BMO Short Corporate Bond Index ETF
BMO Short Corporate Bond ETF ZCS 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 C$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 around two-thirds of its assets in the financials sector. Around half of this stake come from bonds issued by the five largest Canadian banks—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 likely not come as a surprise, since larger Canadian banks must comply with robust capital requirements and close regulatory scrutiny. The Canadian banking sector has also historically displayed its strength, which translates to credit ratings that range between AA and A for these securities.
The fund’s corporate focus makes it looks riskier than category peers with a broader scope. Many peers invest in short-term government or securitized bonds, which tend to carry higher credit ratings. As of April 2025, the fund invested around 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. Nonetheless, the fund will likely suffer more when credit spreads widen.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.