The Morningstar Medalist Rating for the BMO Aggregate Bond ETF was recently upgraded as part of a refresh of the Medalist Rating methodology.
Key Morningstar Metrics for BMO Aggregate Bond Index ETF
- : GoldMorningstar Medalist Rating
- : Above AverageProcess Pillar
- : AveragePeople Pillar
- : AverageParent Pillar
BMO Aggregate Bond Index ETF ZAG offers a sensible approach to the broad investment-grade Canadian bond market at a low fee.
The fund tracks the FTSE Canada Universe Bond Index, which sweeps in Canadian-dollar-denominated investment-grade bonds. Eligible issues must have at least one year remaining until maturity and a minimum issuance size of CAD 100 million. The index excludes floating-rate notes, mortgage-backed securities, and convertible bonds, except for contingent capital securities that are triggered by a nonviability event.
Market-cap weighting parks a majority of the fund’s assets with the largest issuers: the Canadian federal and provincial governments. The fund has historically invested more than 70% of its assets here, which includes 25%-30% in Treasuries, 35% in provincial and municipal bonds, and the remainder in agency debt. Provincial bonds are often riskier than Canadian Treasury bills and are not tax-exempt. Thus, these securities offer higher yields than otherwise-equivalent federal bonds. Nonetheless, they still enjoy the full taxation and fiscal power of the Canadian provincial governments and are generally safer than corporate bonds.
By comparison, the average category peer only invests around half of its assets in government and government-related bonds. The fund’s relative overweight in government bonds and underweight in corporate bonds translated into a muted credit risk profile. That helped it fare better during credit shocks, such as the 2020 coronavirus-driven drawdown or the recent market volatility earlier in 2025. However, the lack of credit risk will be a drag on its performance when credit spreads compress.
A heavy allocation to government bonds may also leave this fund more sensitive to rising government bond yields or interest rate increases. Its duration doesn’t deviate too far from the category average, so underperformance has been minimal when yields rise. Overall, the fund’s low fee and superior downside protection should preserve its performance advantage over category peers in the long run.
BMO Aggregate Bond Index ETF: Performance Highlights
From its 2010 inception through September 2025, the fund beat its average category peer by 37 basis points annualized with slightly higher volatility. Its risk-adjusted return, as measured by its Sharpe ratio, is still in line with peers, thanks to its outperformance. Tightening credit spreads throughout 2024 have been challenging for the fund and dented its edge over category peers. Though it recouped some of its loss when market volatility drove investors toward safe-haven assets earlier in 2025, the subsequent rally quickly eroded those gains.
Nonetheless, the fund continues to be more resilient than peers during credit shocks, thanks to its overweighting of high-quality bonds. It outperformed the category average by 1.60 percentage points during the coronavirus-driven shock from Feb. 20 through March 23, 2020, and by 21 basis points during the market’s increased volatility between January and April 2025.
Although its duration isn’t in line with that of the category average, overweighting government bonds can make it more sensitive to interest rate movements. The fund outpaced the category average by 39 basis points when bond yields fell between April and September 2024 as the market reacted to interest rate cuts from the Bank of Canada.
