Short-term bond exchange-traded funds can help make portfolios defensive and cushion against stock market downturns and rising interest rates. Morningstar Medalist ratings can help investors identify the funds that our analysts believe have the best chance of outperforming.
Funds in the Canadian short-term fixed income 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 fixed-income securities, such that the average credit quality of the portfolio as a whole is investment grade (BBB or equivalent rating or higher) and not more than 40% of the portfolio’s holdings are high-yield fixed-income securities.
The 4 Best Canadian Short-Term Fixed Income ETFs to Buy in 2026
To find the best Canadian short-term fixed-income funds and ETFs to buy, we screened for the lowest-cost primary share classes with
- BMO Short Corporate Bond Index ETF ZCS
- iShares Core Canadian Short Term Bond Index ETF XSB
- Vanguard Canadian Short-Term Bond Index ETF VSB
- Vanguard Canadian Short-Term Corporate Bond Index ETF VSC
Morningstar expects these funds to outperform their peers over a full market cycle. But though all the funds on our list fall into the same category, they may practice different strategies and behave differently. Investors need to do some homework to understand exactly what a particular fund invests in before buying.
Here’s a quick look at each of the best Canadian short-term fixed-income funds. Be sure to review a fund’s complete report for more details.
BMO Short Corporate Bond Index ETF
- : C$4.8 billionFund Size
- Index Fund: Yes
- MER: 0.11
- : SilverMorningstar Medalist Rating
This C$4.8 billion fund has climbed 3.97% over the past 12 months, outperforming the average fund in its category, which rose 3.02%. The BMO fund, launched in October 2009, has climbed 6.24% over the past three years and 2.96% over the past five.
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 over half its assets in the financials sector. A third of the portfolio comes from bonds issued by the five largest Canadian banks, which are also 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 displayed its strength, translating to credit ratings that range between AA and A for these securities.
The fund’s corporate focus makes it look riskier than Morningstar 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 May 2026, the fund invested roughly 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. But it also means the fund will likely suffer more when credit spreads widen.
Brendan McCann, associate analyst
Read Morningstar’s full report on the BMO Short Corporate Bond Index ETF.
iShares Core Canadian Short Term Bond Index ETF
- : C$4.3 billionFund Size
- Index Fund: Yes
- MER: 0.1
- : GoldMorningstar Medalist Rating
This C$4.3 billion fund has climbed 3.14% over the past 12 months, performing roughly in line with the average fund in its category, which rose 3.02%. The BlackRock fund, launched in November 2000, has climbed 5.03% over the past three years and 2.15% over the past five.
IShares Core Canadian Short Term Bond ETF’s broad scope and low fee work well in the short-term, investment-grade Canadian bond market.
The fund tracks the FTSE Canada Short Term Overall Bond Index. The index is a market-value-weighted portfolio of investment-grade bonds with one to five years remaining to maturity. Eligible bonds must have a minimum issuance size of CAD 100 million and a fixed coupon rate. The index excludes mortgage-backed securities and convertibles, but it accepts contingent capital debts. These bonds must be converted to equity or written down at the regulator’s discretion in a nonviability event. Most of these bonds are issued by domestic systemically important banks (D-SIBs) as part of their capital requirements. Despite the added layer of uncertainty, a nonviable designation is unlikely to be a surprise, and regulators will likely continue to work closely with these banks before making such a determination.
The fund’s market-value weighting tilts it toward the largest issuers, namely the Canadian government and financial firms. Government bonds claim around 70% of the portfolio, much higher than the 30% to 35% held by the average category peer. This includes around 20% in provincial bonds, and the rest in federal government bonds. Within the fund’s over-30% stake in corporate bonds, a hefty 20 percentage points tend to be allocated to financial institutions. Still, category peers often invest even more here.
The focus on government bonds pushes the fund toward higher-quality bonds within the investment-grade space. It often invests around half of its assets in bonds rated AAA, compared with 25% for the category average. Category peers tend to load up on bonds rated A and BBB instead, which can give them a leg up when credit spreads tighten. However, the fund’s strong credit-quality profile has and should continue to deliver superior protection during credit shocks. For example, it beat the category average by 40 basis points when credit spreads widened over the first four months of 2025.
The index excludes bonds with less than one year remaining until maturity, which many category peers reach into. This lengthens the fund’s average duration by a few months compared with the category average. It should be more vulnerable to interest rate shocks, such as the interest-rate-driven meltdown in 2022, than some of its peers.
Lan Anh Tran, analyst
Read Morningstar’s full report on the iShares Core Canadian Short Term Bond Index ETF.
Vanguard Canadian Short-Term Bond Index ETF
- : C$1.5 billionFund Size
- Index Fund: Yes
- MER: 0.12
- : GoldMorningstar Medalist Rating
This C$1.5 billion fund has climbed 3.03% over the past 12 months, performing roughly in line with the average fund in its category, which rose 3.02%. The Vanguard fund, which launched in November 2011, has climbed 4.94% over the past three years and 2.14% over the past five.
Vanguard Canadian Short-Term Bond ETF provides a market-value weighted portfolio of short-term Canadian bonds. The fund’s broad scope and low fee should provide a long-term edge.
The fund tracks the Bloomberg Global Aggregate Canada Government/Credit 1-5 Year Float Adjusted Index. The index is a market-value-weighted portfolio of investment-grade bonds with one to five years remaining to maturity. Eligible bonds must have a minimum outstanding amount of CAD 150 million and a fixed coupon rate. The index excludes bonds with equity features such as preferreds or convertibles, but it accepts contingent capital debts. These bonds must be converted to equity or written down at the regulator’s discretion in a nonviability event. Most of these bonds are issued by domestic systemically important banks as part of their capital requirements. Despite the added layer of uncertainty, a nonviable designation is unlikely to be a surprise, and regulators will likely continue to work closely with these banks before making such a determination.
Market-value weighting tilts the fund toward the largest issuers, namely the Canadian government and financial firms. Treasuries claim almost one third of the portfolio, much higher than the 10% held by the category average. The fund also tends to overweight provincial and agency debt, while category peers hold more corporate bonds. The fund has a hefty 20% in bonds from financial issuers, but that’s still lower than the category average.
The focus on government bonds pushes the fund toward higher-quality bonds within the investment-grade space. It often invests around half of its assets in AAA rated bonds, compared with 25% for the category average. Category peers tend to load up on bonds rated A and BBB instead, which can give them a leg up when credit spreads tighten. However, the fund’s strong credit quality profile has and should continue to deliver superior protection during credit shocks. For example, it beat the category average by 40 basis points when credit spreads widened over the first four months of 2025.
The index excludes bonds with less than one year remaining until maturity, which many category peers reach into. This lengthens the fund’s average duration by a few months compared with the category average. It should be more vulnerable to interest rate shocks, such as the interest rate-driven meltdown in 2022, than some of its peers.
Lan Anh Tran, analyst
Read Morningstar’s full report on the Vanguard Canadian Short-Term Bond Index ETF.
Vanguard Canadian Short-Term Corporate Bond Index ETF
- : C$1.5 billionFund Size
- Index Fund: Yes
- MER: 0.11
- : GoldMorningstar Medalist Rating
This C$1.5 billion fund has gained 3.78% over the past 12 months, while the average fund in its category is up 3.02%. The Vanguard fund, launched in November 2012, has climbed 6.08% over the past three years and 2.89% over the past five.
Correction (Aug. 25, 2025): This report was published with an incorrect ratings display, showing a Morningstar Medalist Rating of Neutral instead of Silver. The rating and report now reflect the correct Silver Medalist Rating.
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
Read Morningstar’s full report on the Vanguard Canadian Short-Term Corporate Bond Index ETF.
