XEQT vs VFV: Global Diversification vs Pure S&P 500

What is VFV?

VFV is the Vanguard S&P 500 Index ETF, a Canadian-dollar-denominated fund that tracks the S&P 500. It holds the 500 largest US companies by market capitalization. Its MER is 0.09%, roughly half of XEQT's 0.20%.

When people ask about VFV, they are usually asking: "The US market has beaten global markets for a decade. Why not just own the US?" That is a reasonable question that deserves a real answer rather than a reflexive "diversification is always better" response.

The performance record

VFV has delivered stronger returns than XEQT over most recent periods. This is factually true and worth acknowledging directly.

Why VFV has outperformed

The S&P 500's exceptional run over the past decade is largely attributable to a small number of technology companies: Apple, Microsoft, NVIDIA, Alphabet, Amazon, and Meta. These companies grew to represent an extraordinary share of global market capitalization.

XEQT, by design, owns these companies at their market-cap weight. But XEQT also owns Japanese automakers, European banks, Canadian energy companies, South Korean chipmakers, and thousands of other global businesses that collectively underperformed the US mega-cap tech sector over this period. In a world where US tech dominated everything, more diversification meant less return.

The question for a forward-looking investor is not whether the US outperformed over the last decade. It is whether that outperformance will persist for the next decade, which is when you will need your money. History gives no reliable answer to that question. This is also the core issue explored in our analysis of XEQT's US weighting.

US concentration risk: the other side of the ledger

The S&P 500's top ten holdings represent over 35% of the entire index. Apple alone is roughly 7%. Five companies (Apple, Microsoft, NVIDIA, Alphabet, Amazon) represent more than 25% of the index. Owning VFV means your portfolio is heavily concentrated in a small number of enormous US technology companies whose valuations, as of 2026, are historically elevated by many standard metrics.

There have been extended periods when the US underperformed international markets significantly. The decade from 2000 to 2010 is the most notable example. During that period, US stocks were flat to down on a cumulative basis while international developed markets and emerging markets delivered positive returns. An investor who held only VFV (had it existed) through that decade would have seen negligible growth while global diversification delivered meaningful returns.

Nobody knows when or whether a sustained period of US underperformance will arrive. Diversification is the acknowledgment that you do not know, and you would rather own a bit of everything at fair value than bet everything on one country's continued dominance.

Currency risk: VFV is not hedged

VFV is a CAD-denominated wrapper around a USD-denominated fund (Vanguard's VOO). Your returns in Canadian dollars are affected by the CAD/USD exchange rate. When the Canadian dollar strengthens against the USD, your VFV returns are reduced in CAD terms. When the Canadian dollar weakens, your CAD returns are enhanced.

XEQT also has significant US exposure through its ITOT/XTOT sleeve, so this is not a binary distinction. But XEQT's Canadian and international sleeves provide some natural currency diversification. A Canadian investor's income, mortgage, and expenses are in CAD. Holding a significant portion of savings in an unhedged USD-heavy fund introduces meaningful currency exposure to your largest single asset class.

Being underweight Canada: matters more than you think

VFV holds zero Canadian stocks. XEQT holds approximately 25 to 27% in Canadian equities. For a Canadian investor, this has implications beyond investment returns. Canadian dividends from stocks held in taxable accounts receive the dividend tax credit, making them more tax-efficient than foreign dividends. A portfolio with no Canadian equity holds no eligible Canadian dividends, which matters in a non-registered account.

There is also the practical reality of economic correlation. If you work in Canada, own Canadian property, and spend in Canadian dollars, your human capital and real assets are already highly correlated with the Canadian economy. Owning a fund with significant Canadian equity exposure is not redundant. It provides currency matching. Owning a fund with zero Canadian exposure while living in Canada creates a structural mismatch.

Tax treatment differences

In an RRSP, both funds benefit from the Canada-US tax treaty, which eliminates the 15% US withholding tax on dividends. In a TFSA, both are subject to that withholding tax on their US equity distributions, which is not recoverable. The tax mechanics are essentially identical for both funds when held in registered accounts.

In a non-registered account, VFV's distributions are entirely foreign income, taxed at your marginal rate. XEQT's distributions include a mix of eligible Canadian dividends (taxed more favourably), foreign income (taxed at marginal rate), and sometimes capital gains and return of capital. XEQT is slightly more tax-efficient in a non-registered account for a typical Canadian investor.

The MER difference

VFV's 0.09% MER is lower than XEQT's 0.20%. On a $100,000 portfolio, that is $110 per year. Over 25 years at 7% returns, the compounding effect is approximately $7,000 in favour of VFV. That is a real difference, though smaller than the fee gap between either fund and an actively managed mutual fund.

The lower MER is a genuine advantage for VFV. It is partially offset by VFV's less diversified structure and the currency and tax considerations described above. Whether the 0.11% fee savings outweigh those considerations depends on your specific situation and time horizon.

Who should choose which?

Holding both: a middle path

Some Canadian investors hold XEQT in their TFSA (for the Canadian and international diversification and tax-efficient distributions) and VFV in their RRSP (for the US equity focus and optimal treaty treatment of US dividends). This combination is deliberate and defensible, but it adds complexity without a proven long-run return advantage over simply holding XEQT in both.

If the decision is genuinely causing you paralysis, buy XEQT. The fund you can hold through a 30% decline without selling is worth more than the theoretically optimal fund you panic-sell at the worst possible moment. XEQT's simplicity and broad diversification make it easier to stay invested for the decades required to realize its full potential.