3% of the world, 30% of the fund
Canada makes up roughly 3% of global stock market capitalization. VEQT allocates approximately 30% to Canadian equities. That's a 10x overweight.
The Canadian overweight
3% of the world. 30% of the fund.
VEQT holds roughly ten times Canada’s weight in the global market. The rest of this article is the case for why that is deliberate, not a defect.
On a spreadsheet, this looks irrational. If you believe in market-cap weighting — and the entire philosophy of passive investing is built on that belief — why would you deliberately overweight one country by a factor of 10?
The answer is that pure market-cap weighting optimizes for one thing: capturing global returns as efficiently as possible. But Canadian investors have practical constraints that a pure global portfolio doesn't address. The home bias is a deliberate tradeoff between theoretical optimality and real-world livability.
Vanguard measured it
This isn't a marketing decision. Vanguard published research specifically examining the role of home bias in asset allocation for Canadian investors. Their conclusion: a moderate home-country bias (in the range of 20-40% domestic allocation) improves after-tax, after-currency risk-adjusted returns for Canadian investors.
The research isn't controversial within the industry. BlackRock's XEQT uses a 25% Canadian allocation. BMO's ZEQT uses approximately 30%. Every major all-in-one ETF provider in Canada has independently concluded that overweighting Canada is the right call for Canadian investors.
The debate isn't whether to overweight — it's how much.
You earn and spend in loonies
Your mortgage is in Canadian dollars. Your groceries are in Canadian dollars. Your retirement expenses will be in Canadian dollars. This means your real purchasing power — the thing that actually matters — is measured in CAD.
When you hold foreign stocks, your returns are translated back to CAD. A 10% return on US stocks can become a 5% return in CAD terms if the Canadian dollar strengthens, or a 15% return if it weakens. This currency translation adds volatility to your portfolio that has nothing to do with the underlying businesses.
Canadian stocks eliminate this problem. When you own Royal Bank or Shopify, their revenues, earnings, and stock prices are denominated in the same currency you spend. Your investment returns and your purchasing power move together.
This doesn't mean you should hold only Canadian stocks — you'd lose the enormous diversification benefit of global markets. But holding more Canadian stocks than their global market-cap weight justifies reduces the currency noise in your portfolio without sacrificing meaningful diversification.
For a deeper look at how currency movements affect your VEQT returns, read How Currency Movements Affect Your VEQT Returns.
Canadian dividends keep more
In a non-registered (taxable) account, Canadian dividends receive preferential tax treatment through the dividend tax credit. Eligible Canadian dividends are grossed up and then offset by a federal and provincial tax credit, resulting in a lower effective tax rate than foreign dividends.
For an investor in a middle tax bracket, eligible Canadian dividends might be taxed at an effective rate of 15-25%, while foreign dividends are taxed at your full marginal rate (potentially 30-50%). On the same dollar of dividend income, the Canadian dividend leaves more in your pocket.
This advantage only applies in taxable accounts — in a TFSA or RRSP, all dividends are sheltered regardless of origin. But for investors with substantial taxable holdings, the dividend tax credit is a real, quantifiable benefit of the Canadian equity overweight.
More Canada, less volatility
This is the counterintuitive one. Adding more Canadian stocks — which are a concentrated market dominated by financials and energy — reduces portfolio volatility for Canadian investors.
How? Because the volatility reduction from eliminating currency risk outweighs the volatility increase from sector concentration. When you measure a Canadian investor's portfolio in CAD (which is the only way that matters), the currency-hedged-by-default domestic allocation provides a smoother ride than a fully global allocation would.
Vanguard's research quantified this: for Canadian investors, a 30% home bias produced lower portfolio volatility than both a pure global market-cap allocation (3% Canada) and a much heavier home bias (50%+ Canada). Too little Canada leaves currency risk on the table; too much trades away the global diversification you came for.
The case against, taken seriously
The home bias isn't universally loved. Here are the legitimate pushbacks:
Sector concentration. Canada's stock market is dominated by financials (~35%) and energy (~15%). Holding 30% in Canadian stocks means roughly 10% of your total VEQT portfolio is in Canadian banks and 5% is in Canadian energy. If Canadian financials have a bad decade (regulatory changes, housing crisis), that concentration hurts.
Canada is small. Canada's economy represents about 1.5% of global GDP. Betting 30% of your portfolio on 1.5% of the global economy is a meaningful overweight, even if there are good reasons for it.
Opportunity cost. Every dollar in Canadian stocks is a dollar not in US, European, Asian, or emerging market stocks. If the rest of the world outperforms Canada over the next 20 years — which is entirely possible — the home bias will have cost you returns.
Historical underperformance. Over the past decade, US markets (particularly tech) have dramatically outperformed Canadian markets. An investor who held 3% Canada and 50% US would have crushed VEQT's 30/40 split. But this is backward-looking — the next decade could easily reverse.
These are real concerns, not strawmen. The question is whether the currency, tax, and volatility benefits outweigh them. For most Canadian investors, the evidence says yes.
Where the line should fall
| Allocation | Canada | Currency Risk | Tax Efficiency | Sector Diversification |
|---|---|---|---|---|
| Global cap weight (~3%) | 3% | Highest | Lowest | Best |
| XEQT (~25%) | 25% | Moderate | Moderate | Good |
| VEQT (~30%) | 30% | Lower | Higher | Good |
| Heavy home bias (~50%) | 50% | Lowest | Highest | Poor |
The research from Vanguard, PWL Capital, and others converges on the same conclusion: for Canadian investors, the optimal home bias sits in the 20-40% range. Below 20%, you take on unnecessary currency risk; above 40%, you sacrifice too much diversification. Both VEQT's 30% and XEQT's 25% fall inside it — different points on the same curve, neither one wrong.
The honest middle ground
If 30% still feels like too much Canada, XEQT's 25% is the gentler version of the same idea. Want materially less? You're back to holding VUN (US total market) and VIU (international) yourself — and managing the multi-ETF portfolio that VEQT exists to spare you.
Sources & Further Reading
- Vanguard, "The Role of Home Bias in Global Asset Allocation Decisions" (2012) — Canadian-specific analysis of optimal domestic allocation
- Justin Bender, Canadian Portfolio Manager — extensive writing on home bias and foreign withholding taxes
- Dan Bortolotti, Canadian Couch Potato — model portfolios with home bias rationale
- Ben Felix, PWL Capital — analysis of international diversification benefits and currency risk
This article represents the editorial position of BuyVEQT.ca. This is not financial advice.