4 Top-Performing Fixed-Income ETFs | Morningstar

Exchange-traded funds can be an easy way to gain diversified exposure to the bond market. These four ETFs are the best-performing options for Canadian investors, according to Morningstar’s analysts.

To screen for the top-performing ETFs, we looked for those with the best returns within their Morningstar Categories over the past one-, three-, and five-year periods. Four fixed-income ETFs made it through the screen.

Fixed-Income Fund Performance

• 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 Fixed Income ETF MKB

The Morningstar Canada Core Bond Index has returned 1.91% over the past 12 months. On an annualized rate, the index is up 3.49% over the past three years and down 0.88% over the past five years.

Screening for the Top-Performing Fixed-Income ETFs

To find the best fixed-income ETFs, we looked at returns data from the past one, three, and five years, using data available in Morningstar Direct. We screened for Canada-domiciled ETFs in the top 33% of the category using their lowest-cost primary share classes for those periods. We also filtered for ETFs with a Morningstar Medalist Rating of Bronze, Silver, or Gold. We excluded ETFs with assets under CAD 100 million and analyst coverage that was not 100%. This left four investments.

BMO Short Corporate Bond Index ETF

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★★

Over the past 12 months, the CAD 4.4 billion fund has gained 5.67%, while the average fund in its category is up 2.49%. The BMO fund, which launched in October 2009, has climbed 5.85% over the past three years and gained 2.52% over the past five years.

“BMO Short Corporate Bond ETF offers a comprehensive slice of the short-term Canadian corporate bond market at a razor-thin price.

The fund tracks the FTSE Canada Short Corporate Bond Index, which sweeps in investment-grade corporate bonds with between one and five years remaining to maturity. Qualifying bonds must be denominated in Canadian dollars and have a minimum issuance size of CAD 100 million. The index also excludes riskier types of bonds, such as convertibles and floating-rate notes. It weights selected bonds by their market value. Active managers have less room to find an informational edge here because of the greater certainty of investment-grade bonds’ future cash flows. A passive, market-value-weighted portfolio is a sound approach in this market.

The investment-grade corporate bond market in Canada is heavily concentrated in the financials sector, especially Canada’s five biggest banks. This tilt is even more pronounced in the short-term segment of the market. This reflects the available opportunities in this market, though investors should be aware of these concentration risks before taking the plunge. The fund tends to park around two-thirds of its assets in the financials sector. Around half of this stake comes from bonds issued by the five largest Canadian banks—the fund’s top five issuers. These institutions are classified as domestic systemically important banks and are subject to strict capital requirements and regulatory scrutiny.

The fund also carries around a third of its assets in regulatory bail-in debts, mostly from large banks. It only includes bail-in debts higher in the capital structure and excludes riskier Additional Tier 1 debts. These securities will be converted to equity if Canadian regulators deem the issuer no longer viable. Nonviability events would unlikely be a surprise as larger Canadian banks must comply with robust capital requirements and close regulatory scrutiny. The Canadian banking sector has also historically displayed its strength, which translates to credit ratings that range between AA and A for these securities.

The fund’s corporate focus makes it look riskier than category peers that have a broader scope. Many category peers invest in short-term government or securitized bonds, which tend to carry higher credit ratings. As of April 2025, the fund invested around 40% of its assets in bonds rated BBB, which was similar to corporate-heavy peers in its category.

The additional credit risk has boosted the fund’s absolute and risk-adjusted returns compared with the category average in recent years. Nonetheless, the fund will likely suffer more when credit spreads widen.”

—Lan Anh Tran, Morningstar analyst

Vanguard Canadian Short-Term Corporate Bond Index ETF

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★★★

The CAD 1.1 billion fund has climbed 5.51% over the past 12 months, outperforming the average fund in its category, which rose 2.49%. The Vanguard fund, which launched in November 2012, has climbed 5.78% over the past three years and gained 2.46% over the past five years.

“Vanguard Canadian Short-Term Corporate Bond Index ETF takes a sensible approach to the Canadian short-term investment-grade corporate-bond market by leveraging its broad scope and low fee.

The fund tracks the Bloomberg Global Aggregate Canadian 1-5 Year Corporate Float Adjusted Index, which includes investment-grade corporate bonds denominated in Canadian dollars with an effective maturity between one and five years. Qualifying issues must have a fixed rate and at least USD 300 million in outstanding face value. Eligible bonds are weighted by their market value, which pulls the fund toward the largest and most liquid issues.

Market-value-weighting is a sound approach to the short-term investment-grade corporate-bond market. The fund accurately captures this segment’s risk/return characteristics by leveraging the market’s collective wisdom about the relative value of each of its holdings to size its positions. Active managers struggle to find an informational edge relative to riskier bond segments because the expected future cash flows for short-term, high-quality bonds are more certain.

Representing the opportunity set, this fund’s portfolio holds over 400 bonds from over 100 issuers. But this portfolio also inherits this market’s risks, namely its concentration in issuers from the financial-services sector and the convertible debt increasingly issued by Canada’s top banks.

Roughly 40% of the fund is invested in nonviability contingent capital debt or senior bail-in bonds. These securities were created to help economies withstand major financial stress as a result of the 2008 global financial crisis. If the issuer of these bonds is deemed nonviable by Canadian regulators, the debt would permanently convert to stock, resulting in losses for those investors. They typically receive slightly lower credit ratings than comparable debt offered by the same issuer and compensate investors with slightly higher yields for this unlikely tail risk.

Even so, the portfolio is an accurate reflection of the short-term investment-grade Canadian corporate-bond market, and its low management expense ratio of 0.11% makes it a compelling option.”

—Bryan Armour, Morningstar director

Pimco Monthly Income Fund (Canada)

• Morningstar Medalist Rating: Silver
• Morningstar Rating: ★★★★

The CAD 31.9 billion fund has climbed 6.26% over the past 12 months, outperforming the average fund in its category, which rose 3.10%. The Pimco fund, which launched in September 2017, has climbed 6.25% over the past three years and gained 3.48% over the past five years.

“Dan Ivascyn, Alfred Murata, and Joshua Anderson work to generate competitive returns and consistent monthly payouts, which they revisit each year and adjust when appropriate. Ivascyn is Pimco’s CIO; he and Murata are past Morningstar Managers of the Year. They draw on an army of managers and analysts in groups covering virtually every corner of the bond market, as well as the guidance of Pimco’s investment committee and input from macroeconomic specialists. That kind of description can come across as hype for some firms, but this one has a history of making great use of those resources.

That has been especially true here. The institutional shares of the strategy’s US mutual fund posted a 6.8% annualized return through March 2025 since Ivascyn began managing the fund at its April 2007 inception. That placed it at the top of its (distinct) rivals in the multisector bond Morningstar Category, with a history of lower volatility on average.

Although they remain a cornerstone allocation, the strategy’s nonagency mortgage exposure came down to 25% at the end of March 2025, from a recent high of 33% in February 2023. The team had gorged on beaten-down housing bonds after the financial crisis, and their fat subsequent returns—aided by a long trend of improving sector fundamentals—helped fuel the strategy for years. Outstanding supply of those legacy, precrisis bonds has shrunk dramatically, though, and in recent years the team has snapped up large chunks of older mortgages from banks and ventured more broadly into newer nonagency structures.

The strategy has squeezed out returns from other sources, though, including meaningful contributions over the years from other nonagency securitized sectors, corporates, emerging markets, currency, and sensitivity to government debt markets. That, and the team’s proven ability to capitalize on Pimco’s resources, bode well for the strategy’s future, even as it relies much less on its legacy mortgage positions. Pimco is confident that its broad and deep reservoir of choices across global markets neutralizes the impact of the strategy’s growth. But it’s still an issue worth monitoring as it has ballooned to more than USD 310 billion across vehicles as of March 2025, a more than 30% increase since the end of 2023.”

—Eric Jacobson, Morningstar senior principal

Mackenzie Canadian Strategic Fixed Income ETF

• Morningstar Medalist Rating: Bronze
• Morningstar Rating: ★★★★

Over the past 12 months, the CAD 856.9 million Mackenzie Canadian Strategic Fixed Income ETF rose 2.86%, while the average fund in its category rose 0.57%. The Mackenzie fund, which launched in April 2016, has climbed 4.14% over the past three years and lost 0.32% over the past five years.

“The Mackenzie Strategic Bond strategy (including Mackenzie Canadian Strategic Fixed Income ETF) earns initial Above Average People and Average Process Pillar ratings. These ratings reflect the strategy’s experienced, collaborative portfolio-management team and its competent approach within the Canadian fixed-income Morningstar Category.

Lead manager Konstantin Boehmer has guided the team’s evolution toward a broad, research-driven, and collaborative approach. Together with veteran portfolio managers Felix Wong and Mark Hamlin, he leads this investment-grade bond strategy. Their work draws upon a stable team of portfolio managers with broad expertise and an expanding credit research team of five analysts.

The strategy’s process is grounded in a blend of macroeconomic analysis and fundamental credit research, with active management of interest rate and credit exposures using qualitative and quantitative insights. The team’s approach is broadly in line with industry standards: It seeks to add value by adjusting the portfolio’s exposure to credit and interest rate risk.

The managers typically favor investment-grade corporate bonds over government issues, with no more than 5% of the portfolio in non-investment-grade securities. The team manages the mutual fund and exchange-traded fund vehicles in the same way, but the Mackenzie Strategic Bond Fund differs from Mackenzie Canadian Strategic Fixed Income ETF by allowing up to 2.5% in private credit. It held less than 1% position in the asset class as of March 2025. The strategy’s tilt toward lower-rated BBB credit has historically driven outperformance versus its peers during strong credit markets, but this positioning can cause the fund to lag when government bonds rally.

Since Boehmer was named to this strategy in July 2013, performance has been competitive, with the F series outpacing both the Morningstar Canada Core Bond Index and the peer group average on an absolute and risk-adjusted basis. But results in 2023 and the first quarter of 2025 highlight the strategy’s sensitivity to credit and interest rate positioning, where tactical calls detracted from returns. Overall, the strategy’s track record and experienced team highlight its appeal for investors seeking actively managed exposure to Canadian fixed income.”

—Luke Richardson, Morningstar analyst