Top Canadian Bond ETFs of 2023

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The stock market tends to get most of the retail investor’s attention, but did you know that the bond market is actually bigger? According to the Securities Industry and Financial Markets Association’s (SIFMA) 2022 Capital Markets Fact Book, the global bond market stood at $126.9 trillion in 2021, compared to $124.4 trillion for the global equity market1.

So, what does this mean for investors? Well, for those seeking a diversified portfolio, bonds remain an indispensable asset to include. Historically, bonds have been less volatile than stocks and have held their value during multiple market crises2.

However, buying individual bonds can be complicated. An alternative is exchange-traded funds (ETFs) that provide exposure to bonds.

What is a bond ETF?

A bond ETF is an investment vehicle that holds a basket of underlying bonds, otherwise known as a fund. Shares of bond ETFs trade openly on stock exchanges, hence, the term “exchange-traded”. By purchasing a share of a bond ETF, investors gain exposure to the price movements of the underlying bonds plus periodic interest payments.

Bond ETFs can hold bonds of all types of issuers, geographies, credit quality, and maturities3. The most common types include:

  1. Issuers: Bond ETFs can be categorized based on whether they hold government or corporate issues.  Examples of the former include Canadian provincial government bonds and U.S. Treasury bonds. Examples of the latter include bonds issued by Canadian banks or U.S. tech companies.
  2. Geographies: Bond ETFs can be categorized based on where their issuers are located. For instance, investors can buy Chinese government bonds or U.K. government gilts.
  3. Credit quality: A bond ETF’s credit quality is an assessment of the risk of the issuer defaulting on interest or principal payments. In general, bonds with a lower credit quality tend to pay higher yields to compensate for the risk.
  4. Maturity: Bond ETFs can hold underlying bonds with varying lengths until they mature. In general, longer maturity bond ETFs tend to pay higher yields, but are more sensitive to interest rate fluctuations.

Top Canadian bond ETFs

The following Canadian bond ETFs rank among the most popular in terms of assets under management (AUM) due to a combination of low fees, broad diversification, and high quality.

ETF NameInception dateExpense ratioHighlights
BMO Aggregate Bond Index ETF (TSX: ZAG)2010-01-190.09%Tracks the FTSE Canada Universe Bond Index.
iShares Core Canadian Universe Bond Index ETF (TSX:XBB)2000-11-200.10%Tracks the FTSE Canada Universe Bond Index.
Vanguard Canadian Aggregate Bond Index ETF (TSX: VAB)2011-11-300.09%Tracks the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index
Horizons Canadian Select Universe Bond ETF (TSX: HBB)2014-05-070.10%Tracks the Solactive Canadian Select Universe Bond Index (Total Return)

Data accurate as of January 30th, 2023

BMO Aggregate Bond Index ETF

The most popular bond ETF in Canada is ZAG, which as of January 30th holds over $6.4 billion in AUM. This ETF provides investors with a diversified portfolio of Canadian federal and provincial government bonds, and investment-grade corporate bonds. The ETF targets a weighted average duration of around 7.4 years.

iShares Core Canadian Universe Bond Index ETF

XBB is essentially iShares’ version of ZAG given that it tracks the same index. It also holds a portfolio of high-quality Canadian government and investment-grade corporate bonds. In terms of metrics, XBB has a very similar weighted average duration of 7.5 years. It is slightly more expensive than ZAG with an expense ratio of 0.10% versus 0.09%.

Vanguard Canadian Aggregate Bond Index ETF

VAB tracks a different index than ZAG or XBB does – the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index. However, the overall differences in portfolio composition are minimal. Like the previous ETFs, VAB also has a similar weighted average duration of 7.4 years. Because it tracks a different index, investors can potentially use VAB as a tax-loss harvesting partner for ZAG or XBB.

Horizons Canadian Select Universe Bond ETF

HBB is a unique bond ETF that does not pay distributions, which makes it very tax-efficient when held outside of a TFSA or RRSP. This ETF uses a derivative called a total return swap to provide exposure to the performance of the Solactive Canadian Select Universe Bond Index (Total Return).  The ETF’s price reflects the index’s performance with all distributions reinvested.

In terms of metrics, HBB has a very similar weighted average duration of 7.7 years. It charges a 0.10% expense ratio but does have an additional swap fee that is capped at 0.15%.

Bond ETF Metrics

When purchasing a bond ETF, investors should primarily pay attention to three metrics:

  1. Duration: Bond prices are inversely related to rate movements. When rates rise, bond prices fall. When rates fall, bond prices rise. Duration is an estimate that measures a bond’s sensitivity to interest rate changes, with a higher duration implying greater sensitivity. For example, a bond ETF with an average duration of 7.4 years can be expected to lose around 7.4% if interest rates rose by 1%, all else being equal4.
  2. Yield-to-maturity: This is a theoretical measure of the total expected return of a bond ETF if all the underlying bonds are held to maturity. Investors can use this along with a bond ETF’s 12-month trailing yield to get an approximation of the return they can expect to earn.
  3. Credit quality: This measures the credit risk of the bond ETF using credit rating scales from organizations like S&P Global, Moody’s, or Fitch Ratings. Bond ETFs will often show a percentage breakdown of how much of its portfolio falls into each rating category.

Finally, bond ETFs can be passively managed or actively managed. Passive bond ETFs track an external bond index. They try to match the performance of that index by buying a sample or all of the bonds tracked by the index. These bond ETFs tend to be lower-cost and simpler.

Actively managed bond ETFs are free to hold any bonds their strategy or manager desires and are not constrained by an index. Goals of active bond ETFs can range from hedging interest rate risk, outperforming a benchmark, or providing higher than average income, to name a few.

Pros of investing in bond ETFs

Bond ETFs can be a great complement to a portfolio of stocks for many reasons. Some of the advantages of investing in bond ETFs include:

  • Lower volatility: Historically, bond ETFs have acted as a ballast for portfolios, helping to reduce fluctuations in most market conditions.
  • Lower drawdowns: Historically, high quality bond ETFs have been able to maintain their value and help reduce losses during bear markets or crashes.
  • Income: Bond ETFs can pay monthly distributions, which are beneficial to investors seeking consistent income. Corporate bond ETFs can pay yields that are competitive with Canadian dividend stocks.

Cons of investing in bond ETFs

That being said, investing in bond ETFs isn’t suitable for all investors. Some disadvantages that may cause certain investors to eschew bond ETFs include:

  • Lower returns: Over long periods of time, bonds tend to return less than stocks. Younger investors with a high-risk tolerance may consider forgoing them altogether.
  • Tax-inefficiency: The distributions from most bond ETFs tends to be taxed unfavourably, thus making them poor holdings outside of a TFSA or RRSP.
  • Interest rate risk: Bond ETFs with longer durations can lose substantial value when interest rates rise quickly, as they did in 2022.

Are bond ETFs right for you?

The question of whether or not bond ETFs are right for you depends on your risk tolerance. If the up and down swings of your stock portfolio have your stomach in a twist, consider adding an allocation to a high-quality bond ETF. This can potentially help lower volatility and reduce losses during a market correction.

For retirees, an allocation to shorter-maturity bond ETFs can help provide greater safety of principal while still ensuring some decent income potential. Even younger investors may benefit from a small allocation to bonds to ensure that they have some assets in reserve to rebalance their portfolio.

Article Sources


  1. SIFMA, "Capital Markets Fact Book, 2022."
  2. Corporate Finance Institute, "Bonds vs Stocks."
  3., "What are bonds?"
  4., "How do bond ETFs work?"

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