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These are not good times for Canadian bond investors. We’re not seeing anything like the carnage of 2022, but neither are investors making much money from fixed income securities.
The FTSE Canadian Universe Bond Index is ahead only 1.4% so far this year (to June 30). That’s well below what many analysts were predicting six months ago. Back then, the expectation was that declining inflation would encourage the Bank of Canada to keep lowering interest rates, which would translate into higher bond prices (yields and prices move in opposite directions).
That’s not how things have worked out. After rate cuts in January and March, the Bank has entered a pause mode. One of the prime reasons is Donald Trump’s erratic tariff wars, which have created global uncertainty in the stock and bond markets.
In its latest policy statement, the Bank used the word “uncertain” or variations of it four times. It’s especially concerned about the extent to which higher U.S. tariffs reduce demand for Canadian exports and how much this spills over into business investment, employment, and household spending. The Bank is also looking at how much and how quickly cost increases are reflected in consumer prices, and how inflation expectations evolve.
These aren’t the only factors spooking bond investors these days. There’s growing concern about Canada’s debt to GDP ratio and what could be years of deficit spending ahead. Our problem isn’t as great as that of the U.S., which has seen demand for its bonds weaken as investors become more aware of the implications of Mr. Trump’s One Big Beautiful Bill, now making its way through Congress.
Other factors contributing to the underperformance of Canadian bonds include high corporate debt levels, increased debt issuance, delay in a new federal budget that would clarify fiscal policy, and structural economic challenges, such as chronically low productivity.
The U.S. bond market has been struggling too amid inflationary and debt concerns. That also has a major influence on the price of Canadian bonds.
Against that backdrop, let’s look at some of the more popular bond ETFs. These are also recommendations of my Internet Wealth Builder newsletter, and are updated there regularly.
iShares Canadian Core Bond Index ETF (TSX: XBB). This ETF is designed to replicate the returns of the total Canadian bond universe, including government and corporate issues. After getting off to a slow start this year, the fund performed reasonably well during the late winter. But it’s been a rocky spring and the net result is a year-to-date gain of 1.4%. Long-term results show a 10-year average annual compound rate of return of 1.8% to June 30.
The fund was launched in November 2000 and has $8.3 billion in assets under management. The effective duration (a measure of interest rate risk) is 7.05 years. The MER is very low at 0.1%. Distributions are made monthly, currently at a rate of $0.079 per unit ($0.948 a year). At this level, the forward yield is 3.4%.
There are 1,738 positions in the portfolio. About 42.8% of the assets are in bonds maturing in five years or less (lowest risk). More than 23% is in bonds with a maturity of 15 years or more (highest risk).
The bond market has stalled, and it may drift for some time until the trade and fiscal uncertainties become clearer.
iShares Convertible Bond Index ETF (TSX: CVD). The goal is to replicate the performance of the FTSE TMX Canada Convertible Bond Index, net of expenses. Convertible bonds can be exchanged for common stock under the terms of each specific offering. After hitting a 2025 low in February, the trading price for this fund started to move higher, reaching $17.82 in mid-May before pulling back. It has gained 3.4% so far this year.
This is a relatively small fund, with $97.4 million in assets under management. It was launched in June 2011 and has 25 holdings. The MER is on the high side for a bond fund, at 0.5%.
This fund has relatively few positions and tends to make big bets. Some of the positions are unusually large. They include a weightings of about 10% in the convertible bonds of NFI Group, Chemtrade Logistics Income Fund, and Exchange Income Corp. These large positions put the fund in the higher risk category.
Distributions are paid monthly. The current payout is $0.072 per unit, which if continued over a full year (not guaranteed) would work out to $0.864 annualized. That would be a forward yield of 4.9% at the current price.
The key to the success of this fund is the performance of the stocks that underlie the convertible bonds it holds. If they do well, so will the fund. But the managers are making some big bets and investors need to understand the risk that involves. This fund is best suited for aggressive investors.
iShares Core U.S. Aggregate Bond ETF (NYSE: AGG). This is the U.S. equivalent of XBB. It tracks the performance of the entire U.S. investment-grade bond sector. It has been doing slightly better than its Canadian counterpart, with a year-to-date gain of 4.0%. However, it’s down from its early April high of $99.92. The fund returned 1.37% in 2024 and shows a 10-year average annual compound rate of return of 1.7%.
The fund was launched in September 2003 and has about $124 billion in assets under management. The net expense ratio is a rock-bottom 0.03%. This is a huge fund, with 12,533 positions. The credit quality of this fund is good, but lower than previously because of the downgrade in U.S. Treasuries from AAA to AA.
Distributions are made monthly and are currently about $0.32 per unit ($3.84 per year) for an implied yield of 3.9%. However, the distributions can fluctuate, which would obviously affect the yield.
The uncertainty over U.S. trade and fiscal policy will pose headwinds in the coming months.
iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY). This ETF invests in a broad range of U.S. high-yield, non-investment grade bonds, or, as they are more commonly known, “junk bonds.” It has been one of the better performers among bond ETFs in 2025, with a year-to-date gain of 3.8%. As might be expected from its mandate, it has a volatile history for a bond fund. It lost 11.5% in 2022, only to rebound with a gain of 11.34% a year later.
The fund was launched in January 2010 and has $810 million in assets under management. The MER is high at 0.56%. It has 1,272 holdings, each representing a small position. No big bets here. The only position over 2% of assets is CCO Holdings, at 2.46%.
Distributions are made monthly. The current rate is $0.085 per unit ($1.02 per year), but this usually changes every three months. The implied forward yield at the current rate is 6.1%.
Because of the low credit quality of its assets, this fund would be rated higher risk. The high yield may offset that for investors seeking enhanced cash flow.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
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Notes and Disclaimer
Content © 2025 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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