Most investors optimize stock taxes.
Very few optimize bond taxes.
In this video, I explain how the BMO Discount Bond Index ETF (ZDB) shifts return away from fully taxable interest income and toward more tax-efficient capital gains — without materially changing risk.
If you hold bonds in a non-registered account, this may be one of the simplest structural upgrades available.
00:00 – Introduction
00:40 – Why Bond ETFs Can Be Tax Inefficient
01:19 – What Is a Discount Bond?
01:45 – How ZDB Shifts Return Toward Capital Gains
02:12 – How the Index Screens for Lower-Coupon Bonds
02:58 – Does ZDB Take More Risk? (Duration Explained)
04:07 – ZDB vs. ZAG: After-Tax Performance (2014–2024)
05:04 – Why the Tax Advantage Matters
05:25 – Why More Investors Don’t Use ZDB
06:49 – Who Is ZDB Actually For?
07:26 – Final Takeaway
Great video breakdown of ZDB. I have held it for years in my unregistered account.
Thank you for your continued effort to make informative posts for DIY investors like myself.
@Jeff – You’re so very welcome! (thank you for your kind words :)
Hi Justin, your posts are super informative and helpful. I have recently been sucked into Mackenzies QEBH and QEBL ETFs, within a non-registered account. I know you have touched on QEBL in the context of Mackenzies asset allocation etfs, but now wondering if the tax implications of holding a relatively high yield bond etc is offset by the likely higher risk of holding developing market bonds. Any thoughts? (I am thinking you would simply hold one bond ETF (ZDB) in client portfolios for simplicity and tax efficiency).
@Chris – I’m glad you’ve found the posts helpful! You are correct – I tend to just hold developed markets investment grade bond ETFs, like ZDB, and GICs in client portfolios.
Hi Justin,
You mentioned the BMO Short-Term Discount Bond ETF (ZSDB) as alternative to ZDB for those interested in shorter dated bonds. Would the tax benefit be less (by roughly a half) due to the shorter duration of ZSDB?
Thanks!
@Alan – No, the calculation is unfortunately a bit more complicated.
Currently, for a top rate Ontario taxpayer, I would expect an after-tax benefit of ~0.42% per year for ZSDB (over a regular short-term bond ETF, like ZSB).
Hi Justin, is there a tax efficient bond etf equivalent of VSB.
Looks like ZDB is long dated bonds.
Thanks!
@Dj – The closest tax-efficient alternative to VSB would arguably be the BMO Short-Term Discount Bond ETF (ZSDB):
https://bmogam.com/ca-en/products/exchange-traded-fund/bmo-short-term-discount-bond-etf-zsdb/
Thanks so much for posts. very illuminating. Would you consider something about what’s the deal with gold and silver?
@Al N: You’re very welcome – I’m glad you liked the video.
FYI – I released a video on Gold several years ago – https://www.youtube.com/watch?v=dravkg9j3lk&t=1s
Please add me to your mailing list.
@Perrier Greg – My records show that you are subscribed to the CPM Newsletter, as of April 15, 2020 (perhaps your email is sending the notifications to your spam folder?).
Hi Justin, great post as usual.
The annual financial statements for ZDB on the BMO website show this ETF to have a somewhat large carry-forward capital loss. Presumably this will eliminate any future annual reinvested/phantom distributions until the loss is depleted, meaning there is currently an additional tax deferral benefit? Am I interpreting this correctly?
@Robert – Thanks so much for watching!
You’re reading these reports correctly, although they’re a bit out-of-date (so ZDB’s managers may have already used a portion of these losses to offset gains throughout 2025/2026).