Best fixed-income ETFs for 2022

Overview Canadian U.S. International Fixed-Income All-in-One Desert-Island Picks

If any category of the Best ETFs in Canada were to receive scrutiny from our panel this year, it’s fixed income exchange-traded funds (ETFs). After two decades of more or less solid returns, bond portfolios are now taking a hit, as interest rates push yields higher and prices lower. Indeed, the iShares Core Canadian Universe Bond Index ETF (XBB)—which did not make our list but offers broad-based exposure to investment-grade Canadian bonds—is down nearly 10% year-to-date. That’s a far cry from its 4.26% annualized return over the last 22 years.

While MoneySense always recommends owning bonds as part of a well-diversified portfolio, and as fixed income it can still balance out equity ups and downs, especially if there’s a negative market event, the panel had differing opinions on where bonds fit in a portfolio today.

“I’m not committed to bonds at all,” says panellist Yves Rebetez. “People are now seeing the truth in the descriptive ‘return-free risk’ that some have been pointing to for a while. This ‘return-free risk’ is a tongue-in-cheek play on that. Who wants to invest in risk, void of potential returns?”

Panellist Cameron Passmore, however, says the most resilient ETF portfolios “are globally diversified across stock markets, have an appropriate allocation to fixed income, and, if appropriate, a tilt toward value or small-cap value stocks.”

Panellist Ben Felix takes a more pragmatic approach to fixed income. He points out that the yield-to-maturity (YTM) on XBB (full ETF names can be found in the chart below) is currently at 3.48%, while breakeven inflation—the approximate rate of inflation that the bond market is pricing in—is at 1.9%. That means that real YTM for XBB is around 1.4%, which, he says, is not out of line with historical expected returns.

“We also have to keep in mind that bond prices already fell based on the market’s expectations for future rate increases,” says Felix. “The market priced in rate hikes well before the Bank of Canada hiked, not after. On the date of the BoC announcement [March 2, 2022], bond returns were positive. This does not mean that bond prices can’t fall further, but nobody knows that will happen. If an asset class has been declared dead, it’s probably a great time to invest in it.” While this year’s list does look a lot like last year’s, one choice from 2021 didn’t make it back in: the Vanguard Global Aggregate Bond Index ETF (VGAB). While Felix says he’s a “big fan” of global bonds, he admits that VGAB, with its 0.3% expense ratio, is expensive. It also has foreign withholding tax costs based on its structure, which depending on the account type the fund is held in, can add significant costs.

The panel instead kept its focus on Canadian options, including XSB and VSB—two short-term bond funds that were the only two fixed-income products to receive unanimous approval. The panel also added HFR, which is designed to generate income consistent with short-term corporate bond yields.

It’s worth noting that the panel was split on this one. Rebetez voted yes to HFR, which was previously a floating rate note ETF, but it’s not anymore. “It’s now a less-than-one-year investment-grade bond product, which still means low exposure to rising rates.”