Exchanged-traded funds (ETFs) offer a straightforward way to diversify exposure within the bond market. Analysts from Morningstar have identified four ETFs as the top options for Canadian investors.
In selecting the best-performing ETFs, we focused on those that demonstrated strong returns in the Morningstar category over the last 1, 3, and 5 years. Four fixed-income ETFs emerged from this analysis.
Performance of Fixed Income Funds
- BMO Short Corporate Bond Index ETF ZCS
- Vanguard Canadian Short-Term Corporate Bond Index ETF VSC
- Pimco Monthly Income Fund (Canada) PMIF
- Mackenzie Canadian Strategic Bond ETF MKB
The Morningstar Canada Core Bond Index has yielded a return of 1.91% in the last year, with annual rates seeing a rise of 3.49% over three years but a decline of 0.88% over five years.
Identifying Top-Performing Fixed Income ETFs
To find standout fixed income ETFs, we analyzed returns from the prior year, three years, and five years, using data from Morningstar Direct. We focused on Canada-based ETFs that ranked in the top 33% of their category, selecting those with the most economical primary share classes during these time frames. We also filtered by Morningstar medal ratings—bronze, silver, or gold—while excluding those with less than CAD 100 million in assets and lacking full analyst coverage. This process left us with four promising investments.
BMO Short Corporate Bond Index ETF
- Morningstar Medalist Rating: Bronze
- Morningstar Rating: ★★★★★
In the past year, the CAD 4.4 billion fund has returned 5.67%, outperforming the category average of 2.49%. Since its launch in October 2009, it has achieved a 5.85% increase over three years and a 2.52% rise over five years.
The BMO Short Corporate Bond ETF provides thorough access to the short-term Canadian corporate bond market at very low costs. It tracks the FTSE Canada’s Short Corporate Bond Index, excluding investment-grade corporate bonds with maturities from one to five years, and ensures bonds are denominated in Canadian dollars with a minimum issuance size of CAD 100 million. Riskier bond types, like convertibles and floating-speed notes, are also excluded.
However, a heavy concentration exists in the finance sector, with around two-thirds of the fund’s assets in this area. Half of that allocation comes from bonds issued by the five major Canadian banks, which are closely monitored and adhere to strict capital requirements. This could point to potential concentration risks for investors.
About a third of the fund is allocated to regulatory relief obligations from major banks, acting as safety nets in case an issuer is deemed unviable. If such a determination is made, these securities may be converted to common equity, presenting a risk for investors. Yet, large Canadian banks typically enjoy solid credit ratings due to their historical strengths and compliance with rigorous regulations.
The fund holds more credit risk compared to its peers, many of which lean toward short-term government or securitized bonds that generally boast higher credit ratings. At present, about 40% of its bond holdings are rated BBB, a level consistent with its competitors.
This increased credit risk has positively influenced the fund’s returns compared to category norms. Still, if credit spreads widen, the fund could face more significant challenges.
Vanguard Canadian Short-Term Corporate Bond Index ETF
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★★
The CAD 11 billion fund has gained 5.51% in the last year, outpacing the average increase of 2.49%. Launched in November 2012, it has seen a 5.78% rise over three years and a 2.46% increase over five years.
The Vanguard Canadian Short-Term Corporate Bond Index ETF adopts a strategic approach to short-term investment-grade corporate bonds in Canada, focusing on wide-ranging opportunities and low rates. It tracks the Bloomberg Global Integrated Canada’s 1-5 Year Corporate Float Adjustment Index, including eligible bonds with fixed interest rates and a minimum face value of USD 300 million.
Market-value weighting effectively captures the risk-return dynamic of this segment and helps the fund thrive against active management strategies that might struggle to exhibit edge information in this space.
With a portfolio consisting of over 400 bonds from more than 100 issuers, the fund still remains susceptible to risk concentration within the financial services sector, especially among Canada’s prominent banks.
Roughly 40% of its assets are linked to regulatory obligations created during the 2008 financial crisis, with the understanding that if an issuer’s viability is challenged by regulators, investors can face equity conversion, leading to potential losses.
Nevertheless, the fund’s portfolio is a fitting representation of the short-term investment-grade Canadian corporate bond market, boasting a competitive management cost ratio of 0.11%.
Pimco Monthly Income Fund (Canada)
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★
The CAD 31.9 billion fund achieved a 6.26% return over the past year, exceeding the category average of 3.10%. Initiated in September 2017, it has also returned 6.25% over three years and 3.48% over five years.
The management team, led by Dan Ivascyn and Alfred Murata, aims to deliver competitive returns and consistent monthly payouts, regularly reviewing and adjusting their strategies as necessary. Since Ivascyn took charge in April 2007, their institutional shares have seen annual returns of 6.8%, placing it at the forefront of its competition within the multi-sector bond category.
Returns from non-traditional mortgage exposure have diminished recently, but contributions from diverse segments, including non-ministerial, corporate, and emerging market bonds, have remained significant. Moving forward, Pimco anticipates that a wide selection of investment options will mitigate growth impacts on strategy.
Mackenzie Canadian Strategic Bond ETF
- Morningstar Medalist Rating: Bronze
- Morningstar Rating: ★★★★
This bond ETF, with CAD 856.9 million in assets, has risen by 2.86% over the past year, compared to the average category rise of 0.57%. Launched in April 2016, it has seen increases of 4.14% over three years but a decline of 0.32% over five years.
Mackenzie’s strategic bond strategies emphasize a collaborative and research-driven approach, with input from an established management team. Lead Manager Konstantin Boehmer and his expert crew focus on both macroeconomic and credit research to manage interest rate and credit exposure actively.
Prioritizing investment-grade corporate bonds over government types, the strategy has allowed a minimal allocation to non-investment-grade securities. While such leanings have historically favored performance during robust credit conditions, they may also hinder returns if government bonds strengthen.
Overall, despite some sensitivity to credit and interest rate changes, the team’s experienced approach offers an attractive option for investors looking for managed exposure to Canadian bonds.
