BMO US Aggregate Bond ETF’s Dividend Surge: A Safe Haven or a Risky Gamble?

The bond market is in a state of flux, and the BMO US Aggregate Bond Index ETF (ZAG.TO) has just thrown down the gauntlet with a CAD 0.06 dividend declaration for May 2025—a 50% jump from its previous CAD 0.04 payout. This move sparks a critical question: Is this a sign of yield sustainability in a tightening Fed environment, or a warning that bond ETFs are clinging to income while capital risks loom large? Let’s dissect the data and decide if ZAG is a buy, a hold, or a sell.

1. Dividend History: Stability Amid Rate Hikes?

ZAG has maintained a rock-solid dividend streak since 2021, with payouts rising from CAD 0.04 to CAD 0.06 in May 2025. This increase isn’t arbitrary—it reflects the underlying bond market’s shift as the Federal Reserve hikes rates. The ETF tracks the U.S. Aggregate Bond Index, which includes government, corporate, and mortgage-backed securities. As yields on new bonds rise, existing bonds in ZAG’s portfolio are being rolled over or replaced with higher-yielding issues, boosting income.

But here’s the catch: bond prices fall when rates rise. ZAG’s adjusted close price has fluctuated between CAD 12.50 and CAD 15.00 since 2021, but its dividend yield has held steady at ~3.4%–3.5% (as of April 2025). This suggests income stability, but at a cost: its 30-year annualized return (4.33%) lags behind current Treasury yields. Investors must ask: Is the dividend enough to offset potential price declines?

2. The Fed’s Rate Hikes: A Double-Edged Sword

The Fed’s aggressive rate hikes since 2022 have created a paradox for bond ETFs like ZAG:
- Income Boost: Rising yields on new bonds mean higher dividends.
- Capital Risk: Older, lower-yielding bonds in the portfolio lose value as rates climb.

The 10-Year Treasury yield hit 4.0% in late 2023, and ZAG’s 3.48% dividend yield now sits below this benchmark. This yield gap means investors are taking on price risk for less income than a Treasury. However, ZAG’s dividend growth to CAD 0.06 signals the ETF is aggressively rebalancing toward higher-yielding bonds—a strategy that could pay off if rates stabilize.

ZAG’s yield edges out Canadian short-term bond ETFs like XSB.TO (3.43%), but trails the iShares Core U.S. Aggregate Bond ETF (AGG), which offers a 3.6% yield. Investors must weigh ZAG’s currency risk (denominated in CAD) against its income edge over Canadian peers.

3. Tactical Allocation: Income First, Capital Second

For income-focused portfolios, ZAG’s dividend surge makes it a contender—if you’re willing to accept these terms:
- Hold for the dividend: Treat ZAG as a cash flow generator, not a capital growth asset.
- Diversify rate risk: Pair ZAG with inflation-protected bonds (e.g., XIB.TO) or floating-rate ETFs to hedge against further rate hikes.
- Avoid overconcentration: Allocate no more than 10–15% of fixed-income assets to ZAG to avoid overexposure to U.S. bond volatility.

Final Call: Buy, But Keep Your Eyes Wide Open

ZAG’s CAD 0.06 dividend is a bullish signal that its managers are navigating rising rates with agility. The ETF’s yield remains competitive against most Canadian bond ETFs, and its dividend growth suggests resilience. However, this isn’t a “set it and forget it” investment.

Buy ZAG if:
- You prioritize income and can stomach price dips.
- You’re using it as a ladder rung in a multi-ETF bond portfolio.

Avoid ZAG if:
- You’re a short-term trader chasing capital gains.
- You can’t stomach a 5–10% price drop if rates spike further.

The bottom line? ZAG is a buy for income hunters, but only if you’re prepared to ride out the Fed’s next moves. This ETF isn’t a warning—it’s a calculated bet on the power of dividends in a high-rate world. Act now, but don’t blink!

DISCLAIMER: Past performance ≠ future results. Consult your advisor before making investment decisions.