Best Bond ETF in Canada

Investing in bonds can be a lower-risk way for investors to diversify their portfolios and gain exposure to the fixed income market. Bond funds and bond ETFs offer a convenient way for investors to gain exposure to the bond market without purchasing individual bonds. However, choosing the right bond ETF can be challenging, as there are many options available in Canada.

In this post, we’ll discuss the differences between bond funds and bond ETFs, as well as the advantages of investing in a bond index fund. We will also compare the largest and cheapest broad-based Canadian bond ETFs and discuss key metrics such as Yield to Maturity (YTM), Management Expense Ratio (MER), and fund size, which are important considerations when evaluating bond ETFs.

What is a Bond?

A bond is a type of investment that represents a loan made by an investor to a borrower, typically a government or a corporation. When an investor buys a bond, they are essentially lending money to the issuer of the bond, who promises to repay the loan with interest over time.

Bonds typically have fixed interest rates and a schedule for repayment. They are often considered a lower-risk investment compared to stocks. The returns from investing in bonds are typically less volatile than stocks. However, over the long-run the returns on bonds are typically lower than the returns on stocks.

What is a Bond Fund?

A bond fund pools the capital from multiple investors to create a diversified portfolio of bonds. Bond funds may be managed by professional investment managers (active management) or pre-determined by indexes (passive management).

Bond funds typically hold portfolios of bonds from a variety of issuers including governments and corporations.

One of the primary advantages of bond funds is diversification. By using bond funds, investors can spread their risk across a variety of different types of bonds with a single investment. Additionally, bond funds offer a convenient way for investors to gain exposure to the bond market, without having to purchase individual bonds themselves.

There are many different styles of bond funds for investors to choose from. These include funds that focus on short-term, medium-term, and long-term bonds. Or, some that focus on corporate bonds and others on government bonds.

What is a Bond Index Fund?

A bond index fund is a type of passive investment fund that seeks to track the performance of a specific bond index, such as the Barclays Aggregate Bond Index or the Bloomberg Barclays U.S. Treasury Bond Index. The goal of a bond index fund is to replicate the performance of the index it tracks, rather than trying to outperform through active management.

One of the primary advantages of investing in a bond index fund is that it typically has lower expenses compared to actively managed funds. And, these lower fees contribute to better overall returns for investors.

Bond Fund vs Bond ETF

What is the difference between a bond fund and a bond ETF? Well, a bond fund is typically priced daily and bought and sold using a mutual fund structure. Whereas a bond ETF is an “exchange traded fund” that trades on a recognized exchange like stocks are.

Best Bond ETF in Canada

The following table shows the largest (and cheapest) broad based Canadian bond ETFs. These funds track broad based indexes of Canadian bonds that contain mostly government bonds, but also include corporate bonds.

Whether investors should track broad markets or whether they should focus on specific sectors is something investors and their advisors should consider based on personal objectives and risk tolerance.

	Symbol	YTM	MER	Size (Bil)
Vanguard Canadian Aggregate Bond Index ETF	VAB	3.90%	0.09%	$4.06
iShares Core Canadian Universe Bond Index ETF	XBB	3.88%	0.10%	$4.94
BMO Aggregate Bond Index ETF	ZAG	3.95%	0.09%	$6.30
TD Canadian Aggregate Bond Index ETF	TDB	3.87%	0.09%	$1.00
CIBC Canadian Bond Index ETF	CCBI	3.83%	0.09%	$0.35
Scotia Canadian Bond Index Tracker ETF	SITB	3.90%	0.09%	$0.25

What is Yield to Maturity (“YTM”)?

Yield to maturity (“YTM”) is the total return anticipated on a bond if it is held until its maturity date and all interest payments are made on time. YTM considers a bond’s current market price, its face value, its coupon rate, and the time remaining until maturity.

Investors should compare a bond fund’s yield to maturity when making investment decisions, and not necessarily a bond fund’s distribution yield. Since the amount of cash a bond fund pays to investors may not be the same as the overall returns the fund may be providing.

What is Management Expense Ration (“MER”)?

Management expense ratio (“MER”) is a measure of the total costs associated with managing and operating an investment fund, expressed as a percentage of the fund’s assets under management. The lower the cost of an index ETF, the higher returns for investors when comparing funds tracking the same index.

Why does Size Matter?

Trading costs are a key cost consideration for investors. The fee brokerages provide to make transactions is an explicit cost. But, investors should also consider the liquidity of the investments they are making because the spread between bids and asks (which is a function of their liquidity) is a hidden transaction cost. Generally, the larger the ETF size, the lower the spread. This may not always be the case, but fund size is a good starting point when determining whether to use a certain ETF tracking similar indexes.

Which is the Best Bond ETF in Canada?

The best bond ETF in Canada tracking a broad market bond index is either the Vanguard Canadian Aggregate Bond Index ETF, iShares Core Canadian Universe Bond Index ETF, or the BMO Aggregate Bond Index ETF. This is because they are the cheapest and most liquid of the ETFs considered.

But, depending on your brokerage and style of investing, another one of the ETFs in this list or another ETF altogether may be more suitable. For example, TD Easy Trade offers commission free ETF trades on certain ETFs which includes their own ETFs. Or, maybe your investment objectives are more aggressive than average, and so you may choose a bond ETF with a greater weight towards corporate or high yield bonds.

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