ZAG: BMO Aggregate Bond ETF

What ZAG holds

ZAG tracks a broad Canadian aggregate bond index, holding hundreds of investment-grade bonds — federal and provincial government bonds plus high-quality corporate bonds — across a range of maturities. In one trade you own a diversified slice of the Canadian bond market. If bonds are new to you, how bonds work covers the basics this builds on.

'Investment-grade' means the issuers are rated as relatively safe borrowers, so ZAG is a lower-risk holding than a stock fund. Its job in a portfolio isn't growth — it's stability and income, cushioning the swings of your equity holdings. Confirm the current MER and distribution yield on the provider's fund page before buying — these change over time.

How bond ETFs move with interest rates

The one thing every bond-ETF buyer should understand: bond prices and interest rates move in opposite directions. When rates rise, existing bonds paying lower coupons become less attractive, so their prices fall — and a broad fund like ZAG dips. When rates fall, bond prices rise. How much a fund moves depends on its 'duration'; ZAG's mix of short-, medium- and long-term bonds gives it a moderate, market-average sensitivity.

This is why 2022 was a rare bad year for bond funds — rates rose quickly. But bonds still did their long-run job of being far steadier than stocks, and as older bonds mature and are replaced at higher rates, a bond ETF's income gradually reflects the new rate environment. For money you might otherwise lock in, it's worth comparing bonds against GICs, which don't fluctuate in price but can't be sold before maturity as freely.

ZAG's role in a portfolio

Bonds are the ballast of a diversified portfolio. Pairing ZAG with an equity fund reduces how much your total balance swings and gives you something stable to draw on — or rebalance from — when stocks fall. How much to hold is the core asset-allocation decision: a common rule of thumb scales bonds up as your time horizon shortens or your risk tolerance drops.

If you'd rather not manage the stock/bond split yourself, an all-in-one ETF like VBAL (60/40) or VGRO (80/20) already bundles bonds and equities and rebalances automatically — ZAG is mainly for investors building a portfolio from individual building blocks.

Distributions and tax

ZAG pays monthly distributions, mostly interest income from its bonds — attractive for investors who want a steady, predictable cash flow. Reinvesting via a DRIP compounds that income if you don't need it yet.

Tax placement matters more for bonds than for stocks: bond interest is taxed as ordinary income at your full marginal rate, with no preferential treatment like the dividend tax credit. That makes ZAG relatively tax-inefficient in a non-registered account, so many Canadians hold bonds inside an RRSP or TFSA and keep more tax-friendly assets in taxable accounts — see tax-efficient investing.

ZAG vs VAB and other bond ETFs

VAB is Vanguard's near-equivalent — the Vanguard Canadian Aggregate Bond Index ETF — covering the same broad investment-grade market. The differences between ZAG and VAB are minor (issuer, exact index, small fee differences); pick one and don't hold both, since they overlap almost completely.

There are also narrower bond ETFs — short-term, long-term, corporate-only, or real-return — but for most investors a single broad aggregate fund like ZAG or VAB is all the bond exposure they need. Our best Canadian ETFs roundup includes the main bond options.

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