Top bond ETFs in Canada | Find the best fixed income funds

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A bond ETF is a basket of bonds held in one fund, so you don’t have to invest in just a single bond. When you invest in a bond ETF, you’re purchasing a fund that pools bonds on the exchange in the same way you would buy stocks. While bond ETFs don’t typically offer the potential for substantial growth, and they may seem boring compared to other investments, they’re pivotal in portfolio diversification.

A bond ETF will help you mitigate risks while generating consistent income in your portfolio. During turbulent economic times, investors may want to limit their exposure to stocks and riskier assets. Bond ETFs allow you to reduce volatility, especially during market dips. Tariffs and market swings have likely impacted anyone who has been paying attention to their portfolios. 

A bond ETF typically generates income through monthly interest payments, making it easier to plan financially if you’re looking for fixed income or are retired. The main distinction between investing in a bond ETF and a regular bond is that ETFs don’t mature like regular bonds.

Bond ETFs are ideal for conservative investors, retirees and rebalancing your portfolio.

As you get older, they tend to smooth volatility and can also be used for rebalancing a portfolio.

@filbo132 Reddit user

For example, if the market tanks, bonds are usually used to be sold in order to buy more shares of your stocks part (like VTI) and when the market is hot and your percentage in VTI, for example, is way too high, you can take profit to bring it back to its target allocation and you will most likely buy more bonds who usually have an inverse correlation (not all the time, but most of the time).

Because you’re purchasing a pool of bonds held under one fund while being traded on the stock market, the bond ETF that you invest in pays you a portion of the fund’s return since you’re buying a share of it. 

Top bond ETFs in Canada right now

If you’re looking to review some of the top bond ETFs in Canada at the moment, these are your best options. For the sake of this chart, we gathered the annualized distribution yield so that you know what to expect. 

Bond ETF Fast facts: Key characteristics
ZAG (BMO Aggregate Bond Index ETF) MER: 0.09%

Yield: 3.46% 		Solid diversification for set-and-forget investors The most popular bond ETF in Canada, with exposure to Canadian government bonds and investment-grade corporate bonds
XBB (iShares Core Canadian Universe Bond Index ETF) MER: 0.10%

Yield: 3.36% 		Tracks the same index as ZAG (FTSE Canada Universe Bond Index) with a slightly higher fee
VAB (Vanguard Canadian Aggregate Bond Index ETF) MER: 0.09%

Yield: 2.93% 		Tax-loss partner to ZAG/XBB, very similar holdings, different index (Bloomberg Global Aggregate Canadian Float Adjusted Bond Index)
HBB (Horizons Canadian Select Universe Bond ETF) MER: 0.10%

Yield: 3.25% 		No distributions (total return swap). Tax-efficient when held outside of an RRSP or TFSA accountIdeal for long-term investors
XSB (iShares Core Canadian Short Term Bond Index ETF) MER: 0.10%

Yield: 3.21% 		Low cost, broad exposure to Canadian investment-grade bonds. Pays monthly cash distributions with low interest rate riskIdeal for individuals seeking a secure short-term investment
VSB (Vanguard Canadian Short-Term Bond Index ETF) MER: 0.11%

Yield: 2.82% 		Short-term bonds if you expect interest rates to drop Offers exposure to the short-term, investment-grade Canadian bond market by tracking the Bloomberg Global Aggregate Canadian Government/Credit 1–5 year Float Adjusted Bond Index
ZCS (BMO Short Corporate Bond Index ETF) MER: 0.11%

Yield: 3.26% 		Invested in corporate bonds by tracking the FTSE Canada Short Term Corporate Bond Index. Ideal for investors looking for defensive income
Track all markets on TradingView

NOTE: You’ll find different yields when searching for the best bond ETFs in Canada, since they fluctuate with interest rates. For example, Yahoo! Finance lists the annual yield, while the fund’s website notes the annualized distribution yield. The numbers could be completely different. 

Related read: Best ETFs for Canadian investors

VAB and XBB cover the whole bond market; there are other etfs that cover segments: governments, corporate, junk, short, long etc. The interest paid is mostly determined by the rating companies (Moody's, Standard and Poor etc) and is meant to reflect the risk of default, e.g. governments can borrow for less than companies; the yield curve reflects the different maturities and expectations about future rates, typically the longer bonds yield more and are therefore more sensitive to rate changes (duration) but not always (you may have heard references to inversions of the curve). The market reflects the larger economy and interest rates (inversely) in particular. Bonds generally are considered less risky than stocks and usually yield less hence their role in a balanced portfolio. Choosing particular segments of the market is analogous to stock picking, you can increase your yield and risk; eg, junk bonds can have high yields but those companies have to pay a lot to borrow for a reason.

@Heavy_Direction1547 Reddit user

When comparing the best Canadian bond ETF options, you’ll want to ensure that you find the investment that matches your financial goals. If you’re looking for safety and reduced rate sensitivity, you’ll want to consider short-term bonds, as they move with interest rates. If you have a longer time horizon, you may embrace taking some risks by looking for corporate bond ETFs.

💡 Pro tip: Use these as part of a bond ladder or diversify by term length and issuer (government vs. corporate).

How to choose the right bond ETF

As a young investor, consider adding a bond ETF to your portfolio for rebalancing or some guaranteed income. However, with a longer-term horizon, you may only want to allocate a smaller percentage of your portfolio towards this stable asset. 

If you’re retired or close to retiring, you may want higher bond exposure for capital preservation since you’ll also want a predictable income stream. Bond ETFs can act as a buffer in uncertain markets since you likely don’t want to stress about fluctuations due to unforeseen circumstances.

You can invest in different types of bends, based on:

  1. 1 Issuers
  2. 2 Location
  3. 3 Credit quality
  4. 4 Maturity dates

If you’re looking to add a bond ETF to your portfolio, here are a few points to consider before making a decision on where to invest your money. 

Duration

The duration is expressed in years and it tracks how sensitive the bond ETF is to interest rates. You’ll want to base your decision on the duration of the bonds because bond prices have an inverse relationship with interest rate decisions. This means that when interest rates rise, bond prices will fall. When rates rise, bond prices drop. 

On the other hand, short-term bonds are ideal for safety. The general rule is that longer maturity bond ETFs pay higher yields but are more sensitive to interest rate decisions. This is something to keep in mind if you plan to access your funds in the near future for a major purchase, such as a wedding or your first home.

Yield-to-maturity vs. trailing yield

Yield-to-maturity will help investors determine the total expected return if all of the bonds in the ETF are held until maturity. Some argue this isn’t as important because fund managers can sell bonds before the maturity date. 

The trailing yield is the bond ETF’s one-year yield, which helps determine a rough percentage of what to expect. 

The distribution yield is calculated as the most recent monthly distribution, multiplied by 12 (to annualize the amount), divided by the share price.

@Sagelllini Reddit user

@Sagelllini went on to state:

“Remember, the distribution yield is what you will receive in cash. The extra yield in the SEC Yield is only generally reflected in the share price, and can only be redeemed when sold, or if the fund sells the underlying bond and distributes the amount as a dividend.”

Credit quality

Bond ETFs can be classified based on the credit quality of the bond issuers in the portfolio, which measures the risk of the issuer defaulting. You’ll want to review the credit risk of the bond ETF by using one of the credit rating scales. For example, government bonds are generally considered safer, while corporate bonds typically offer a higher yield. However, it’s worth mentioning that bond ETFs that hold bonds with a lower credit quality will pay higher returns in exchange for accepting risk. 

Index vs active

Bond ETFs can be managed passively or actively. A passive bond ETF tracks an external bond index and aims to match its performance by investing in a sample of the bonds in the index. These are often the lower-cost and simpler option for bond ETFs.

An active bond ETF will hold any bonds that the manager chooses to invest in, without setting restrictions based on the index it invests in. The primary goal of an active bond ETF is to provide a higher return while also mitigating interest rate risk.

Pros and cons of bond ETFs

  • Low cost and passive exposure to hundreds of bonds, so you don’t have to select just one.
  • Easy to buy and sell at any time, compared to purchasing individual bonds. Bond ETFs such as XBB will hold over 1,000 bonds, which will diversify your exposure to fixed-income products.
  • Great for TFSA or RRSP income strategies due to the payouts. When you receive interest payments (in the form of a “coupon”, you get predictable cash flow, which is much better than most stocks or individual bonds.
  • Instant diversification to your portfolio, especially during volatile times in the stock market.
  • Bond ETFs with a longer duration could lose value when the central banks raise rates. The value can drop if interest rates rise quickly (as seen in 2022).
  • Bond ETFs can provide a lower return in the long run compared to stocks. As a younger investor with a higher risk profile, you may want to consider ignoring them or limiting your exposure to safer assets.
  • Taxed as income in taxable accounts, which will impact your returns. Not ideal investments outside of a TFSA or RRSP account.
  • Not all bond ETFs are created equal, and some carry higher risk.

Where to buy bond ETFs in Canada

If you’re looking to add bond ETFs to your portfolio in Canada, you have many options. 

Online Brokerages

We recommend low-cost online brokerages, such as Questrade, Wealthsimple Trade or TD EasyTrade. The goal is to look out for platforms with no commissions on ETF purchases, similar to how you would invest in stocks.

You can purchase ETFs commission-free on Questrade, like you would with stocks, and it’s much simpler than tracking bond maturity dates. 

You’ll want to research the holdings of the bond ETFs to ensure that the return and the potential risk are worth it to you. For example, on the Questrade platform, they note that corporate bond ETFs will usually come with increased risks, but a higher amount of interest since they’re typically unsecured bonds. This means that the bonds don’t have any assets or physical property that secures them, as they rely solely on the credit rating. The credit ratings are usually conducted by Standard & Poor, Fitch or Moody’s, so you’ll want to verify these sources before deciding on a bond ETF.

Bond ETF considerations

You’ll also want to consider the following when selecting a bond ETF:

  • DRIP/Auto-investing: You may want to ensure that distributions are automatically reinvested so you could purchase more of the bond ETF. For example, Vanguard's distribution reinvestment plan (DRIP) reinvests distributions without charging a commission.
  • TFSA/RRSP integration for tax advantages: Since bond ETFs will provide a consistent income, you’ll want to consider purchasing them in a TFSA or RRSP account for savings.

Are bond ETFs right for you?

Bonds, in general, are ideal investments when you want to focus on stability instead of maximum growth. During periods of market volatility, you may not want to deal with the stress that comes from fluctuations. If you’re concerned about the stock market, you’ll be happy to hear that bond prices move independently of stocks. This provides you with protection during stock market sell-offs. A bond ETF can also be a higher source of income, compared to a savings account or a GIC. 

One of the primary advantages of investing in a bond ETF is that it invests in a diverse range of bond types, offering you exposure to different kinds of markets. There are ETFs that track bond issues by governments, corporations, municipalities and broad market funds that track a combination. You can also invest in actively managed bond ETFs or go with a passive one. 

If you’re looking to simplify your investments, consider selecting a bond ETF to avoid the hassle of managing different maturity dates by investing in individual bonds. The fund management will handle everything, from selecting the bonds to rebalancing the fund, for an annual management fee. 

The good news is that when you search for the best Canadian bond ETF, you’ll find numerous options from which to choose. You can focus on matching the bond ETF type that you invest in to your time horizon and risk tolerance levels. For example, if you want to hold the investment for a long time in an RRSP account and don’t mind taking on some risks, you can find higher yields with a corporate bond ETF.

Martin Dasko Author

Martin Dasko has been helping millennials make sense of their finances without missing out on life since 2008. Martin started his financial writing career as a business major in Ryerson when he realized that there was so much school didn't teach us about managing money. Martin covers topics ranging from investing in real estate to trying to build your credit score without letting life pass you by.

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