How to invest in bonds in Canada
NicoElNino / Shutterstock
Updated: January 19, 2024
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware this post may contain links to products from our partners. We may receive a commission for products or services you sign up for through partner links.
Bonds are essential to a diverse investment portfolio. They help protect your portfolio against stock market volatility while providing a regular and reliable source of passive income. Best of all, it’s now easier than ever to buy bonds in Canada!
I personally keep 20% to 25% of my entire investment portfolio in bond ETFs. These funds are some of my favorite holdings in my portfolio because they pay dividends monthly, which provides a reliable cashflow I can use to buy other investments. I even keep my core bond funds set on DRIPs (Dividend Reinvestment Plan), so I’m always increasing my position in these ETFs. As a result, my passive income grows every single month. I think bonds are a must-have for any portfolio, and anyone who wants to start investing should allocate a percentage of their investment portfolio to this asset class.
What are bonds?
Bonds, like stocks, are issued by corporations in order to raise capital for business operations. Bonds, however, are much different than stocks in how they work and what they provide for the investor.
When investing in stocks, you’re purchasing shares in a business and becoming a part-owner of that corporation. That entitles you to profit sharing and often voting rights to have a say in how the business is run. With bonds, you are lending a business money. This entitles you to interest payments plus a guaranteed return of your capital when the term of the loan ends. Unlike with stocks, you don’t receive any profit sharing in the company or voting rights as a bondholder.
The best way to understand what bonds are and how they work is to think of them as a loan. You are loaning a company money that they will pay back by a certain date, with interest. To put it simply, bonds are not that different than student loans or a car loan, except you’re the lender instead of the borrower!
Where to buy bonds in Canada
- Low trading fees
- No annual fees
- Excellent customer service
Questrade is considered one of the top online brokerages in Canada. It’s earned this reputation by being a low-cost leader in the industry and offering no-fee ETF purchases. With its user-friendly DIY trading platform and competitive fees, Questrade is an excellent choice for Canadian Couch Potato Portfolio followers aiming to build a passive portfolio with ETFs, as well as any investor looking to save a significant amount on fees.
- Low-cost trading
- Trade corporate bonds
- Wide selection of ETFs
Qtrade Direct Investing™ is an investment platform based in Canada, operated by Aviso Wealth. It offers a variety of investment options, including commission-free ETFs, stocks, options, bonds and mutual funds. Qtrade is known for its comprehensive educational resources, particularly suitable for beginners, as well as attractive sign-up bonuses and rewards for active accounts. With its award-winning customer care, Qtrade has become a preferred choice among Canadian investors. The platform caters to the needs of both novice and experienced investors, offering affordable trading fees, a wide range of investment options, and robust research tools.
- Access to human advisors
- Sleek, user-friendly platform
- ETF MERs are some of the lowest in the industry
Wealthsimple is one of the world’s leading robo-advisors, making them well-equipped to manage your money. They employ a team of world-class financial experts and the best technology talent. Some of the features they offer include portfolio review service, free tax-loss harvesting, access to financial advisors, investment in fractional shares and more.
- Low fees
- Hands-off investing
- Automated contributions
Moka is a financial app based in Canada that enables users to invest in a variety of investment vehicles, including stocks, bonds, ETFs and mutual funds. With Moka, users can effortlessly begin saving for their future by automatically rounding up their purchases to the nearest dollar and investing the spare change.
- Low trading fees
- Wide range of account types and investment options
- Quotes and research
CIBC Investor's Edge is the online brokerage division of CIBC, one of the largest banks in Canada. It provides clients with a wide range of account types, investment options, and convenient online and mobile trading capabilities. With a low, flat commission fee of $6.95 per online trade for stocks and ETFs, it offers competitive pricing to investors. In addition, clients can access free research and analysis tools to assist with their investment decisions. This brokerage platform is particularly suitable for investors seeking affordable trading fees within a reputable banking institution. It is also an attractive choice for existing CIBC banking clients who prefer to take control of their own investments.
Why do I need bonds in my portfolio?
Bonds are essential to have in your portfolio to balance your investment allocations, as well as provide a source of passive income.
Bonds typically move in the opposite direction of stocks. So when the stock market goes down, the prices of bonds tend to increase, and vice versa. By having a mix of both bonds and stocks in your investment portfolio, you can reduce the amount of volatility you experience as an investor.
Bonds also provide an excellent source of passive income for your portfolio. Because bonds guarantee a rate of return on your investment paid on a fixed schedule, they’re perfect for investors who want a reliable source of passive income. Bond ETFs tend to make their interest payments monthly, which means you’re paid more frequently than stocks which typically pay on a quarterly schedule. This is the reason many people tend to adjust their portfolio to have more bonds as they near retirement.
When it comes to understanding bonds and adding them to your investment portfolio, there are some key investment terms you need to understand:
- Term: the length of time from the date the bond is issued to its maturity date. In other words, the term of the loan! This can range from 1 to 20 years.
- Maturity Date: the date at which the bond term ends, and your investment capital is returned.
- Coupon Rate: the interest rate paid to the bondholder per year. A bond with a 3% coupon pays 3% per year. Payments are typically scheduled monthly.
Curious to learn even more investment terms? Check out our investment glossary.
How to buy bonds in Canada
There are two ways to buy Canadian bonds: you can purchase a bond fund through your brokerage account, or you can purchase bonds directly from the issuing government or corporation by way of a financial broker.
Buying a bond ETF
The best way to buy bonds in Canada is to purchase a bond fund, like a bond ETF. There are bond funds that contain either corporate or government bonds, short or long-term bonds, or a mix of all of the above. If you’re overwhelmed by the number of choices, it’s best to select a broad market bond fund that contains both domestic and international bonds of varying terms, from both corporations and governments. A bond ETF is the easiest way to invest in a diverse portfolio of bonds at a low cost.
To purchase shares of a bond ETF, all you need to do is select the ETF in your brokerage account during trading hours, and purchase the number of shares you want to add to your portfolio. Since ETFs are traded on the stock market exchange, your order will be filled and the shares in the bond fund added to your portfolio as soon as the trade is completed. You will be charged the same commissions your brokerage account charges for any other ETF purchase.
Questrade is a discount broker that charges no commissions to purchase ETFs. You can buy as little as one share at a time and pay no trading fees. This makes it easy and free to add bonds to your investment portfolio with Questrade.
The interest payments you receive from the bonds in your bond ETF will be paid directly to your brokerage account, usually on a monthly basis. You can then use this cash to purchase more shares of the bond ETF or invest it in other ETFs or stocks. When bonds in the bond ETF mature, the fund manager will purchase new bonds to maintain the fund allocation and income.
Bond ETFs do have management fees and operating costs, which will be calculated in the fund’s Management Expense Ratio (MER). Bond MERs typically range from 0.05% to 0.20% depending on the ETF provider, which is comparable to stock ETFs.
Buying Canadian bonds directly
Another way to buy bonds is directly from the government or corporation issuing them. These are not traded on the stock exchange like a bond ETF, so you will need to contact a broker in order to make a purchase.
Your broker is a financial institution, brokerage, or another licensed financial advisor. They will provide a list of bonds available for purchase, you select the one that you want and then contact them via phone, and they will make the purchase for you. Brokers typically charge a flat rate commission to purchase bonds, so it only makes sense to make a purchase that is at least a few thousand dollars to keep your costs to a minimum. If you want to sell the bonds you own before they mature, you will need to call your broker again to make a trade and pay commissions again.
Interest payments from your bond will be deposited in the account you designate with your financial account, and this is the same account your investment capital will be returned to when the bond matures. If you want to re-invest your money in another bond, you will again have to call your broker and pay commissions to do so.
There are no management fees when you buy individual bonds. However, that’s because you have to take on the trouble of ensuring you have a diversity of bonds with different coupons and terms in your portfolio!
Choosing bonds for your portfolio
When it comes to selecting bonds for your investment portfolio, you want to include a mix of corporate and government bonds with varying terms and coupon rates. Like with stocks, diversification is key! The easiest and most affordable way to achieve this is with a bond ETF, otherwise, you will have to select an asset mix that contains dozens or even hundreds of different individual bonds to properly diversify your capital. If you’re interested in the environmental impact your finances have, you can also opt for adding Green Bonds to your portfolio along with your other bonds and bond ETFs.
Risks of bonds
While bonds are an essential investment to add to any portfolio, they are not risk-free. Bonds are typically less volatile than stocks, but they can go down in value. And there is also the risk that they will not be paid back.
Interest rate risk
If interest rates increase, the value of bonds decreases in response. The longer the term of the bond, the more sensitive its price is to interest rates. If interest rates see a further increase in 3 or 5 years from now, that will lower the value of bonds purchased today.
Issuer credit risk
There is also the possibility of the bond issuer not being able to pay back the capital they owe the bondholder on maturity. This is rare, which is why bonds are generally considered safer investments than stocks, but the risk is not zero. The more creditworthy the bond issuer, like a provincial or federal government, the more likely they are to make good on their debts. The riskier the bond issuer, like a new or struggling corporation, the higher the possibility that they may not be able to pay back the amount they borrow. The risk of the bond not being paid back is typically reflected in the coupon rate, which is why you see higher rates for longer less creditworthy issuers and bonds of longer terms.
Nevertheless, bonds remain a less volatile investment than stocks and an excellent source of passive income for your portfolio. Carefully selecting the right mix of bonds as investments can protect your capital and generate a good return.
Conclusion: How to buy bonds
Bonds are fixed-income and fixed-term investments, which makes them similar to GICs, but they trade more like stocks. They’re essential to balance and diversify your investment portfolio, and the easiest way to add them is with a bond ETF purchased through your brokerage account. Whether you’re looking to protect your portfolio against stock market volatility, or you just want to add a consistent passive income stream to your investments, bonds are the ideal choice.