My favourite Canadian bond ETFs

This is not a thorough analysis, but I think these ETFs provide the best risk/reward tradeoffs.

Beware that the US treats Canadian ETFs as PFICs, which can cause tax complications for US Persons. Depending on your tax situation, you may want to avoid holding any Canadian ETFs.

Performance is the 1 year total return to the end of July 2016. Performance is quoted after fees are taken into account. Note that this is NOT the yield.

The "Sec lending" column refers to the percent of assets loaned out in securities lending operations. I did not find any indication that the Vanguard ETFs (VSB, VAB) do any securities lending in their bond ETFs. This interview with Vanguard Canada also says that bond ETFs do not lend securities.

Bond ETFs from safest to riskiest

I think all of these offer attractive risk/return. You will also notice that the performance (1 yr return) rises with the degree of risk. I did not list any government bond ETFs because I am not aware of any that have pure composition and low securities lending.

ETF Description Term Fees Sec lending 1 yr return
VSB Short-term generic 3 yrs 0.11% 0% 1.27%
VSC Short-term corporates 3 yrs 0.11% 0% 1.71%
XSH Short-term corporates 3 yrs 0.14% 0% 1.84%
VAB Generic bond fund 11 yrs 0.13% 0% 4.63%
ZDB Discount bond fund 10 yrs 0.22% 18% 4.41%

VSB: A solid short-term generic bond fund with low fees. It's relatively safe due to the high credit quality and short term exposure, but it does contain corporate exposure. I listed this instead of iShares XSB because the iShares one has very high securities lending. If VSB really has no securities lending, I would consider this a "safe haven".

VSC: Short-term corporate bonds, with more risk (and reward) than VSB. Virtually identical to XSH.

XSH: Short-term corporate bonds, but this has shown slightly better performance than VSC over several years. I think this offers an attractive point on the risk spectrum, even though it has corporate exposure.

VAB: Generic bond fund with longer maturity. This has high credit quality with only 8% rated below the A level. The main risk comes from the long maturity and volatility of these bonds.

ZDB: This fund is interesting because it focuses on bonds with small coupons, generating minimal interest income. The resulting tax-adjusted performance is actually higher than the nominal performance shown in the table, as explained in this article. This is the same tax-efficient strategy that I follow when I purchase bonds individually. It also has reasonably high government bond composition and mostly AAA and AA exposure. However, it has high securities lending and this adds to its overall risk.