Vanguard VCIT vs iShares MUB: Which Bond ETF Should You Choose?

Investors seeking tax-exempt income may prefer iShares National Muni Bond ETF (NYSEMKT:MUB), while those prioritizing higher yields and lower costs could favor Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT).

Fixed-income investors often choose between municipal and corporate debt depending on their specific tax bracket and overall risk appetite. While the iShares fund targets the tax-advantaged municipal market for those in higher brackets, the Vanguard fund provides exposure to investment-grade corporate bonds with intermediate maturities. This comparison analyzes how these two massive bond funds differ in cost, volatility, and total return.

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 based on the July 1 closing price.

The Vanguard fund is slightly more affordable with a 0.03% expense ratio compared to 0.05% for the iShares fund. This small difference can compound over long holding periods. Additionally, the Vanguard fund provides a significantly higher yield, with a gap of 1.74 percentage points over the iShares fund payout.

Performance & risk comparison

What's inside

Vanguard Intermediate-Term Corporate Bond ETF is a fixed-income fund that holds 2,283 securities. It primarily invests in U.S. dollar-denominated investment-grade corporate securities with maturities between five and 10 years. Its largest positions include debt from industrial, utility, and financial companies, and the portfolio is highly diversified, with no single position exceeding 0.31% of assets. The fund was launched in 2009. VCIT has paid $4.28 per share over the trailing 12 months, which, on its recent ~$82.19 share price, works out to a 5.20% yield.

iShares National Muni Bond ETF is a fixed-income fund that manages 6,379 holdings. It tracks an index of high-quality municipal bonds issued by various U.S. states and territories. Its largest positions include a diversified mix of tax-exempt bonds, and the portfolio is structured so that no single holding accounts for more than 0.26% of assets. The fund was launched in 2007. iShares National Muni Bond ETF has paid $3.69 per share over the trailing 12 months, which, on its recent ~$107.34 share price, works out to a 3.40% yield.

Which fund is the better buy?

Both funds offer the relative safety of fixed-income with income generation that many investors will appreciate. There are key differences, however.

The Vanguard Intermediate-Term Corporate Bond ETF — VCIT — focuses on investment-grade corporate debt across its pool of 2,283 holdings. Most of the fund is in U.S. corporates, but about 15% of the fund is in non-U.S. corporate bonds, led by the U.K., the Eurozone, and Japan.

The iShares National Muni Bond ETF invests in a different type of bond: municipals, which are debt issued by states, cities, towns, and other local and regional government entities. That means the fund is all in U.S. issuers. The effective duration of holdings in the fund is slightly over 6 years, surprisingly similar to that of the Vanguard fund. The major difference for investors in MUB is that the fund’s income is federally tax-free for most investors. That means the effective yield is higher considering the tax benefit. The fund does invest across states, so that largely mutes the state income tax benefit for many investors. New York is the leading locality of issuers in the fund, at about 20% of holdings, followed by California at 17.4%. and Texas at 11.7%.

Both are good bond funds. MUB has been the better performer over the past year and has delivered fine, bond-like returns over the longer term. Assuming there is a tax benefit for an investor, iShares National Muni Bond ETF gets the nod.

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.