Should ETF Investors Flock to Municipal Bonds or Treasuries in 2026?

The iShares National Muni Bond ETF (NYSEMKT:MUB) offers a lower-cost path to tax-exempt income, while the iShares 3-7 Year Treasury Bond ETF (NASDAQ:IEI) provides federal government backing with a higher trailing yield.

Both funds serve as core fixed-income holdings but target different segments of the bond market. While MUB focuses on the tax advantages of high-quality municipal debt, IEI targets the belly of the Treasury yield curve, offering high liquidity and sovereign credit quality.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield as of the close of trading on July 30.

The iShares National Muni Bond ETF is more affordable for long-term holders with an expense ratio of 0.05%. This creates a 0.10 percentage point cost advantage over the 0.15% fee charged by the iShares 3-7 Year Treasury Bond ETF.

Performance & risk comparison

What's inside

The iShares 3-7 Year Treasury Bond ETF is a fixed-income fund. It holds 83 positions, and its largest positions include Treasury Note 4.375% 11/30/2030 at 2.92%, Treasury Note 4.00% 02/28/2030 at 2.32%, and Treasury Note 4.125% 08/31/2030 at 2.27%. The fund was launched in 2007. iShares 3-7 Year Treasury Bond ETF has paid $4.28 per share over the trailing 12 months, which on its recent ~$116.64 share price works out to a 3.7% yield.

The iShares National Muni Bond ETF is also a fixed-income fund. The fund is highly diversified, holding 6,727 positions where no single position exceeds 0.38% of the portfolio. The largest position is the BlackRock liquidity municash fund, which invests in short-term positions to maximize tax-free returns as an alternative to cash, while providing liquidity to the fund manager on demand. Bond issues from the University of Texas, New York State Thruway Authority, the State of New Jersey, and Ohio State University are also notable holdings in its top 10. The iShares National Muni Bond ETF has paid $3.40 per share over the trailing 12 months, which on its recent ~$105.76 share price works out to a 3.2% yield. It was launched in 2007.

Which fund is the better buy?

Bond investors seeking security have two good choices here. The U.S. government, of course, has never defaulted on its debt obligations, while few municipalities ever have, and the diversity of MUB’s portfolio means any potential default is unlikely to affect the fund much.

Interestingly, municipals bond tend to price with lower yields than Treasuries because of their tax exemption, from federal, state, and local taxes (where there are those) means in reality investors are actually keeping more of their yield than if they bought comparable Treasuries, the interest on which is taxable at the federal level.

Yet the performance of the muni bond fund, MUB, compared to the Treasury fund IEI, doesn’t quite reflect that fact. MUB returns exceed those of IEI in most time frames, even before accounting for any tax benefits, probably because not every municipal bond issuer is a top-rated credit, meaning they have to offer higher yields to compensate for the risk investors perceive. There is also the face-value price, which changes as bonds are traded at premiums or discounts to their face value.

Over the past 10 years, MUB has returned an annualized 1.76% veruss 1.14% for IEI. In the 3- and 5-year look-backs, MUB returned 2.72% and 0.52%, compared to the respective 3.73% and 0.05% return for IEI. Investors in income tax states will see a tax benefit, given MUB is a national bond fund, but that benefit will be muted because only a small portion of the fund will include bonds from their tax state.

Overall, investors looking for the security of bonds with income to boot are wise to explore the iShares National Muni Bond fund, MUB, for their investing.

For more guidance on ETF investing, check out the full guide at this link.

Brendan Coffey 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.