By Bob Lai, Tawcan
Special to the Financial Independence Hub
A while ago, I wrote a VEQT review where I performed a thorough and deep analysis of the Vanguard All-Equity ETF. While I really like VEQT, we ended up buying XEQT for our kids’ RESPs due to a few key reasons. The beauty of a one-fund solution ETF such as the iShares All-Equity ETF (XEQT) means there’s no need to re-balance regularly. This makes it a very straightforward and simple investment approach. More importantly, the all-in-one ETFs provide instant asset class diversification and geographical diversification, all for a very low management fee.
Vanguard and iShares are two of the most well established and most trusted ETF companies in the world. Both companies offer similar all-equity ETFs – VEQT and XEQT, respectively. Lately, when I’m coaching clients new to investing, I’d typically recommend XEQT to them because of the lower MER fee compared to VEQT.
Although XEQT is great for beginner investors, this all-equity ETF is just as good for experienced investors. This ETF definitely has a place in most investors’ portfolios.
Having written a VEQT review, I figured I needed to write a similar review for XEQT so readers can compare the two side-by-side.
The iShares All-Equity ETF Portfolio, XEQT, holds 100% in equity. This means that the ETF holds no bonds. iShares have several all-in-one ETFs and XEQT falls in the more volatile, riskier spectrum of all the all-in-one ETFs because XEQT holds 100% in stocks.
XEQT seeks to provide long-term capital growth by investing primarily in one or more exchange-traded funds managed by BlackRock Canada, or an affiliate that provides exposure to equity securities. Just like its counterpart all-in-one ETFs, iShare All-Equity ETF trades on the Toronto Stock Exchange under the ticker name “XEQT” and is traded in Canadian dollars.
XEQT is a relatively new ETF. It was created in Aug 2019. Some key facts of XEQT:
- Inception Date: Aug 7, 2019
- Eligibility: RRSP, RRIF, RESP, TFSA, DPSP, RDSP, taxable
- Dividend Schedule: Quarterly
- Management Fee: 0.18%
- MER: 0.20%
- Listing Currency: CAD
- Exchange: Toronto Stock Exchange
- Net Asset: $595.48M
- Number of holdings: 4
- The number of stocks: 9,444
XEQT has a management expense ratio (MER) of 0.20%, which is 0.05% lower than VEQT. While 0.05% may not seem a lot, if your portfolio value is $250,000, it means $125 in fees each year. While it’s not an enormous amount of money when your portfolio is that big, it adds up eventually.
One thing to note is that the all-in-one and all-equity ETFs that Vanguard, iShares, and other ETF companies all have very low management fees. These management fees are typically much, much lower than the MER on the typical mutual funds available to Canadians. The low MER is one of the key reasons why index ETFs are excellent investment options for Canadians.
If you use a discount broker like Questrade, you can buy ETFs commission free. This would reduce your overall transaction cost significantly. If you use Wealthsimple, you can also buy ETFs commission free.
Check out my Questrade vs. Wealthsimple Trade review to see which discount broker is best for you.
XEQT Underlying Holdings
Like other iShares all-in-one ETFs, XEQT holds four iShares ETFs which means that XEQT holds 9,033 stocks. The underlying holdings are:
- iShares Core S&P Total US Stock (ITOT) – 48.02%
- iShares MSCI EAFE IMI Index (XEF) – 24.39%
- iShares S&P/TSX Capped Composite (XIC) – 22.71%
- iShares Core MSCI Emerging Markets (IMEG) – 4.64%
The rest of the portfolio holds USD and CAD cash and/or derivatives.
XEQT Top 10 Market Allocation
Here is XEQT’s top 10 market allocation.
- US: 47.13%
- Canada: 23.79%
- Japan: 5.37%
- UK: 3.08%
- Switzerland: 2.25%
- France: 2.23%
- Germany: 1.92%
- Australia: 1.84%
- China: 1.74%
- Netherlands: 1.27%
Having a large exposure to the US market makes sense given that so many international companies are based in the US. One certainly wouldn’t want to miss out on the next Apple, Tesla, or Facebook.
Given the size of the Chinese economy, I was a little bit surprised that XEQT only has slightly over 2% exposure to the Chinese market. It is possible that as the Chinese market grows, the overall exposure will increase.
XEQT Top 10 Holdings
XEQT’s top 10 holdings are composed of a mix of US and Canadian companies.
- Apple: 2.43%
- Microsoft: 2.28%
- Shopify: 1.77%
- Amazon: 1.52%
- Royal Bank: 1.50%
- TD: 1.26%
- Facebook: 0.90%
- Alphabet Inc Class A: 0.90%
- Enbridge: 0.83%
- Alphabet Inc Class C: 0.83%
XEQT Sector Exposure
XEQT has a similar sector exposure as VEQT, which is expected. Please note, since iShares does not disclose XEQT sector exposure information, I had to find this information from Morningstar.
- Financial Services: 18.59%
- Technology: 17.88%
- Industrials: 11.21%
- Healthcare: 9.83%
- Consumer Cyclical: 10.03%
- Communication Services: 8.06%
- Consumer Defensive: 6.27%
- Basic Materials: 6.20%
- Energy: 5.16%
- Real Estate: 3.64%
- Utilities: 3.12%
Because XEQT is a relatively new ETF, the historical return data is a bit lacking. As of July 31, 2021, XEQT has a 1 year return of +26.98% and a +17.35% return since its inception. In comparison, VEQT has a 1 year return of +26.63%.
XEQT pays distribution quarterly. The actual dividend amount varies each quarter. In 2020, XEQT paid out $0.39765 per share. At the current stock price that’s equivalent to around 1.49% yield.
If you’re looking for yield, XEQT probably isn’t the right ETF for you. Instead, you might want to take a look at one of the best Canadian dividend ETFs instead.
Foreign Withholding Tax with XEQT
Since XEQT has a large exposure to the US market, one thing to keep in mind is the 15% withholding taxes that the US government charges on any dividends paid to Canadians. Fortunately, XEQT would take care of the withholding taxes when it pays dividends every quarter. If you hold XEQT in TFSA, RRSP, or RESP, you won’t be able to recover any withholding taxes paid, unfortunately. If you hold XEQT in a taxable account, you can recover a portion of the withholding taxes in the form of foreign tax credits.
According to the calculator, XEQT has the following tax drag in the different accounts:
- TFSA: 0.22%
- RRSP: 0.22%
- RESP: 0.22%
- Taxable: 0.01%
Combined with the MER fee of 0.20% that means the overall tax drag for the different accounts are:
- TFSA: 0.42%
- RRSP: 0.42%
- RESP: 0.42%
- Taxable: 0.21%
This makes XEQT much cheaper to hold compared to VEQT. By holding XEQT you’d be saving yourself anywhere from 0.05 to 0.06% in terms of fees per year.
While it may be cheaper to hold XEQT in a taxable account for the quarterly distributions, you need to consider capital gains when you eventually sell XEQT. Therefore, always consult a tax specialist for tax planning and investment efficiency.
XEQT Review – Pros and Cons of XEQT
A review wouldn’t be complete without a pros and cons list. Like every investment, there are pros and cons. Therefore, I believe it is always important to go over them before making any investment decisions.
Pros of XEQT
There are lots to like about XEQT:
- Instant diversification by holding over 9,000 international stocks
- Instant geographical diversification
- Instant asset class diversification
- Low Management fees, much lower than the Vanguard equivalent (VEQT)
- Possible higher returns than VEQT due to higher exposure to the US market
- No need to re-balance regularly
- Hands-free portfolio management
- Commission-free purchase when a broker like Questrade
Cons of XEQT
I have to admit, it was really hard to come up with cons of XEQT.
- More volatility and higher risk because of 100% in stocks
- Slightly more fees in the long run compared to the multi-ETFs approach. For example, holding VCN and XAW.
XEQT vs. VEQT
As mentioned already, XEQT is very similar to VEQT as both hold 100% in stocks. After my thorough analysis of the all-equity ETFs, I decided to hold XEQT for our kids’ RESP. Why did I do that? My key reasons were:
- XEQT has a lower overall fees than VEQT
- XEQT has a higher exposure to the US market than VEQT
With so many iShares ETFs available, some readers might wonder, how does XEQT compare to the other iShares ETF funds?
XEQT vs. XGRO
XGRO holds around 80% in stocks and 20% in bonds, while XEQT holds 100% in stocks. For people that aren’t as risk tolerated, XGRO might be a better ETF to hold. You can check out my All-in-One ETF in Canada comparison for more information.
XEQT vs. XIC
XIC, the iShares Core S&P/TSX Capped Composite Index ETF, only tracks the Canadian market. So if you hold XIC, you definitely want to find another index ETF that tracks the global market. XEQT has a good exposure to the global market.
XEQT vs. XAW
XAW, the iShares Core MSCI All Country World ex Canada Index ETF, tracks all markets outside of Canada, as the name suggests. Like XEQT, XAW also holds the likes of XEF and IMEG. XAW is an excellent choice if you go with a multi-ETF approach (i.e. holding XIC and XAW) and are OK with the regular re-balancing. The multi-ETF approach will result in a slightly lower fee. If you want a straightforward approach, XEQT is a superb choice.
XEQT vs. ITOT
XEQT holds over 47% of ITOT, the iShares Core S&P Total US Stock Market ETF. While ITOT has a manage expense ratio of 0.03%, it only covers the US market. XEQT is a good fund to hold if you want international exposure.
Who should buy XEQT?
So, XEQT seems like a good ETF to hold, but who should consider buying XEQT? If you check off some of these items below, XEQT may be a good fit for you.
- An all-in-one portfolio that invests 100% in equity
- Exposure to all the major global markets
- No desire to tinker and re-balance your portfolio regularly
- OK with higher risk and volatility due to the 100% equity exposure
XEQT is a great index ETF for most Canadian investors, whether novice investors or experienced investors. The one fund approach that covers everything can make investing a very simple and pleasant experience.
Summary – XEQT Review
XEQT is a relatively new ETF but the fund has performed well. This one fund with 100% exposure to global stocks can be a great all-equity ETF to hold for both novice and experienced investors. Per my VEQT vs. XEQT vs. HGRO showdown, XEQT came out on top of all three all-equity ETFs compared. As mentioned, XEQT is the ETF we are using for our kids’ RESPs.
Why do I hold XEQT? Because of its simplicity and straightforward approach. I no longer need to worry about re-balancing. Whenever we add new contributions, we just need to purchase more shares of XEQT. Whenever there’s a distribution, we’d purchase more XEQT shares via DRIP. Best of all, XEQT provides asset class and geographical diversification by holding over 9,000 different international stocks for a low MER of 0.20% per year.
What’s not to like about XEQT? Therefore, my review of XEQT is overwhelmingly positive.
This blog originally appeared on the Tawcan site on Aug. 9, 2021 and is republished on the Hub with the permission of Bob Lai. Here’s his bio: Hi there, I’m Bob from Vancouver Canada. My wife & I started dividend investing in 2011 with the dream of living off dividends in our 40’s. Today our portfolio generates over $2,250 dividend per month, which covers >55% of our expenses.
One thought on “XEQT Review: An iShares All-Equity ETF Analysis”
Great information. Thank you for posting this! One thing I am confused about due to conflicting information in my personal research. For RRSP account I was told by my account that “The tax treaty between US and Canada grants a US tax exemption for foreign investments held within a RRSP (but not a TSFA, which is not recognized by the US). So, it’s totally ok to hold foreign investments in an RRSP, as no tax is deducted at source on foreign income in a RRSP.” but you mention otherwise. Trying to understand exactly what would happen if I own XEQT.to in my RRSP.