What are we looking for?

Well-rated fixed-income funds and exchange-traded funds that invest across the credit risk spectrum.

The screen

With the Bank of Canada’s recent decision to trim its policy interest rate to 2.25 per cent, the conversation around fixed income has shifted meaningfully. After two years of rising bond yields and volatile prices, investors are once again considering fixed income as a source of diversification and opportunity.

Lower interest rates generally support bond prices, but they also make the quality and composition of a fixed-income portfolio more important than ever.

This said, not all global bond funds are built alike. The Canadian Investment Funds Standards Committee (the industry committee that governs mutual fund and ETF categories) distinguishes them by geography and credit quality.

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Global Fixed Income funds invest primarily in investment-grade securities, with less than 5 per cent in high-yield bonds, while Global Core Plus Fixed Income funds can hold between 5 and 25 per cent in high-yield debt. A third category, Global High Yield Fixed Income, goes a step further, and funds allocate the majority of assets to sub-investment-grade, or so-called junk bonds – securities that offer higher coupon income in exchange for greater credit and default risk.

Each increase in credit risk exposure brings more potential yield but also greater sensitivity to economic conditions and market sentiment. When growth slows or credit spreads widen, high-yield-heavy portfolios can experience sharper drawdowns, while investment-grade mandates tend to act as steadier anchors. For investors who are repositioning in a post-tightening rate cycle, understanding these distinctions is key to aligning bond exposure with intent – whether it’s stability, income or total return.

Today, I use Morningstar Direct to screen across these three global fixed income categories to find those that have:

1) a Morningstar Rating for Funds (or “Star Rating”) of four stars or better, signifying that the fund has outperformed peers in the same category on an after-fee risk-adjusted basis. The rating is backward-looking and accounts for risk using a unique application of utility theory, placing a greater emphasis on downside protection.

2) I also screened using our Morningstar Medalist rating, our qualitative assessment on whether a fund has the right ingredients to outperform peers after fees in the future, based on an assessment of people (tenure and track record of the portfolio management team), parent (the stewardship qualities of the fund company) and process (the robustness and repeatability of how the fund invests assets). Only the oldest share class of each fund was considered in the search.

What we found

The funds and ETFs that met the above requirements across the three categories are listed in the table accompanying this article, including ticker (where available), category, management expense ratio (MER), Morningstar rating, trailing returns and inception date.

As mentioned, funds with different credit exposures have different risk and return profiles, and so readers are encouraged to first consider the category to which each fund belongs, given that Morningstar’s ratings are calculated against these peer groups.

This article is provided for informational purposes only and does not constitute financial advice. Investors should conduct their own independent research before buying or selling any of the investments listed.

Ian Tam, CFA, is director of investment research for Morningstar Canada.