XEQT vs a Target Date Fund: Why Canadians Don't Need One
Target date funds do one clever thing. XEQT does the same thing better, cheaper, and with more Canadian-specific options.
What is a target date fund?
A target date fund is a fund designed for investors planning to retire in a specific year. You pick the year closest to your expected retirement (2045, 2055, 2065) and the fund automatically adjusts its equity-to-bond ratio over time, becoming more conservative as the target date approaches.
A 2055 target date fund might hold 90% equities and 10% bonds today for a 30-year-old investor. By 2045, it might hold 70% equities and 30% bonds. By 2055, it might hold 50% equities and 50% bonds. This automatic transition is called the glide path. It removes the need for you to manually rebalance toward safer assets as you age.
Target date funds were popularized in the United States, particularly in 401(k) employer plans, as a way to give unsophisticated investors a single-fund solution that accounts for the passage of time. Vanguard, Fidelity, and Schwab all offer extensive target date fund lineups in the US at very low costs.
The clever idea behind them
The core insight is genuinely good: your investment risk should decrease as your time horizon shortens. A 25-year-old who can hold through a 40% market crash has decades for the portfolio to recover. A 64-year-old who needs to start drawing income in twelve months cannot afford to see their portfolio halved the year before retirement. Automatically adjusting the portfolio toward bonds over time reduces this sequence-of-returns risk.
This concept is sound. The question for Canadian investors is whether the target date fund vehicle is the best way to implement it. The XEQT vs XGRO comparison explains how the iShares lineup already provides this glide path at a fraction of the cost.
The Canadian problem
Target date funds are primarily a US product. The Canadian market for them is thin, expensive, and dominated by actively managed mutual fund versions charging 1.5 to 2.5% MER.
There are a handful of low-cost target date ETF options in Canada, but they lack the variety and depth of the US market, have limited assets under management, and are not widely available across all Canadian brokerages. The Canadian iShares and Vanguard product lineups do not include a compelling, low-cost, liquid target date ETF series the way their US counterparts do.
This means that most Canadians drawn to the target date fund concept end up with an expensive bank-sold mutual fund version, paying 2% or more for the automatic glide path feature. That fee premium, compounded over decades, dwarfs the value of the automatic rebalancing service. For a full picture of what that fee gap costs over a career, see the XEQT MER analysis.
A 2% MER target date fund versus a 0.20% XEQT self-managed approach on $500 per month over 30 years costs the target date investor approximately $200,000 in additional fees. The automatic glide path service is not worth $200,000. Not even close.
The glide path concept: what you actually need
The glide path idea, reducing equity exposure as you approach and enter retirement, is genuinely useful financial planning. The appropriate equity allocation in your 30s is different from the appropriate allocation in your 60s. Holding 100% equities at 70 and drawing down your portfolio through a bear market is a real risk that has derailed many retirement plans.
The Canadian iShares lineup provides the perfect set of building blocks for a DIY glide path at a fraction of the cost of a target date fund. Each fund covers the full equity and bond mix in a single ETF:
Building your own glide path
A sensible self-directed approach that replicates the target date fund concept at 0.20% MER:
The cost comparison
| Approach | MER | 30yr cost ($500/mo) | Glide path | Verdict |
|---|---|---|---|---|
| XEQT to XGRO to XBAL | 0.20% | ~$11,000 | Manual (once per decade) | Excellent |
| Low-cost Canadian target date ETF | ~0.60% | ~$35,000 | Automatic | Decent |
| Bank-sold target date mutual fund | ~2.00% | ~$155,000 | Automatic | Expensive |
The DIY approach requires exactly three investment decisions over your entire investing lifetime: when to switch from XEQT to XGRO, when to switch from XGRO to XBAL, and what to do in retirement. That is not a demanding level of active management. Most people can handle it.
Who actually needs a target date fund?
Target date funds make sense in specific circumstances: employer retirement plan accounts with limited investment options where a target date fund is the only sensible default, investors who are genuinely unwilling to make any investment decisions ever (including the one-per-decade glide path shift), or US investors with access to Vanguard or Fidelity target date funds at 0.10 to 0.15% MER.
For a Canadian investor with a Wealthsimple or Questrade account and access to the iShares suite of all-in-one ETFs, a target date fund adds complexity and cost without meaningful benefit. The XEQT to XGRO to XBAL progression is simple enough that it does not require automation. You check it once every several years, make one trade if the time has come, and move on.
The iShares lifecycle: already built for you
There is something elegant about the fact that BlackRock Canada has built the entire lifecycle of a Canadian investor's portfolio into five ETFs that all charge 0.20% and all automatically rebalance internally. XEQT for the accumulation phase. XGRO as you approach middle age. XBAL as retirement nears. XCNS or XINC in drawdown. Each fund holds global equity and bond exposure in appropriate proportions for its intended purpose.
You do not need a target date fund. You need to know those five tickers exist and roughly when in your life to shift from one to the next. That is the entirety of the investment strategy.
Start with XEQT. The rest can wait.
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