Short-duration bond exchange-traded funds (ETFs) and broad-market fixed-income ETFs have remained in demand this year, just as they were in 2024. But investors are exercising caution, mindful of the ongoing tariff war and mounting U.S. government debt concerns. Canada’s fixed-income ETF sector totalled $173.3 billion as of the end of September — accounting for 26% of all Canadian ETF assets.
During the first nine months of 2025, fixed-income ETFs captured 31.3% of total ETF net creations in Canada, compared with 31.5% for all of 2024, according to data from National Bank Financial.
Money market ETFs continue to attract capital. National Bank reported in May: “Investors have taken a fairly tactical approach to fixed-income ETFs this year — lengthening duration after yield increases, then shortening it again amid uncertainty.”
Even while caution remains, continued inflows into corporate bond ETFs and aggregate bond ETFs show there’s also appetite for risk, National Bank said.
“In their product selection, investors have both extended duration and moved down the credit-quality scale,” it said.
Barbell strategies
The strong demand for short-term credit and broad-market bond funds again points to the popularity of the so-called barbell portfolio strategy. The approach involves overweighting fixed-income positions at both ends of the yield curve — short- and long-term maturities — while underweighting the middle segment.
“This strategy tends to gain favour when the yield curve is dislocated and short- and long-term rates are more attractive,” said Laurent Boukobza, vice-president and ETF strategist at Mackenzie Investments.
However, this barbell in today’s market — overweighting short-term and total-market ETFs — is confined largely to Canadian holdings. The long end of the barbell is also a mixed bag, since total-market Canadian ETFs hold a blend of short-, medium- and long-term bonds, including federal, provincial and corporate issues.
For instance, the BMO Aggregate Bond Index ETF (TSX: ZAG) showed a weighted average duration of 7.05 years in September, with holdings split across 41% federal bonds, 32% provincial and 25% corporate.
The traditional barbell — dividing a portfolio cleanly between short- and long-term bonds while underweighting the middle — is less in vogue.
U.S. credit ETFs, however, remain somewhat popular.
National Bank doesn’t specify which types of U.S. credit have drawn Canadian investor interest. Yet long-term U.S. Treasuries have clearly lost appeal, despite anticipated rate cuts from the U.S. Federal Reserve.
“For the first time since the Second World War, investors see serious issues with U.S. public finances,” said Yanick Desnoyers, chief economist and strategist at Addenda Capital. “The debt is simply too high. Thirty-year Treasuries are frightening — projections suggest debt could swell to 200% of GDP over that period.”
That view is shared by Frédéric L’Heureux, portfolio manager at Desjardins Securities Inc. “For long-term U.S. bonds, the risks are significant given the high deficits. That’s putting upward pressure on long-end yields. We’re not at a point where those securities look like an opportunity.”
ETF discounts amid U.S. volatility
This spring, U.S. tariff announcements triggered market turbulence, prompting widening discounts between some ETFs’ market prices and their net asset values (NAVs), TD Securities noted.
During this bout of volatility, notable discounts and heavy trading volumes emerged among senior loan ETFs, high-yield bond ETFs and collateralized loan obligation ETFs.
Reflecting the relative liquidity of these markets, the discounts remained under 1% of NAV — a level TD described as moderate. Despite high volumes, senior loan ETFs traded at smaller discounts than in March 2020, when Covid fears gripped the market. The Invesco Senior Loan ETF (NYSE-ARCA: BKLN), for example, saw a 3.86% discount on March 23, 2020.
Investors should remain aware of this additional risk, which hasn’t touched higher-quality (investment-grade) ETFs. During April’s market turbulence, these funds experienced “modest turnover, modest creations and redemptions, and no significant dislocations between ETF prices and their NAVs,” TD noted.
Canada’s safer haven
The credit risk landscape in Canada is entirely different, said Addenda’s Desnoyers. While the U.S. Federal Reserve’s policy rate was in the 3.75%–4.0% range after its last cut in October, the Bank of Canada’s stands at 2.25%. Canada’s federal debt represents roughly 40% of GDP — far below the U.S. level.
“There’s no debt sustainability issue here like in the U.S.,” he said.
As a result, Canada offers a relatively safer haven amid current global turbulence — a fact reflected in National Bank’s data, which show that most bond ETF assets continue to flow into Canadian markets.
L’Heureux sees the same trend in his portfolios. “The strength of the Canadian economy isn’t the same as in the U.S., which is why most of our exposure is in Canada.”
National Bank data also show that internationally exposed fixed-income ETFs have become more appealing.
“There are countries like Brazil and Mexico where real rates — nominal rates minus inflation — remain quite high and attractive,” said Mackenzie’s Boukobza. “We also like New Zealand, whose economy is very similar to Canada’s. But of course, you have to consider currency effects carefully.”
L’Heureux sees the benefits in using fixed income ETFs. “It makes management easier. We don’t have to worry about the maturities of hundreds of individual bonds. Plus, we gain access to over-the-counter traded bonds that we normally couldn’t trade,” he said. “We get better diversification and liquidity in listed markets than in over-the-counter trades. And even though the management fees are slightly higher, it’s a modest price for those advantages.”
Active management gaining ground
To identify opportunities abroad, L’Heureux relies on an actively managed ETF specializing in regions outside North America.
That’s another trend noted by National Bank — the popularity of actively managed ETFs, a segment with deep roots in fixed income. At the end of 2024, 26.3% of fixed-income ETF assets in Canada were actively managed (representing 57% of all fixed-income ETF products). Only 8.7% of equity ETF assets were actively managed (31% of available funds).
“Active management is more prevalent in fixed income than in equities,” National Bank noted. “Average assets under management (AUM) per product in passive fixed-income ETFs stand at $514 million, compared with $193 million for actively managed fixed-income ETFs. In equities, the average AUM per product is $1 billion for market-cap-weighted passive ETFs, versus $178 million for strategic (factor-based) equity ETFs and $139 million for actively managed ones.”
This article appears in the November 2025 issue of Investment Executive. Read the digital edition or read the articles online.