Which Is the Better Government Bond ETF, iShares' MUB or Fidelity's FIGB?

The iShares National Muni Bond ETF (NYSEMKT:MUB) and Fidelity Investment Grade Bond ETF (NYSEMKT:FIGB) both provide exposure to high-quality debt, but they serve different roles based on an investor's tax situation and credit preference.

Investors looking for stability often turn to investment-grade debt, but the choice between the iShares fund and the Fidelity fund involves more than just picking a bond ETF. These two funds differ in their tax treatment, credit exposure, and cost structures, making each suitable for distinct portfolio goals within a fixed-income allocation.

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 iShares fund is the more affordable option with a 0.05% expense ratio, compared to 0.36% for the Fidelity fund. However, FIGB offers a higher payout, with a trailing yield approximately 0.9 percentage points above its peer.

Performance & risk comparison

What's inside

The Fidelity Investment Grade Bond ETF is a core fixed-income fund that holds over 800 positions across various high-grade sectors. Its sector exposure is primarily in government bonds, which comprises 45.17% of its holdings. Its largest positions are in various U.S. Treasury bonds and notes. Launched in 2021, the fund has paid $1.77 per share over the trailing 12 months. This fund may appeal to those seeking broader market exposure across various investment-grade sectors, such as U.S. Treasuries and corporate credit.

In contrast, the iShares National Muni Bond ETF focuses exclusively on investment-grade U.S. municipal bonds, which are often exempt from federal income taxes. Its portfolio is strictly concentrated in fixed-income securities without an equity sector breakdown. The fund lists 6,538 holdings, making it highly diversified. Launched in 2007, the iShares fund has a trailing-12-month dividend of $3.39 per share. For investors in high tax brackets, the lower yields of the iShares fund may be more attractive on a tax-equivalent basis.

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What this means for investors

Investing in government bonds delivers stable, low-risk income. Two funds offering exposure in this area are the Fidelity Investment Grade Bond ETF (FIGB) and iShares National Muni Bond ETF (MUB). Choosing between them comes down to a few key considerations.

MUB targets investment-grade municipal debt issued by state and local governments. Its holdings are vast with the state of California occupying the top position in the fund at 4.5% of the total assets. This focus is what gives the ETF its appeal, particularly since interest is federally tax-exempt, and often exempt from state and local taxes for residents of the issuing state.

Although its dividend yield is lower than FIGB, the ETF is far cheaper, given its 0.05% expense ratio. MUB also sports a much larger AUM, granting it far greater liquidity. The fund is ideal for investors who want to capitalize on its tax advantages, or who want to focus on municipal bonds.

FIGB casts a wider net than MUB, with holdings encompassing U.S. government debt as well as corporate bonds. The ETF also includes debt from foreign issuers, although North America comprises 91.6% of the fund.

FIGB offers a better dividend yield, but a higher expense ratio because it is an actively-managed fund. This ETF is for those investing through a tax-advantaged account (like an IRA or 401k) or who prefer an active management strategy designed to navigate changing yield curves and credit markets.

Robert Izquierdo 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.