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What are we looking for?

How Canadian bond funds have fared over the past year.

Investors have flocked to fixed-income funds amid roller-coaster stock markets. But holding bonds involves risk, too. When interest rates rise, the value of existing bonds fall because new issues pay a higher yield.

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The screen

We looked at the eight best and eight worst performers among Canadian fixed-income funds for the year ended July 31. These funds invest in government and corporate bonds with a duration greater than 3.5 years and less than nine years.

U.S. dollar, segregated, pooled and duplicate versions of funds were excluded. We did not look at funds that require more than a $10,000-minimum investment, or that must be bought as part of a portfolio of funds.

What did we find?

Three BMO exchange-traded funds [ETFs] made the top eight.

BMO Mid Federal Bond Index ETF, the biggest gainer, rose 9.4 per cent. BMO Aggregate Bond ETF, which invests in federal, provincial and corporate bonds, posted a 7.9-per cent gain. And BMO Mid Corporate Bond ETF returned 7.6 per cent.

"Canadian bonds have benefited from the flight to safety over the past year" as stock markets continued to be roiled by the European debt crisis, said Mark Raes, an ETF portfolio manager at BMO Global Asset Management.

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Bonds have also benefited from slower global growth, which has dampened expectations that interest rates will head higher, he said. "Within fixed income, federal bonds have outperformed corporate bonds as they are considered a better haven."

Given that Canadian stock markets were down 7 per cent over the one-year period, investors who diversified their portfolios with Canadian fixed-income funds have been rewarded. No fund lost money over the period.

Is the bond party over? With rates already scraping historic lows, it may seem there is little potential for further bond price gains. But Mr. Raes seems a more positive outlook. Continued concerns about weak global economic growth and jitters about volatile stock markets are helping sustain demand for bonds, he said.

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