Bond ETFs in Canada (2026): How They Work, and ZAG, XBB, VAB and Others Compared

A bond ETF is a fund that holds many bonds and trades on a stock exchange, and it pays out the interest those bonds earn. The main choice is what kind of bonds a fund holds (the broad Canadian market, short-term bonds, government bonds, corporate bonds or inflation-linked bonds) and how sensitive its price is to interest rates, which a figure called duration, given in years, measures: it sets how far the price moves when rates change. This page explains both, then compares funds from BMO, iShares and Vanguard using each issuer’s published figures. It doesn’t pick one.

Jump to a category:

• Broad market (aggregate)
• Short-term
• Government
• Corporate
• Other
• Real return

What does a bond ETF hold, and how is it different from owning a bond?

Buying a bond means lending money to a company or a government, and a bond fund pools many bonds; the Ontario Securities Commission’s investor site describes a bond fund as a mutual fund or ETF invested in several different bonds. Most ETFs are designed to follow an index, and the OSC names tracking a bond index as one focus a bond fund can have. BMO says ZAG is built to replicate the FTSE Canada Universe Bond Index, in which each bond is weighted by its market value and the weights are reset daily.

The biggest difference from owning one bond is the end date. A single bond pays back its face value at maturity unless the issuer defaults, but the fund itself has no maturity date, so there is no day when your original amount comes back. Its income changes as the bonds inside it change, so you generally won’t know in advance how much it will pay in a year. Like a stock, an ETF trades throughout the day at the market price. Buying bonds one at a time is covered on our Government of Canada bonds page.

Why do bond ETF prices fall when interest rates rise?

In general, when interest rates rise, bond prices fall, and when rates fall, prices rise; selling a bond after rates have gone up usually means getting less than you paid for it. Duration, given in years, is the measure of how much a bond’s price reacts when rates change. The OSC gives the rule of thumb: a bond with a five-year duration falls about 5% in price for each 1% rise in interest rates, and gains about 5% for each 1% fall.

By the same measure, a short-term fund such as XSB, with a duration of 2.83 years, moves less, and the long federal bond fund ZFL, at 15.67 years, moves more.

What kinds of bond ETF are there?

The table groups the funds by the kind of bonds they hold, as each issuer describes them:

• Broad market (aggregate). Federal, provincial and corporate bonds across the Canadian investment-grade market, generally with more than a year to maturity, as BMO puts it for ZAG.
• Short-term. Investment-grade bonds with short maturities, 1 to 5 years in XSB’s case (XSB, VSB). ZST is shorter still: its bonds mature or reset within a year, and BMO says its portfolio manager adjusts the holdings based on their own analysis. Cash and money market ETFs have their own page.
• Government. Government bonds with more than a year to maturity; ZFL holds long federal bonds with more than ten years to run.
• Corporate. Investment-grade bonds issued by companies. Their prices also move with the issuers’ credit ratings: when a rating goes down, the price drops. High-yield bonds, from companies with low credit ratings, pay more interest and carry the most credit risk; this table has no high-yield fund.
• Real return. Bonds whose interest and face value are adjusted for inflation; XRB holds federal and provincial real return bonds.
• Other. BMO’s ZDB holds bonds whose coupon is no more than 1.4 times their yield to maturity.

The main Canadian bond ETFs compared

The table lists bond index ETFs listed in Canada from BMO, iShares and Vanguard that publish an MER: the largest in each kind of bond by the net assets the issuer reports, plus the tickers readers search for, and ZST, whose bonds a portfolio manager chooses. Funds from other issuers, hybrid bond funds and long-term funds other than ZFL are left out.

Issuer-published figures. Holdings as of September 30, 2026 and October 9, 2026 and August 31, 2026. Duration as of September 30, 2026 and October 9, 2026 and August 31, 2026. MER as of BMO: September 30, 2026; Vanguard: June 30, 2026; iShares: June 30, 2026 (each issuer's latest reported MER). Each ticker links to the issuer's page, which has the current price, holdings, distributions and performance.

Rows are grouped by the kind of bonds the fund holds. Duration is each issuer’s own figure in years. There are no return or yield columns: BMO notes that ZAG’s distribution rates can change, up or down, with market conditions and the fund’s value, and how a fund did in the past can’t tell you how it will do next. Each ticker links to the issuer’s page, which has the current price, holdings, distributions and performance.

How do the funds differ?

Duration. Durations run from 0.38 years for ZST to 15.67 years for ZFL. The short-term and short corporate funds sit near 2.8 years and the broad-market funds near 6.7, so for the same change in rates the broad funds’ prices move more than twice as far.

Credit. Government funds hold federal and provincial bonds, which the OSC says generally have low credit risk; corporate funds hold company bonds, and the broad funds hold a mix of both.

Fees. MERs run from 0.08% for VAB to 0.39% for XRB. The MER comes out of the fund whether it gains or loses.

Holdings. The broad-market funds hold well over a thousand bonds each (1,919 in ZAG), while XRB holds 13.

Distributions. ZCB pays quarterly and XRB twice a year; the other funds pay monthly.

What do the yield figures on a bond ETF mean?

Issuers publish two kinds of yield, and they answer different questions:

• Yield to maturity is, in iShares’ words, “the discount rate that equates the present value of a bond’s cash flows with its market price”; the fund figure is a weighted average across its bonds, and it doesn’t include fees. The fund itself, though, has no maturity date, and its income changes as its bonds change.
• Distribution yield takes the latest distribution, annualizes it and divides by the fund’s net asset value, after fees, so it is what you would get if that payment stayed the same. BMO notes distributions aren’t guaranteed and can change.

BMO gives ZAG’s weighted average yield to maturity as 4.16% as of September 30, 2026. Distribution rates change with market conditions, so the issuer’s page has the current figures. Today’s Government of Canada bond yields are on our bond yield page.

ZAG: what does the BMO Aggregate Bond Index ETF hold and cost?

ZAG tracks the FTSE Canada Universe Bond Index, which BMO describes as the Canadian investment-grade bond market of federal, provincial and corporate bonds rated BBB or higher. As of September 30, 2026 it held 1,919 bonds and about $12.9 billion in net assets. By sector, 43.82% was federal government bonds, 29.51% provincial, 24.90% corporate and 1.73% municipal; by credit rating, 45.34% was AAA and 10.37% BBB, the lowest rating its index allows.

Its MER is 0.09%, with a management fee of 0.08%; it pays monthly and was launched on January 19, 2010. Its duration and yield to maturity are in the duration example and yield section above. BMO’s ZAG page, linked from the table row, has the current price, distributions and performance.

ZAG vs VAB vs XBB

Each of the three holds the broad Canadian bond market.

• Index: ZAG and XBB track the FTSE Canada Universe Bond Index; VAB tracks the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index.
• MER: 0.09% for ZAG, 0.08% for VAB, 0.10% for XBB.
• Duration: 6.69, 6.90 and 6.69 years.
• Holdings: 1,919, 1,316 and 1,925.

The note under the table gives the date of each figure. How the funds differ covers what does separate bond ETFs.

Are bond mutual funds the same as bond ETFs?

They hold the same kinds of bonds: the OSC treats a bond fund as either a mutual fund or an ETF. The difference is how you buy them. A mutual fund is bought or sold on any business day at a price usually set once a day, while an ETF trades on an exchange throughout the day. Both charge an MER, and the OSC says ETF MERs are usually lower than those of mutual funds in the same class. ETFs vs mutual funds compares them in full, and mutual funds explained covers how they’re sold.

Bond ETF or GIC? Most GICs pay a set rate for a set term, a GIC gives back the amount you deposited at the end, and CDIC covers eligible GICs; a bond ETF has no end date, its price moves, and CDIC doesn’t cover ETFs. GIC vs bond ETF vs high-interest savings compares the three, and the GICs hub and GICs vs bonds have the details.

What don’t bond ETFs do?

• They don’t give your money back on a set date. The fund has no maturity date, and if you sell when rates are up you can get less than you paid.
• Their prices fall when rates rise. Longer duration means bigger moves; see the duration example.
• Corporate and high-yield funds carry credit risk. A downgrade lowers a bond’s price.
• Their payments vary. Distributions can change or stop.
• Interest is taxed as income in a non-registered account. iShares says interest is typically taxed at your marginal rate, and a fund set up as a mutual fund trust sends a T3 slip. How ETFs are taxed explains each kind of distribution, and asset location covers which account to hold them in.
• They aren’t covered by deposit insurance, and they can lose money.

Where to go next

• GIC vs bond ETF vs high-interest savings
• Cash and money market ETFs
• All-in-one ETFs, which hold bonds alongside stocks
• Where to buy ETFs: compare brokers
• All ETF guides