Everyone's Talking About Treasury Yields: Is MUB or VGIT a Better Investment for Your Portfolio?

Comparing iShares National Muni Bond ETF (NYSEMKT:MUB) and Vanguard Intermediate-Term Treasury ETF (NASDAQ:VGIT) reveals a choice between tax-advantaged municipal income and the federal credit safety of intermediate-term U.S. government securities.

Both funds serve as core fixed-income holdings. The iShares fund tracks high-quality municipal bonds, which may provide tax benefits for certain investors. The Vanguard fund targets Treasury notes with maturities between three and 10 years, offering a refuge from credit risk during periods of market uncertainty.

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.

The Vanguard fund is more affordable with its 0.03% expense ratio compared to 0.05% for the iShares fund. Additionally, the Vanguard fund currently offers a higher payout, with a trailing dividend yield that is 0.67 percentage points higher.

Performance & risk comparison

What's inside

Vanguard Intermediate-Term Treasury ETF primarily holds U.S. Treasury bonds to provide a modest income stream. The fund manages 102 holdings and was launched in 2009. Vanguard Intermediate-Term Treasury ETF has paid $2.29 per share over the trailing 12 months, which on its recent ~$57.44 share price works out to a 4% yield.

iShares National Muni Bond ETF seeks to replicate the performance of investment-grade municipal bonds issued across the United States. The fund is highly diversified, with 7,063 holdings, and no single position exceeds 2% of the portfolio. It was launched in 2007. iShares National Muni Bond ETF has paid $3.42 per share over the trailing 12 months, which on its recent ~$102.72 share price works out to a 3.3% yield.

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Which looks like the better buy

Yields are climbing due to persistent inflation worries and expectations that interest rates will stay high. That's leading some investors to pay increased attention to the bond market. Both the Vanguard Intermediate-Term Treasury ETF and the iShares National Muni Bond ETF offer compelling yields that trounce the average S&P 500 dividend, and they may offer tax advantages, too. In fact, your tax bracket may be more important than yield when choosing between the two funds.

Municipal bonds and Treasuries generally have opposite tax treatments. Income earned from municipal bonds, like the thousands held in MUB, is generally exempt from federal income taxes. Income earned from Treasuries, like the ones held in VGIT, is generally exempt from state and local taxes, but may be subject to federal taxes.

For investors in a higher tax bracket who are investing these funds into a regular brokerage account, investing in municipal bonds may allow you to keep more of your after-tax dollars.

On a final note, to take full advantage of this tax strategy, you may need to do some extra legwork. According to Vanguard, you'll need to calculate the income you earned from the fund's holdings to take advantage of the exemption when you file your taxes. It's not likely to be reflected on the tax forms issued by your investment company.

Sarah Sidlow 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.