Which Bond ETF Is the Better Buy: iShares' MUB or Vanguard's VGIT?

Investors evaluating iShares National Muni Bond ETF (NYSEMKT:MUB) against Vanguard Intermediate-Term Treasury ETF (NASDAQ:VGIT) are essentially weighing the federal tax advantages of municipal income against the government-backed credit security of U.S. Treasuries.

MUB focuses on high-quality municipal bonds, providing a strategy that is often favored by those in higher tax brackets seeking federal tax-exempt income. VGIT tracks intermediate-term U.S. Treasury notes, offering government-backed credit quality and a moderate sensitivity to interest rates with maturities typically ranging between three -- 10 years.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund is slightly more affordable with a 0.03% expense ratio compared to the 0.05% fee for the iShares fund. Regarding income distributions, VGIT provides a higher trailing-12-month distribution yield of 3.90%, though MUB may offer superior after-tax returns for certain investors.

Performance & risk comparison

What's inside

VGIT is a fixed income fund without an equity sector breakdown, primarily holding 76 U.S. Treasury bonds. This fund, which was launched in 2009, has a trailing-12-month dividend of $2.27 per share and remains a liquid option for investors seeking government-backed income.

MUB also operates as a fixed income fund without an equity sector breakdown and was launched in 2007. It is diversified across six holdings where no single position exceeds 0.89% of the portfolio, ensuring that its exposure to any individual municipal issuer remains limited. The iShares fund has a trailing-12-month dividend of $3.40 per share, reflecting its focus on high-quality bonds issued by state and local governments across the United States.

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What this means for investors

This choice here starts with one question: What is your tax bracket? MUB holds more than 6,300 municipal bonds whose income is generally exempt from federal taxes. VGIT holds only U.S. Treasury bonds whose income is fully taxable at the federal level. That single difference can flip the outcome entirely for higher-bracket investors.

VGIT's stated yield is slightly higher than MUB's, but for investors in the 32% or 37% tax bracket, keeping more of every dollar of income matters more than the headline number. Once taxes are applied, MUB's after-tax income can match or exceed VGIT's for those in higher brackets. For investors in lower brackets or holding bonds inside a retirement account where tax exemption provides no advantage, VGIT's lower cost and Treasury-backed simplicity make it the more straightforward choice.

The five-year track record also favors MUB, which held up better during the rate-hiking cycle of 2022 through 2024 and delivered stronger total returns including dividends over that period. For most taxable-account investors in higher tax brackets, MUB is the stronger long-term choice.

Sara Appino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.