It helps but the sound is still pretty disappointing. A Bel Canto 1 or 2 is a good match but don't expect miracles.
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Stick with the onboard outputs unless you already have an outboard DAC to run it into.
Any nonlinearities of deficiencies in the onboard DAC will already be SWAMPED by the poor nature of the XM medium itself. The DAC component of the Polk is more than capable of complete transparency where XM is concerned, unless you're looking for something to take the edge off the aliasing distortion.. :)
I somewhat agree with the points in some of the other comments, XM radio sound quality is not worth going out and spending big bucks for a DAC, the source and not the conversion is probably the limiting factor. However, I have two moderately priced DAC's that I have run my Polk tuner through, an Aragon D2A2 and a Channel Island DAC-1 with the upgraded power supply. The CI is the better match. While I would not upgrade to the DAC solely for occasional XM listening, if that is one of your main sources I think the very modest price you can pick up a DAC-1 for, now that DAC-2 is on the market, make it an upgrade worth making.