By Tony Dong, MSc, CETF on October 28, 2026 Estimated reading time: 12 minutes

Should Canadian investors break up with their bond ETFs?

By Tony Dong, MSc, CETF on October 28, 2026 Estimated reading time: 12 minutes

Since the 2022 bond bloodbath, investors have questioned bond ETFs. Learn how stock-bond correlations, diversification benefits and alternative ETF strategies affect your portfolio.

One of the biggest behavioural pitfalls investors need to watch out for is recency bias. This is the tendency to place disproportionate weight on recent events when forming expectations about the future. It can influence everything from which investments we buy to how portfolios should be constructed. 

One example I’ve noticed gaining traction on Reddit is the argument that investors should break up with their bond exchange-traded funds (ETFs). We’ve previously explored a variation of this idea through the proposed 40/30/30 portfolio, which allocates 40% to stocks, 30% to bonds, and 30% to alternative investments. Its proponents argue that adding alternatives can provide better risk-adjusted returns than the traditional balanced 60/40 portfolio of equities and fixed income.

This discussion gained momentum following 2022, when an unusual combination of high inflation and rapidly rising interest rates produced historically poor returns for bonds in the same year as a stock market slump. Fixed-income investments, normally expected to provide some stability during equity market downturns, suffered substantial losses of their own. For example, according to Portfolio Visualizer, the iShares Core Canadian Universe Bond Index ETF (XBB) lost 11.67% in 2022. By comparison, the iShares S&P/TSX 60 Index ETF (XIU), which tracks 60 of Canada’s largest publicly traded companies, declined by a comparatively modest 6.36%.

Compounding the problem was the increased correlation between stocks and bonds. In 2022, XBB exhibited a correlation of 0.52 with XIU. A correlation of 1 indicates that two investments move perfectly together, while a correlation of zero indicates no linear relationship. That positive correlation meant bonds offered relatively little diversification benefit precisely when investors might have wanted it most.

It’s understandable why this experience caused some investors to question the role of bonds in their portfolios. If bonds can lose more than stocks during a bear market while simultaneously moving in the same direction, what exactly are they accomplishing?

But that’s also where recency bias raises its ugly head. The conditions that prevailed in 2022 were unusual, and extrapolating that experience indefinitely could be just as problematic as assuming bonds will always protect against equity losses.

So, should Canadian investors really ditch their bond ETFs? Let’s examine the evidence on both sides and consider some potential ETFs depending on which argument you find more convincing.

The case for breaking up with your bond ETF

The strongest argument for reconsidering traditional bond ETFs starts with the direction of government bond yields. According to the Bank of Canada’s historical data, yields on Government of Canada marketable bonds have generally moved higher since the exceptionally low levels reached during the COVID-19 pandemic, although the increase has been interrupted by periods of declining yields.

The trend has affected different maturities, including longer-term bonds and inflation-indexed real return bonds. As of October 19, 2026, the benchmark 10-year Government of Canada bond yielded 3.93%, while the long-term benchmark yielded 4.25%. The long-term real return bond yield stood at 1.97%.

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Source: Bank of Canada

Part of the explanation may be the growing concern about government borrowing and the compensation investors demand for lending over longer periods. Statistics Canada’s government finance data illustrates the pressure. In the first quarter of 2026, the federal deficit reached $19.4 billion, an increase of $3.3 billion from the same quarter a year earlier. Federal liabilities increased by $100.4 billion, including $78.8 billion in additional debt securities.

Larger deficits generally require more government borrowing. All else equal, increased bond issuance can put upward pressure on yields as governments compete for investors’ capital. Investors may also demand additional compensation for inflation uncertainty, fiscal........

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