60/40 Portfolio in Canada (2026): How Much Should You Actually Hold in Bonds?
The 60/40 portfolio (60% stocks, 40% bonds) was declared dead after its worst year on record in 2022. Three years later it is back to doing exactly what it was designed to do. Here is how much of your Canadian portfolio belongs in bonds in 2026, and which TSX-listed ETFs to use.
What the 60/40 portfolio actually is
A 60/40 portfolio holds 60% in equities (Canadian, US, and international stocks) and 40% in investment-grade bonds (a mix of federal, provincial, and corporate debt). The idea is that bonds smooth out the ride during equity drawdowns, so investors are less likely to panic-sell at the bottom.
For most of the last forty years it worked beautifully. From 1982 to 2021, a 60/40 split using broad Canadian and US index funds returned roughly 8 to 9 percent annualised with about half the volatility of a pure equity portfolio.
What broke in 2022 and what fixed it
2022 was the first year since 1969 that both Canadian equities and Canadian aggregate bonds finished deeply negative. The S&P/TSX Composite fell about 9 percent, and the FTSE Canada Universe Bond Index dropped 11.7 percent. Bonds did not just fail to hedge stocks, they amplified the loss.
The reason was simple: bond yields started at all-time lows. With the Bank of Canada policy rate at 0.25 percent in January 2022, there was no income cushion to absorb the impact of rate hikes. When the BoC took rates from 0.25 to 4.25 percent in eleven months, every existing bond repriced lower.
How much should you actually hold in bonds?
The classic rule of thumb is "your age in bonds": a 30-year-old holds 30 percent bonds, a 60-year-old holds 60 percent. That is a starting point, not a prescription. The right number depends on your time horizon, your income stability, and how much short-term loss you can stomach before doing something rash.
| Age band | Conservative | Balanced | Growth |
|---|---|---|---|
| 20s to early 30s | 20% bonds | 10% bonds | 0% bonds |
| Mid 30s to 40s | 30% bonds | 20% bonds | 10% bonds |
| 50s | 40% bonds | 30% bonds | 20% bonds |
| 60s (pre-retirement) | 50% bonds | 40% bonds | 30% bonds |
| 70s+ (in retirement) | 60% bonds | 50% bonds | 40% bonds |
These ranges assume the equity portion is globally diversified across Canada, the US, and international markets, not concentrated in a single sector or country. Concentration risk in the stock sleeve raises the case for more bonds, not less.
The cheapest Canadian bond ETFs in 2026
You do not need to pick individual bonds. A single broad-market bond ETF gives you exposure to hundreds of federal, provincial, and corporate issuers. These four cover 95 percent of what most Canadians need:
| Ticker | Fund | MER | Yield to maturity | Average duration |
|---|---|---|---|---|
| VAB | Vanguard Canadian Aggregate Bond | 0.09% | ~3.7% | 7.4 yrs |
| ZAG | BMO Aggregate Bond Index | 0.09% | ~3.7% | 7.5 yrs |
| XBB | iShares Core Canadian Universe Bond | 0.10% | ~3.6% | 7.3 yrs |
| ZDB | BMO Discount Bond | 0.10% | ~3.4% | 6.9 yrs |
60/40 vs the alternatives
Classic 60/40
- Simple to explain, easy to rebalance
- Historical 8 to 9% annualised return
- Vulnerable to simultaneous stock and bond drawdowns
- Works well from current yield starting point
Risk Parity / All-Weather
- Adds gold, commodities, long-duration treasuries
- Smaller drawdowns on average
- Complex to implement and rebalance
- Underperforms in strong equity bull markets
How to build a 60/40 portfolio in Canada
You can construct a 60/40 portfolio with as few as two ETFs. Pair a global all-equity fund like VEQT, XEQT, or ZEQT with a Canadian aggregate bond fund like VAB or ZAG, in a 60/40 ratio. Total fees come in under 0.20 percent annually.
If you would rather not rebalance yourself, the asset allocation ETFs do it for you. VBAL (Vanguard), XBAL (iShares), and ZBAL (BMO) all hold a 60/40 split internally and rebalance back to target automatically. They cost about 0.20 percent. The trade-off is you cannot tilt the equity sleeve toward what you prefer.
Pick your 60/40 path
- Want one ticker and zero maintenance: buy VBAL, XBAL, or ZBAL
- Want lower fees and full control: buy 60% VEQT plus 40% VAB
- Holding bonds in a non-registered account: swap VAB for ZDB to fix the premium-bond tax drag
- Worried about rate risk: split the 40% bond sleeve between ZAG and a short-term fund like VSB
- Heavy US dollar exposure already: use XSH or VSB for the Canadian-dollar bond portion
When to rebalance back to 60/40
Markets push your allocation around. After a strong equity year, you might find yourself holding 68/32 instead of 60/40, which means you are taking more risk than you signed up for. Two rebalancing rules work well for Canadians:
- Calendar rebalancing: Check once a year and trade back to target. Simple, low-effort, and tax-efficient.
- 5% threshold rebalancing: Only act when an asset class drifts more than 5 percentage points from its target. Fewer trades, lower friction.
- Contribution-based rebalancing: Direct new contributions to the underweight asset class. You almost never need to sell, which avoids capital gains in a taxable account.
Should you still use 60/40 in 2026?
Yes, but with eyes open. The 60/40 framework is not a magic ratio, it is shorthand for "hold meaningful diversification across risk-on and risk-off assets." With bond yields meaningfully positive again and equity valuations stretched in the US, the math behind 60/40 is more favourable than at any point since 2010.
If you are in your 20s or early 30s with 30+ years to retirement, you can probably skew further toward equities. If you are within 10 years of retirement, the 40 percent bond sleeve is doing real work cushioning sequence-of-returns risk. The tool that matters most is not the ratio you pick, it is whether you actually rebalance back to it when markets push you off course.
Frequently asked questions
Is 60/40 still a good portfolio in 2026?
Yes. The combination of mid-single-digit bond yields and reasonable global equity valuations makes the forward math for 60/40 better than it has been in over a decade. The 2022 drawdown was painful but unusual, and it would not happen the same way from current starting yields.
Should I use 60/40 in my TFSA or RRSP?
Use it in either. Interest income from bond ETFs is fully taxable in a non-registered account, so registered accounts are the natural home for bonds. If you must hold bonds in a non-registered account, consider ZDB to reduce the premium-bond tax drag.
What is the difference between VBAL and a manual 60/40?
VBAL holds about 60% global equities and 40% global bonds in a single ETF and rebalances itself. A manual 60/40 with VEQT plus VAB has slightly lower fees and lets you control the geographic split, but you have to rebalance yourself once or twice a year.
How often should I rebalance a 60/40 portfolio?
Once per year is enough for most investors. If you want to be more precise, rebalance whenever any asset class drifts more than 5 percentage points from its target weight. Funnelling new contributions into the underweight side is the most tax-efficient method in a non-registered account.
Can I replace bonds with cash or GICs?
For short-term money you need within 1 to 3 years, yes. GICs and HISA ETFs like CASH.TO or PSA give you predictable income with no rate risk. For the bond sleeve of a long-term portfolio, broad bond ETFs offer better diversification and the chance for capital appreciation when rates fall.
What is a good 60/40 alternative for younger investors?
A common adjustment for investors under 35 with stable income is 80/20 or 90/10. You keep some bond exposure as dry powder to rebalance into during equity drawdowns, but you maintain higher expected returns. The all-equity asset allocation ETFs like VEQT or XEQT are the simplest way to do this with no bond sleeve.