Vanguard ETF Tops iShares Muni Bond on Yield and Cost

The iShares National Muni Bond ETF (NYSEMKT:MUB) provides tax-exempt income through high-quality municipal bonds, while the Vanguard Intermediate-Term Treasury ETF (NASDAQ:VGIT) offers lower costs and government-backed security through intermediate-term U.S. Treasuries.

Bond investors often look to intermediate-term debt for a balance between income and price stability. While both funds target high-quality fixed income, MUB focuses on the tax-exempt municipal market, while VGIT provides the safety of the federal government. This comparison examines differences in cost, performance, and portfolio composition to help you determine which strategy best fits your financial goals.

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.

VGIT is the more affordable option with an expense ratio of 0.03%, compared to 0.05% for MUB. The Vanguard fund also currently offers a higher trailing 12-month payout, at 3.90% versus 3.20% for the iShares fund.

Performance & risk comparison

What's inside

The Vanguard Intermediate-Term Treasury ETF manages 103 bond holdings, focusing on U.S. Treasury notes with maturities between three and 10 years to provide a consistent income stream alongside moderate interest rate sensitivity. Its largest positions include United States Treasury Note/Bond 4.63% 02/15/2035, United States Treasury Note/Bond 4.38% 05/15/2034, and United States Treasury Note/Bond 4.25% 08/15/2035. Launched in 2009, the fund has paid $2.27 per share over the trailing 12 months and maintains assets under management (AUM) of $49.5 billion.

The iShares National Muni Bond ETF is highly diversified across 6,781 holdings. This fund is designed to replicate the performance of high-quality municipal bonds issued across the United States, which may appeal to investors seeking tax-advantaged income. Launched in 2007, it has a trailing-12-month dividend of $3.40 per share and $45.2 billion in assets under management (AUM).

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What does this mean for investors?

These are both high-quality bond funds. Both delivered nearly identical returns over the past five years and don’t differ much in expense ratios or volatility.

However, these funds differ significantly in tax treatment. The VGIT’s U.S. Treasury focus means investors pay taxes on income in taxable accounts. But the main advantage for MUB is its focus on a broad basket of municipal bonds, which are generally excluded from federal income tax. This means investors in high tax brackets may prefer MUB over VGIT.

The main advantage of VGIT is that it is relatively safe from credit risk because the U.S. government fully backs Treasuries. Investors may prefer it if they are investing in a taxable account or are in a relatively lower tax bracket.

John Ballard 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.