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Saturday, July 20, 2024

Perplexity compares XEQT to mutual funds

I asked Perplexity how owning XEQT, the complete Canadian portfolio in one ETF,  compares to owning a number of carefully chosen mutual funds to create a complete, diversified portfolio. Perplexity answered:

Answer:
 
The iShares Core Equity ETF Portfolio (XEQT) is an all-in-one ETF designed to provide broad diversification across global equity markets. It includes a mix of underlying ETFs that cover various regions and sectors, making it a convenient option for investors looking for a simple, diversified equity portfolio. Key features of XEQT include:
 
XEQT provides broad diversification with exposure to over 9,500 stocks across global markets, including US, Canadian, international developed, and emerging markets.
 
  • This level of diversification helps spread risk across various sectors, countries, and company sizes.
  • Low cost: With a management expense ratio (MER) of 0.20%, XEQT is significantly cheaper than most actively managed mutual funds
  • Lower fees can have a substantial impact on long-term returns.
  • Simplicity: As an all-in-one ETF, XEQT eliminates the need for manual rebalancing and simplifies portfolio management
  • You can achieve a globally diversified portfolio with just one investment.
  • Automatic rebalancing: The fund managers handle annual rebalancing, ensuring the portfolio maintains its target asset allocation
  • This helps in selling high and buying low, potentially boosting returns over time.
  • Tax efficiency: ETFs are generally more tax-efficient than mutual funds due to their structure and lower turnover.
  • Long-term growth potential: XEQT is designed for long-term capital growth, making it suitable for investors with a long time horizon and higher risk tolerance
  •  
    Risk tolerance: XEQT is a 100% equity portfolio, which means it can be more volatile than balanced funds that include bonds. (My add: If you insist on bonds in your portfolio, consider XGRO for 80% equity and 20% bonds or XBAL for 60% equity and 40% bonds. I would never even consider holding more than 40% bonds even though this option is offered.)
     
  • Ensure XEQT aligns with your risk tolerance and investment goals.
  • Time horizon: Due to its all-equity composition, XEQT is best suited for investors with a long-term investment horizon (5 or more years with the accent on "more years".)
  • Home bias: XEQT has a 25% allocation to Canadian stocks, which is higher than Canada's global market capitalization. While this can provide some benefits for Canadian investors, it's important to be aware of this overweight.
     
    When all is said and done, what we all want to know is how does XEQT perform when compared to mutual funds? Answer: XEQT more than holds its own.
     
  • XEQT: Historical performance has been strong, with notable returns over the past few years. For example, XEQT returned 17.05% in 2023, which is competitive with other investment options
  • Mutual Funds: Performance varies widely among mutual funds. While some actively managed funds may outperform the market, others may under-perform, especially after accounting for higher fees. For instance, the RBC Select Aggressive Portfolio returned 12.71% in 2023, which is lower than XEQT's performance
  •  
    In conclusion: For investors seeking a simple, low-cost, and globally diversified equity portfolio, XEQT can be an excellent replacement for a portfolio of mutual funds. It offers broad diversification, professional management, and automatic re-balancing at a fraction of the cost of most mutual funds. 
     
    However, as with any investment decision, it's important to consider your personal financial situation, risk tolerance, and investment goals before making a switch. If you decided that you prefer active management and are willing to pay the higher fees, you may still find value in a carefully chosen portfolio of mutual funds.
     
    After Perplexity answers a question, it posts a number of suggestions for areas for future investigation. In this case, Perplexity suggested some of the following questions:
     
    • What is the historical performance difference between XEQT and a carefully selected mutual fund portfolio?
    • How do the distribution yields of XEQT compare to those of mutual funds?
    • How does the risk of XEQT compare to other ETFs?
    • How does the risk of XEQT compare to a mix of mutual funds?

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