXT in your taxable account for the Canadian equity sleeve
• You are willing to manage multiple ETFs and rebalance periodically

For the vast majority of people reading this, XEQT in a TFSA on Wealthsimple is the answer. It is cheap, diversified, simple, and effective. Do not let a Reddit thread about tax optimization talk you into a more complicated setup that you may not need and might not fully understand.

Start simple. Build the habit of consistent investing. You can always add complexity later when your portfolio is large enough to make the tax savings meaningful.

Related Articles

• What Is XEQT? The Complete Guide
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• Best ETFs to Pair with XEQT
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• Best ETFs for TFSA in Canada
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