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 Canadian bond investors sort through it all, we’ve screened 265 Canadian ETFs across fixed-income categories for those with Gold, Silver, or Bronze Medalist Ratings (meaning Morningstar analysts expect them to outperform relative to its Morningstar Category index or category median over the long term.
For this story, we highlight the eight best bond ETFs for Canadian investors 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
- Vanguard Canadian Short-Term Corp Bd ETF VSC
- iShares Core Canadian Short Term Bd ETF XSB
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). All eight of the best names 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. Analyst Lan Ahn Tran says both funds offer “a well-constructed portfolio of investment-grade Canadian bonds at an attractive price tag.”
Both funds have a higher-than-average allocation to government or government-related bonds, usually more than 70%, compared to roughly 50% 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 Tran. “Overall, the fund’s low fee and superior downside protection should preserve its performance advantage over category peers in the long run.”
The iShares fund is slightly more expensive, with a management expense ratio of 0.10%, compared with 0.09% for the BMO fund.
Vanguard Canadian Aggregate Bond ETF
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★
This 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 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.
“Overall, the portfolio accurately reflects the characteristics of the investment-grade corporate bond market in Canada, and its low annual fee makes it a compelling option,” says Tran.
BMO Short Corporate Bond ETF
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★★
The 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.
“The fund’s corporate focus makes it look riskier than the category average. Peers can invest in short-term government bonds, which tend to carry higher credit ratings,” says Tran. “Overall, the portfolio accurately reflects the characteristics of the short-term investment-grade corporate bond market in Canada, and its low annual fee makes it a compelling option.”
Vanguard Canadian Short-Term Bond ETF
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★
The 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.”
Vanguard Canadian Short-Term Corp Bond ETF
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★
This fund tracks the Bloomberg Global Aggregate Canadian Credit 1-5 Year Float Adjusted Index, a market-cap-weighted portfolio of investment-grade, CAD-denominated corporate bonds that mature in one to five years. The index only includes fixed-rate bonds and those with at least C$300 million outstanding.
“The fund courts a fair amount of credit risk. As of April 2023, 85% of its assets were invested in bonds rated BBB or A, rendering it vulnerable to large drawdowns when credit spreads widen,” says Bryan Armour, Morningstar director of passive strategies research for North America. “Even so, the portfolio is an accurate reflection of the short-term investment-grade Canadian corporate bond market, and its low MER of 0.11% makes it a compelling option.”
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 its peers in its category.
“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.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
