Best ETFs for 2023: Best fixed-income ETFs for Canadian investors

By Michael McCullough on May 2, 2023
Estimated Reading Time: 3 minutes

The MoneySense best ETFs panel picks the best fixed-income ETFs for Canadian portfolios.

wdt_ID	FIXED INCOME	Ticker	Management Fee	MER (%)	Holdings	Description
1	BMO Aggregate Bond Index ETF	ZAG	0.08	0.09	1,464	Broad universe of Canadian investment grade government and corporate bonds
2	Vanguard Canadian Short-Term Bond Index ETF	VSB	0.10	0.11	487	Canadian investment grade short-term government & corporate bonds
3	iShares Core Canadian Short Term Bond Index ETF	XSB	0.09	0.10	568	Slightly cheaper than VSB, similar credit risk and rating profiles

Table of Contents: Best ETFs for Canadian Investors

The usually dull fixed income category was rocked in 2022, and not just because broad indices like the FTSE Canada Universe Bond Index lost around 12% of their value. With the sudden rise in interest rates, long-forgotten money-market funds saw a surge in payouts and popularity.

Exchange-traded funds (ETFs) that hold high-interest savings deposits, with ticker symbols like CI High-Interest Savings ETF Currency (CSAV), Horizons High Interest Savings ETF (CASH) and High Interest Savings Account Fund (HISA), are now yielding around 4%. They also have negligible volatility (they tick up and down in a less than 1% range as distributions are made) and easy liquidity (unlike competing guaranteed investment certificates).

Best fixed-income ETFs for Canadian investors

The high-interest savings sub-category is seen as a threat to the status quo. As a result, some bank-owned brokerages prevent their clients from accessing them. They want customers to direct their no-risk savings to their own high-interest savings accounts (HISAs) instead.

It’s only fair to point out other shortcomings of cash ETFs: Your principal is not guaranteed as with a HISA or guaranteed investment certificate (GIC) covered by Canada Deposit Insurance Corporation (CDIC) limits, and the income they provide is fully taxable as interest if held outside a registered account.

Moreover, it would be unwise to write off bond funds after a bad year in 2022. Now that interest rates and bond yields have normalized closer to their historical averages, there is a high possibility bond ETFs could experience capital gains in the coming year should interest rates come down again. Money-market ETFs can only provide income, not capital gains.

Last year was a historical anomaly with stocks and bonds falling in tandem. Henceforward, the negative correlation between equity and fixed-income holdings is almost certain to resume. That means bond ETFs will once again provide your portfolio with diversification benefits, tending to rise when stock markets fall. Money market funds, by contrast, will simply hold their value.

That, in a nutshell, explains why our panel’s consensus gravitates back to bond index funds, in particular the short-duration funds Vanguard Canadian Short-Term Bond Index ETF (VSB) and iShares Core Canadian Short Term Bond Index ETF (XSB), which were unanimous picks. These funds are yielding the same or more as ETFs representing the broader spectrum of longer-term Canadian bonds, without the volatility. If you’re duration-neutral, the also highly rated Aggregate Bond Index ETF (ZAG) has slightly lower fees.