Fixed income investments: A steady way to grow your wealth

Sandy Yong

By Sandy Yong

🗓️

Updated: December 19, 2024

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With economic uncertainty continuing into 2025, conservative investors may want to consider fixed income investments — they're low-risk and fit well into a balanced portfolio. 

Fixed income investments, such as bonds and treasury bills, attract cautious investors because they’re considered safer investments than equities (aka stocks), which can be more volatile and have variable returns. 

If you’re looking for a stable way to grow your wealth, read on to learn more about what is a fixed income investment, the pros and cons and how you can start investing in these asset classes in Canada. 

Fixed income investments provide investors with a predictable income over a set period of time. Typically, they pay interest or dividends at regular intervals, such as monthly or annually. The most popular types of fixed income products include bonds, guaranteed investment certificates (GICs) and treasury bills. 

What’s great about fixed income products is that they offer a way to earn income while safeguarding your principal. As a result, they’re a desirable option for conservative investors. 

How to invest in fixed income

Investing in fixed income is straightforward. All you have to do is open an investment account at your bank (e.g. TD Direct Investing, Scotia iTrade, etc.) or you can save money with one of the best trading platforms. From there, you can buy individual bonds, GICs or treasury bills. Another way is to invest in fixed income ETFs or mutual funds to gain exposure to various fixed income securities for diversification.  

Our favourite trading platforms to buy individual bonds

Questrade review CIBC Investor's Edge review BMO InvestorLine
Questrade logo CIBC Investor's Edge logo BMO InvestorLine logo
Bond types available: Government bonds, corporate bonds, municipal bonds, strip bonds
Features
◦ Access to a fixed-income marketplace through its platform
◦ Allows you to search for and buy individual bonds directly
◦ Competitive pricing with transparent commissions 		Bond types available: Federal, provincial, and municipal bonds; corporate bonds.
Features
◦ Fixed-income trading desk for tailored solutions
◦ Real-time quotes on available bonds 		Bond types available: Government bonds, corporate bonds, strip bonds, GICs
Features:
◦ Offers new issues and secondary market bonds
◦ Provides tools for fixed-income laddering strategies
Go to Questrade Go to CIBC Go to BMO

Some investors may consider a laddering strategy involving purchasing bonds or GICs with different maturity dates. This provides a consistent income stream while reducing the impact of interest rate changes over time. Also, before you buy, it’s a good idea to compare interest rates, fees and maturity terms to find the best fixed income products that suit your needs. 

Related: Best GIC rates

Individual bonds require significant capital and without proper diversification may pose some risks. Bond ETFs simplify everything, giving you instant diversification, low fees, and the flexibility to trade anytime—all without the headaches of managing individual bonds.

5 reasons to choose bond ETFs

  • Instant diversification: With one purchase, you reduce the risk of default from a single issuer (e.g., a company or government entity). A bond ETF like the Vanguard Canadian Aggregate Bond Index ETF (VAB) might hold hundreds of bonds across government and corporate sectors.
  • Lower cost of entry: Individual bonds typically have a high minimum purchase requirement (e.g., $5,000 per bond). Bond ETFs allow you to invest with as little as the cost of one share (BMO's Bond Index ETF (ZAG) is $10 to $20), making them more accessible to smaller investors.
  • Professional management: Bond ETFs are managed by professionals who monitor the portfolio, reinvest income, and rebalance holdings as needed.Managing a portfolio of individual bonds yourself requires expertise and regular effort to maintain diversification and optimize returns.
  • Automatic reinvestment: Bond ETFs reinvest interest payments automatically, which helps maintain your investment's compounding effect without requiring manual action. Individual bonds pay interest directly to you, and reinvesting it requires additional transactions and decisions.
  • Cost efficiency: Bond ETFs often have lower overall costs due to economies of scale. Their management expense ratios (MERs) are typically minimal, especially compared to the transaction costs of buying and selling multiple individual bonds. For example, The MER for a bond ETF like Vanguard Canadian Aggregate Bond Index ETF (VAB) might be as low as 0.09%.

Investing in bond ETFs

Bonds are an essential part of a fixed income strategy. Depending on your age and risk tolerance, they might represent 10% to 50% of a diversified portfolio. 

Examples of bond ETFs

Vanguard Canadian Aggregate Bond Index ETF (VAB) iShares Core Canadian Universe Bond Index ETF (XBB) BMO Aggregate Bond Index ETF (ZAG)
Overview: Broad exposure to Canadian investment-grade bonds, including government and corporate bonds.
Overview: Tracks the FTSE Canada Universe Bond Index, offering a mix of federal, provincial, and corporate bonds across various maturities.
Overview: Broad exposure to the Canadian bond market, including government and corporate bonds with varying maturities.
Best for: Investors seeking a diversified, low-cost option for fixed-income stability. Best for: Long-term investors looking for a reliable benchmark ETF for Canadian bonds. Best for: Cost-conscious investors wanting an all-in-one bond solution.
MER: 0.09% MER: 0.10% MER: 0.09%

Related: Best ETFs in Canada

Adding bond ETFs to your fixed income portfolio

You can buy bonds ETFs on your own with any of the top-rated brokerages below or you can use one of the best robo advisors in Canada who will manage your portfolio for you — they'll buy stocks, bonds and more for an ultra low fee of 0.2% to 0.5%

Wealthsimple review Qtrade review Moomoo review
Wealthsimple logo Qtrade logo moomoo logo
Buy ETFs with Wealthsimple Buy ETFs with Qtrade Buy ETFs with Moomoo

All the types of fixed income investments in Canada

There’s a variety of fixed income products you can choose from. Here’s an overview of the different types that are available in Canada.

  • Government bonds

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    Federal, provincial and municipal bonds are considered one of investors' safest fixed income investment options. These bonds are backed by the government, which means they have a low default risk.

  • Corporate bonds

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    These are issued by companies and can offer higher yields than government bonds. However, they come with varying levels of credit risk, depending on the company’s financial health.

  • Guaranteed Investment Certificates (GICs)

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    GICs provide secured returns over a fixed term. As a result, they’re one of the safest investment options in the market. You’ll also have peace of mind that your principal is preserved, ensuring your investment doesn’t lose value.

  • Treasury bills

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    These are short-term government securities with high liquidity. They’re low risk and usually mature within a year or less. Thus, they’re popular among investors looking for fast and safe returns.

  • Alternative fixed income investment options

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    These include investments such as covered call exchange-traded funds (ETFs) and high-yield bonds. Covered call ETFs blend equity and options strategies to generate income. In contrast, high-yield bonds offer higher returns at a higher risk level.

Pros and cons of fixed income investments

Before you decide to invest in fixed income investments, you’ll need to weigh the pros and cons.

Pros

Pros

  • Predictable income stream: These investments provide consistent payouts, which can appeal to those who rely on stable income.

  • Portfolio diversification: Fixed income investments are an excellent way to spread out your risk and lower the volatility of your investment portfolio.

  • Lower volatility compared to stocks: If you can’t stomach the ups and downs of the stock market, fixed income investments can be a suitable choice for risk-averse investors.

Cons

Cons

  • Interest rate sensitivity: If interest rates increase, the value of fixed income investments, such as bonds, tends to decrease.

  • Inflation reducing real returns: When inflation grows faster than the returns of fixed income investments, it may reduce the value of your earnings.

  • Default risk for corporate bonds: Corporate bonds tend to have a higher default risk than government bonds. As such, it may result in losing some or all of your investment.

Best fixed income investments in Canada

Here are some of the top fixed income ideas for investing in Canada:

  • High-yield GICs from the major banks may offer better returns than a regular savings account 
  • Top-performing bond ETFs which offer broad exposure to corporate and government bonds 
  • Green bonds are a growing trend focusing on environmentally friendly projects while earning returns for investors 

You can purchase these investments in several ways to earn a fixed income. You can visit your bank, use an online broker or work with a financial advisor to purchase bonds and ETFs. Be sure to take the time to do research and choose the investments that match your financial needs and risk tolerance. 

FAQs

  • What are fixed income investments?

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    Fixed income investments provide stable and consistent income, usually by paying interest or dividends to investors. Typically, these investments are less volatile compared to stocks. This makes them a safer option for conservative investors looking to grow their wealth steadily over the long term.

  • How do I start investing in fixed income?

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    To begin investing in fixed income, you can open an investment account with a bank or broker. This will allow you to purchase individual bonds, bond ETFs, GICs or treasury bills. Having fixed income assets in your investment portfolio is a great way to diversify your holdings and spread your risk.

  • Are bonds a good choice for Canadians right now?

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    Bonds may be a good choice depending on the Bank of Canada’s interest rate announcements. While they may not produce significant returns compared to stocks, they tend to provide reliable income and have better returns than cash. It’s important to review your time horizon and risk tolerance before making buying decisions.

  • What’s the average rate of return for fixed income investments?

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    The average rate of return on fixed income investments can vary depending on the term and type of investment you choose. For example, GICs may provide returns between 2% and 4%, whereas bonds and ETFs may range from 3% to 5%, based on market conditions and credit risk.

  • Which is better: GICs or bonds?

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    GICs are generally a low-risk and safer option with guaranteed returns, but you’re required to lock away your money for a set period. On the other hand, bonds tend to be slightly riskier but offer the potential for higher returns, especially for corporate bonds. Ultimately, your decision will depend on the market conditions, risk tolerance and income needs.

Sandy Yong Freelance Contributor

Sandy Yong is the author of the award-winning book, The Money Master: Inside Secrets On How To Make Your Money Grow and Stay Safe. She has been featured in the Toronto Star, NBC News and Yahoo! Finance.

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