Owning thousands of stocks sounds like diversification solved. That’s one reason the iShares Core Equity ETF Portfolio (TSX: XEQT) has become such a popular all-in-one choice. Buy one ticker and you get exposure to about 8,300 companies across Canada, the United States, developed international markets, and emerging markets.
The catch? You may own many of those same companies somewhere else too.
Add another exchange traded fund (ETF), a few Canadian banks, or your favourite technology stocks and a portfolio that looks diversified by ticker count can become much more concentrated underneath.
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What’s inside
XEQT is built from five underlying iShares ETFs and targets 100% equities. About 45.3% currently sits in U.S. equities, 25.5% in Canada, 24.4% in developed international markets, and 4.8% in emerging markets.That’s broad geographic diversification for a 0.19% management expense ratio (MER).
It also means understanding how ETFs work requires looking past the ticker itself. XEQT’s largest individual holdings currently include Nvidia at 3.25%, Apple at 3.03%, Microsoft at 2.26%, Royal Bank of Canada at 1.98%, and Amazon at 1.51%. Therefore, the top 10 stocks represent about 17.8% of the entire ETF. That’s not extreme concentration, but enough that adding another fund can change the picture quickly.
Overlap adds up
Consider an investor who likes XEQT but also wants more U.S. exposure, so 30% of the portfolio goes into the Vanguard S&P 500 Index ETF (TSX: VFV), with the other 70% in XEQT. VFV currently has Nvidia at about 8.1%, Apple at 7%, and Microsoft at 5.7%. Put the two ETFs together and the portfolio could look like this:
| STOCK | WEIGHT IN XEQT | WEIGHT IN VFV | APPROX. WEIGHT IN 70/30 PORTFOLIO |
|---|---|---|---|
| Nvidia | 3.25% | 8.07% | 4.70% |
| Apple | 3.03% | 7.03% | 4.23% |
| Microsoft | 2.26% | 5.69% | 3.29% |
| TOTAL | 8.54% | 20.79% | 12.22% |
Three companies would now represent more than 12% of the entire portfolio. The U.S. allocation would also jump from XEQT’s roughly 45% to around 62%. That may be exactly what the investor wanted. The problem starts when it happens accidentally.
Stocks count too
ETF overlap isn’t limited to owning another ETF. XEQT already contains the largest Big Six Banks in Canada and largest energy stocks among its larger holdings. Buying those stocks separately isn’t automatically a mistake. It simply means you’re deliberately increasing their influence.
Someone holding $80,000 in XEQT plus $20,000 directly in Canadian banks may feel like they own an ETF plus several stocks. Economically, they have increased an existing financial-sector position that already makes up roughly 20.5% of XEQT. That’s the number I’d care about.
Considerations
XEQT remains one of the simpler ways to build a globally diversified equity portfolio. BlackRock automatically rebalances it, the MER remains low at 0.19%, and no individual stock currently dominates the fund. Its largest holding is only a little above 3%. The bigger risk is what investors add around it.
Holding XEQT inside a Tax-Free Savings Account (TFSA) and then adding VFV, Canadian banks, or mega-cap technology stocks can tilt the portfolio toward markets and companies already doing plenty of work inside XEQT. That can increase gains when those holdings perform well. It increases the damage when they don’t.
Bottom line
I wouldn’t avoid XEQT because some holdings overlap with other investments. I’d check the overlap before buying anything else.
Eight thousand stocks sounds diversified, and it is. Yet your portfolio isn’t determined by how many ticker symbols appear on your brokerage screen. It’s determined by how much money ultimately depends on the same companies.
