Short-term bond funds can provide investors with defensive positions in their portfolios, protecting against rising interest rates. To screen for the top-performing funds in this category, we looked for those with the best returns over the last one-, three-, and five-year periods. Three Canadian short-term fixed-income funds made it through the screen:
- BMO Short Corporate Bond Index ETF ZCS
- Vanguard Canadian Short-Term Corporate Bond Index ETF VSC
- Fidelity Canadian Short Term Corporate Bond ETF FCSB
Screening for the Top-Performing Canadian Short Term Fixed Income Funds
Funds in this category must invest at least 90% of their fixed-income holdings in securities denominated in Canadian dollars with an average duration of less than 3.5 years. In addition, they must invest primarily in investment-grade securities, and no more than 40% of a portfolio’s holdings can be invested in high-yield fixed-income securities.
Over the past 12 months, the average Canadian short-term fixed-income fund returned 2.52%. On an annualized basis, these funds have climbed 4.18% over the past three years and 2.13% over the past five. Meanwhile, the Morningstar Canada Core Bond Index has risen 0.91% over the past 12 months, 2.75% per year over the past three years, and 0.47% per year over the past five.
We looked at returns from the past one, three, and five years using data in Morningstar Direct. We screened for Canada-domiciled open-end and exchange-traded funds in the top 33% of the category using their lowest-cost primary share classes for those periods. We also filtered for funds with a Morningstar Medalist Rating of Bronze, Silver, or Gold. We excluded funds with assets under C$100 million and analyst coverage that was less than 50%. This left three investments.
BMO Short Corporate Bond Index ETF
- : BronzeMorningstar Medalist Rating
- : ★★★★★Morningstar Rating
This C$4.2 billion fund has gained 3.39% over the past year. The BMO fund, launched in October 2009, has climbed 5.28% over the past three years and 2.66% over the past five.
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 come 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 subjected 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 looks 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, analyst
Vanguard Canadian Short-Term Corporate Bond Index ETF
- : SilverMorningstar Medalist Rating
- : ★★★★★Morningstar Rating
Over the past year, the Vanguard fund rose 3.22%. The fund, launched in November 2012, has climbed 5.17% over the past three years and 2.60% over the past five.
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, director
Fidelity Canadian Short Term Corporate Bond ETF
- : BronzeMorningstar Medalist Rating
- : ★★★★Morningstar Rating
This C$344.7 million fund has gained 3.15% over the past year. The Fidelity International fund, launched in September 2019, has climbed 5.20% over the past three years and 2.68% over the past five.
