Bond ETFs: Your Tax Bracket Decides the Winner Between AGG and MUB

The iShares National Muni Bond ETF (NYSEMKT:MUB) and the iShares Core US Aggregate Bond ETF (NYSEMKT:AGG) differ most in market exposure, with AGG’s broader U.S. investment-grade bond coverage, a deeper historical drawdown, and a modestly higher yield, while both maintain low costs and high liquidity.

This comparison pits two popular iShares bond ETFs against each other: MUB, which targets investment-grade U.S. municipal bonds, and AGG, which tracks the U.S. investment-grade bond universe. Both appeal to investors seeking core fixed income exposure, but their risk, yield, and portfolio makeup diverge in meaningful ways.

Snapshot (cost & size)

The 1-yr return represents total return over the trailing 12 months.

AGG looks a bit more affordable with a lower expense ratio and currently delivers a higher payout, offering a 0.8 percentage point yield advantage over MUB.

Performance & risk comparison

What's inside

AGG invests across the total U.S. investment-grade bond market, holding 13,015 positions. The portfolio is entirely in cash and equivalents. With over two decades of history, AGG aims to represent the broadest possible slice of the U.S. bond market, making it a core holding for many fixed income investors.

MUB, by contrast, focuses exclusively on U.S. municipal bonds, with 6,098 holdings. Its portfolio is also currently 100% cash and equivalents. MUB’s narrower muni focus may appeal to those seeking tax-advantaged income or lower correlation with taxable bonds.

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What this means for investors

Bond ETFs serve as the stability anchor in most portfolios, generating steady income while stocks bounce around. Unlike stock ETFs that buy company shares, bond ETFs hold debt—essentially IOUs from governments or corporations that pay regular interest. AGG and MUB represent two fundamentally different approaches to that income, and the right choice depends entirely on your tax bracket.

AGG holds a massive mix of U.S. investment-grade bonds: Treasuries, corporate debt, and mortgage-backed securities. Its 3.9% yield is fully taxable as ordinary income at both federal and state levels. MUB invests exclusively in municipal bonds issued by states and cities to fund projects like schools and highways. Its 3.1% yield looks lower, but it's exempt from federal taxes—making the actual after-tax return higher for someone in the top tax bracket. AGG charges rock-bottom fees at 0.03% versus MUB's 0.05%, and its $136 billion size dwarfs MUB's $42 billion, providing superior liquidity.

Investors in lower tax brackets or using retirement accounts should choose AGG for its higher taxable yield and broader diversification across bond types. High earners in the 32%+ federal bracket using taxable accounts should explore MUB, where tax savings transform that lower headline yield into superior after-tax income.

Glossary

ETF: Exchange-traded fund that holds a basket of securities and trades like a stock.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund's average assets.
Dividend yield: Annual cash distributions from a fund divided by its current share price.
1-yr return: Total return an investment produced over the most recent 12-month period.
Total return: Investment performance including price changes plus all dividends and interest, assuming reinvestment.
Beta: Measure of an investment's volatility compared with a benchmark index, often the S&P 500.
AUM (Assets under management): Total market value of all assets managed within a fund.
Max drawdown: Largest peak-to-trough decline in value over a specified period.
Investment-grade bond: Bond rated relatively low-risk of default by major credit rating agencies.
Municipal bond: Bond issued by state or local governments, often offering tax-advantaged interest income.
Core fixed income exposure: Foundational bond holdings intended to provide stability, income, and diversification in a portfolio.
Liquidity (of a fund): How easily fund shares can be bought or sold without significantly affecting the price.

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.