Best Bond ETFs for Canadian Investors

The bond market can be difficult to navigate, with thousands of issuances across diverse categories. Exchange-traded funds can offer an inexpensive way to gain broad exposure to bonds. To help bond investors sort through it all, we’ve screened 218 Canadian ETFs across fixed-income categories for those with Gold, Silver, or Bronze Medalist Ratings, meaning Morningstar analysts expect them to outperform relative to their category indexes or category medians over the long term.

These are the eight best funds, as evaluated by Morningstar analysts:

• BMO Aggregate Bond ETF ZAG
• iShares Core Canadian Universe Bond ETF XBB
• Vanguard Canadian Aggregate Bond ETF VAB
• iShares Core Canadian Corporate Bd ETF XCB
• BMO Short Corporate Bond ETF ZCS
• Vanguard Canadian Short-Term Bond ETF VSB
• iShares Core Canadian Short Term Bd ETF XSB
• Mackenzie Canadian Strategic Fixed Income ETF MKB

Screening for the Best Canadian Bond ETFs

We screened for ETFs with Gold, Silver, or Bronze Medalist Ratings that are 100% assigned by Morningstar analysts (rather than indirectly or quantitatively assigned), and excluded funds with fewer than C$100 million. All but one, the Mackenzie Canadian Strategic Fixed Income ETF, are index funds.

Here’s a closer look at the best bond ETFs for Canadian investors. A table with their recent performance is at the end of this article.

BMO Aggregate Bond ETF

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★

iShares Core Canadian Universe Bond ETF

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★★

These funds track the FTSE Canada Universe Bond Index, a market-cap-weighted index of CAD-denominated investment-grade bonds, excluding most floating-rate notes, mortgage-backed securities, and convertible bonds.

Both funds have a higher-than-average allocation to government or government-related bonds—usually more than 70%, compared with roughly 60% for the Canadian fixed-income category. “A heavy allocation to government bonds may also leave this fund more sensitive to rising government bond yields or interest-rate increases,” says Morningstar analyst Lan Ahn Tran. “Overall, the fund’s low fee and superior downside protection should preserve its performance advantage over category peers in the long run.”

The C$8.2 billion iShares fund is slightly more expensive, with a management expense ratio of 0.10%, compared with 0.09% for the C$11 billion BMO fund. Tran writes that both funds offer “an attractive price tag.”

Vanguard Canadian Aggregate Bond ETF

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★★

This C$5.6 billion fund tracks the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index, a market-cap-based index of CAD-denominated investment-grade bonds. The index excludes bonds with equity features, floating-rate notes, and most contingent capital securities, as well as bonds with less than one year until maturity and less than C$150 million outstanding. This fund also has a higher-than-average allocation to government and government-related bonds compared with the Canadian fixed-income category.

“Vanguard Canadian Aggregate Bond ETF provides a well-constructed portfolio of investment-grade Canadian bonds at an attractive price tag,” says Tran.

iShares Core Canadian Corporate Bond ETF

• Morningstar Medalist Rating: Silver Rating
• Morningstar Rating: ★★★

This C$2.3 billion fund tracks the FTSE Canada Corporate Bond Index, a market-cap-weighted index of investment-grade CAD-denominated corporate bonds. It excludes bonds with less than one year until maturity, those with less than C$100 million in issuance, convertible bonds, mortgage-backed securities, and bonds without a semiannual coupon schedule.

“While the fund’s straightforward approach might lag more nimble peers when risky assets are in favor, its broad portfolio does a good job of capturing the full investment opportunity set and allowing it to keep up with its category,” writes Tran. “The fund often outperforms in credit shocks, offering better protection than the category average. These features, combined with a low annual fee, make the fund a compelling option.”

BMO Short Corporate Bond ETF

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★★

The C$4.4 billion BMO Short Corporate Bond ETF tracks the FTSE Canada Short Corporate Bond Index, which collects CAD-denominated investment-grade corporate bonds that mature in one to five years. It excludes convertible bonds, mortgage-backed securities, and bonds smaller than C$100 million. The fund is heavily concentrated in financials because the Canadian corporate bond market is concentrated there, even more so with short-term markets.

“BMO Short Corporate Bond ETF offers a comprehensive slice of the short-term Canadian corporate bond market at a razor-thin price,” writes Tran. “The fund’s corporate focus makes it looks riskier than category peers that have a broader scope. Many category peers invest in short-term government or securitized bonds, which tend to carry higher credit ratings.”

Vanguard Canadian Short-Term Bond ETF

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★

The C$1.1 billion Vanguard Canadian Short-Term Bond ETF tracks the Bloomberg Global Aggregate Canada Government/Credit 1-5 Year Float Adjusted Index. This market-cap-weighted index collects investment-grade, CAD-denominated bonds that mature in one to five years. The minimum bond size is C$150 million, and it excludes bonds with equity features, floating-rate securities, and contingent capital securities with explicit balance-sheet-based triggers.

The fund holds a higher-than-average weighting of Treasuries—about a third compared with 10% for the Canadian short-term fixed income category. “The focus on government bonds pushes the fund toward higher-quality bonds within the investment-grade space,” says Tran. “It often invests around half of its assets in AAA-rated bonds, compared with 25% for the category average.”

iShares Core Canadian Short Term Bond ETF

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★

The iShares Core Canadian Short Term Bond ETF tracks the FTSE Canada Short Term Overall Bond Index, a market-cap-weighted index of CAD-denominated investment-grade bonds that mature in one to five years. The index excludes mortgage-backed securities, convertible bonds, and bonds with issuances of less than C$100 million. It also only includes bonds with a fixed coupon rate. The fund’s allocation to government bonds is roughly double that of its peers.

“iShares Core Canadian Short Term Bond ETF’s broad scope and low fee work are an effective approach to the short-term investment-grade Canadian bond market,” says Tran.

Mackenzie Canadian Strategic Fixed Income ETF

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★

The Mackenzie Canadian Strategic Fixed Income ETF has the distinction of being the only actively managed fund on the list. The C$836 million fund focuses on investment grade bonds, with high-yield allocations never going above 5%.

“This strategy uses qualitative and quantitative research to identify relative value opportunities, combining macroeconomic views on interest rates and credit risk with the team’s fundamental credit analysis,” writes Morningstar analyst Luke Richardson.

“Lead portfolio manager Konstantin Boehmer is the ultimate decision-maker for this strategy, which he’s served since joining Mackenzie in 2013. He brings more than two decades of experience, mainly in global sovereign bond analysis,” writes Richardson. “Mackenzie’s broad know-how and manager collaboration contribute to the team’s appeal. Four other portfolio managers with expertise in quantitative research, non-investment-grade credit, leveraged loans, and macroeconomic analysis are members of the team.”