Why XEQT Doesn’t Hedge Currency (And Why That’s Correct)
April 29, 2026
If you’ve recently bought XEQT and started paying attention to the USD/CAD exchange rate, you’ve probably had a moment of mild panic. The Canadian dollar dips, you check your portfolio, and you wonder: is my investment actually going up, or is this just a currency illusion? And then the natural follow-up question arrives: why doesn’t XEQT just hedge against this? Wouldn’t that make things cleaner?
This is one of the most common concerns from new investors, and it’s a completely reasonable thing to wonder about. The short answer is that currency hedging sounds protective but is, in practice, expensive, imprecise, and almost certainly not worth it for a long-term equity investor. The longer answer is worth understanding, because once you get it, you’ll stop worrying about the exchange rate entirely and focus on what actually matters.
What Currency Exposure Actually Means for XEQT Holders
XEQT holds four underlying iShares ETFs, and roughly 47% of its weight sits in US equities through ITOT, the iShares Core S&P Total US Stock Market ETF. Another chunk sits in international developed markets through XEF, and a smaller slice covers emerging markets through IMEG. Only the Canadian portion, about 23% through XIC, is denominated in CAD by default.
That means when you own XEQT, you are indirectly holding shares of Apple, Toyota, Nestlé, and thousands of other companies whose earnings are reported in US dollars, Japanese yen, euros, and other currencies. When the Canadian dollar weakens against the USD, your XEQT units become worth more in CAD terms, all else being equal. When the loonie strengthens, the reverse is true.
This is not a glitch. This is diversification working exactly as intended. You are not just diversified across industries and geographies. You are also diversified across currencies, which is a meaningful hedge in itself against Canada-specific economic problems.
Currency exposure in a globally diversified equity portfolio is not a risk to be eliminated. It is one of the mechanisms through which global diversification actually protects you from domestic economic weakness.
The Case Against Currency Hedging for Long-Term Investors
Let’s be direct: currency-hedged equity ETFs exist, and they serve a purpose, but that purpose is not to help long-term investors build wealth. They exist for shorter-duration holders, institutions managing specific currency risk windows, and investors who need to reduce short-term volatility at the cost of long-term return. For someone building a TFSA or RRSP over decades, hedging introduces more problems than it solves.
First, hedging costs money. Currency hedges are implemented using forward contracts and swaps, and these instruments carry real costs. Research from Vanguard and others consistently shows that hedging costs for Canadian investors holding US equities have historically run between 0.5% and 1.5% per year, depending on the interest rate differential between Canada and the US. That drag compounds over time in a way that quietly destroys wealth. When the US federal funds rate is significantly above the Bank of Canada’s rate, the cost of hedging CAD/USD rises sharply because you’re essentially borrowing at a higher rate to fund the hedge.
Second, hedging introduces tracking error. A hedged ETF doesn’t perfectly mirror the unhedged version of the same portfolio. The hedge has to be rolled over periodically, and the execution of those rolls isn’t seamless. The result is a portfolio that diverges from its benchmark in ways that are hard to predict and that add a layer of complexity the investor never signed up for.
Third, and most importantly, over long time horizons, currency fluctuations tend to even out. There is no reliable evidence that the Canadian dollar will trend one direction against the US dollar permanently. Academic research on purchasing power parity, while imperfect as a short-term predictor, consistently supports the idea that exchange rates mean-revert over decades. Locking in the cost of a hedge to protect against something that tends to wash out anyway is a poor trade.
Cost of hedging: Research suggests currency hedging for Canadian investors in US equities has historically cost between 0.5% and 1.5% per year in drag, depending on rate differentials. XEQT’s entire MER is just 0.20%. Hedging can cost more than the whole fund.
What Happens When the Loonie Falls (The Part Nobody Complains About)
Here’s something worth sitting with. When the Canadian dollar weakens, which happens regularly during periods of economic stress, falling oil prices, or global risk-off sentiment, your XEQT units denominated in CAD go up in value relative to the underlying foreign assets. This is not a small effect. During periods of real economic distress in Canada, when you might actually need your portfolio to hold its value, the currency exposure in XEQT is working in your favour.
Think about what happened during various commodity price collapses. Canada’s economy took hits. The Canadian dollar fell. Canadian investors holding unhedged global equities saw their portfolios cushioned precisely because those foreign holdings were worth more in CAD. The investor holding a hedged Canadian equity fund got no such cushion. The currency exposure you’re worried about is, in fact, one of the better risk-management tools available to a Canadian investor, and it costs you nothing extra.
If you’re a Canadian investor who earns CAD, spends CAD, and plans to retire in Canada, you actually want some protection against the scenario where Canada-specific problems drag down your purchasing power. Global unhedged equity exposure provides exactly that. A hedged fund strips it out.
Why iShares Made the Right Call with XEQT’s Design
iShares didn’t stumble into an unhedged structure for XEQT by accident. This was a deliberate design decision consistent with how serious investment managers think about long-term equity portfolios. BlackRock, which manages the iShares lineup, applies currency hedging selectively. For shorter-duration instruments like bond ETFs, hedging makes a lot more sense because currency moves can overwhelm fixed income returns. For a 100% equity fund with a long investment horizon, the math doesn’t support hedging.
Compare XEQT to its hedged equivalent if one existed, and you would see, over a 20-year horizon, the hedged version almost certainly trailing the unhedged version by a meaningful amount simply due to the cost drag. iShares keeps XEQT’s MER at 0.20%. Adding currency hedging would push the effective cost well past that, and the benefit would be nothing more than reduced short-term volatility on the currency component, which is not the same as better returns or better risk management over the long run.
For bond ETFs, hedging is often sensible. For long-term equity portfolios, hedging is largely a cost you pay to feel less anxious in the short term. XEQT is optimized for the long term, and its structure reflects that clearly.
The Psychological Trap: Mistaking Volatility for Risk
A lot of the anxiety around currency exposure comes from watching your portfolio value change for reasons that feel outside your control. The Canadian dollar moves, and suddenly your XEQT balance shifts even on days when global markets are flat. This can feel disorienting, like you’re being exposed to something unnecessary.
But this conflates volatility with risk. In the financial sense, risk for a long-term investor is the permanent loss of capital or the failure to meet your retirement goals, not the day-to-day fluctuation in account value. Currency fluctuations add short-term noise. They do not add long-term risk in any meaningful sense for a 20- or 30-year investment horizon. What does add long-term risk is paying higher costs, which is precisely what currency hedging does.
The solution to currency anxiety is not to hedge. The solution is to stop checking your portfolio every day, set up automatic contributions through your TFSA or RRSP or FHSA, and let compounding do its work over time. The Canadian TFSA room for 2026 is $7,000. If you contribute $7,000 per year into XEQT in a TFSA starting from zero and do nothing else, the currency noise becomes increasingly irrelevant against the compounding of a globally diversified equity portfolio.
2026 account limits: TFSA: $7,000/year contribution room. RRSP: 18% of prior year’s earned income, up to the annual limit. FHSA: $8,000/year, $40,000 lifetime. All of these accounts can hold XEQT. Your best move is maximizing contributions, not optimizing currency exposure.
What About Hedged Alternatives: Are They Ever Useful?
To be fair, hedged ETFs do have legitimate use cases. If you are within a few years of a major spending event in Canadian dollars, such as retirement or a home purchase, reducing your currency exposure for that specific portion of your portfolio might make sense. If you’re holding a large position in US equities and you have a specific view that the Canadian dollar is about to strengthen significantly, a short-term hedge could be a deliberate tactical decision.
But those are specific, time-limited, goal-oriented decisions. They are not the default choice for someone in their 30s or 40s building a long-term portfolio. And crucially, if you’re using XEQT as your primary investment vehicle, you don’t need to layer on a separate hedged product to solve a problem that doesn’t really exist for your time horizon.
There are hedged all-equity ETF options available on the TSX if you genuinely want that exposure. But before you reach for one, ask yourself honestly: are you hedging because the math supports it for your situation, or are you hedging because watching currency fluctuations makes you uncomfortable? One of those is a financial decision. The other is an emotional one. And managing your emotions by paying higher fees is one of the most reliable ways to underperform over time.
The best hedge against long-term underperformance is low costs and consistent contributions. Currency hedging achieves neither. XEQT, by design, focuses on both.
Practical Reality: How to Think About USD in Your XEQT Portfolio
Here’s a grounding exercise. Open your XEQT position on Wealthsimple or Questrade. You’ll see a CAD price per unit, a CAD account balance, and a CAD return. XEQT itself trades on the Toronto Stock Exchange in Canadian dollars. You are not buying and selling in USD. You are not exposed to currency conversion fees when you buy or sell XEQT. The currency exposure is internal to the fund and shows up in the unit price, not in transaction costs.
This means you never need to worry about Norbert’s Gambit, USD settlement accounts, or cross-border conversion fees. You buy XEQT in CAD. It goes up and down in CAD. The underlying foreign currency exposure is embedded in the NAV and managed by BlackRock. You’re a passenger, not a pilot, on the currency component. And that’s exactly where you want to be.
Your job is simpler than you’re making it. Maximize your registered accounts. Buy XEQT. Reinvest distributions. Ignore the exchange rate. Repeat for decades. The currency exposure you’re worried about is, over a long enough horizon, part of why your portfolio will reflect the actual global economy rather than just the Canadian slice of it, which represents roughly 3% of global market capitalization.
Frequently Asked Questions
Does XEQT have any currency hedging built in? No. XEQT is an unhedged ETF. Its underlying holdings include US, international, and emerging market equities that are exposed to their respective currencies. This is intentional and reflects best practices for long-term equity investing.
Will a stronger Canadian dollar hurt my XEQT returns? In the short term, yes, a strengthening CAD will reduce the CAD value of your foreign holdings. Over the long term, currency movements tend to mean-revert and have a much smaller impact than the actual performance of the underlying equities. Consistent contributions matter far more than the exchange rate.
Is there a hedged version of XEQT I can buy instead? There is no XEQT-specific hedged version, but iShares and other providers offer hedged equity ETFs on the TSX. Before switching, carefully consider the additional cost drag from hedging and whether your investment timeline actually warrants it. For most long-term investors, it does not.
Do I pay currency conversion fees when I buy XEQT? No. XEQT trades in Canadian dollars on the Toronto Stock Exchange. You buy and sell in CAD with no currency conversion required. The internal foreign currency exposure is embedded in the fund’s unit price and managed by BlackRock at the portfolio level.