Comparing Muni Bonds ETFs: FBND vs. MUB's Tax and Yield Trade-offs

When evaluating muni bonds etf options, investors face a critical decision between income generation and tax efficiency. Two prominent choices dominate this space: the Fidelity Total Bond ETF (FBND) and the iShares National Muni Bond ETF (MUB). While both appeal to income-seeking investors, they serve distinctly different investment philosophies and tax profiles.

Understanding Your Choice Between Municipal and Taxable Bond ETFs

The core distinction between these two funds reveals contrasting approaches to bond investing. MUB specializes exclusively in municipal bonds—debt issued by state and local governments that typically offer tax-exempt interest income at the federal level, and sometimes at state and local levels. FBND, by contrast, casts a much wider net, holding a diversified portfolio of taxable bonds with a pronounced tilt toward energy and corporate issuers.

Launched in 2014, FBND manages a broad portfolio containing 4,459 separate holdings. Within this mix, approximately 67% of bonds carry the highest AAA rating, signaling minimal default risk. However, the fund also strategically allocates up to 20% of assets into lower-tier debt securities rated BBB or below—riskier instruments that compensate investors with higher yields.

MUB tracks an equally diversified but fundamentally different universe. Its 6,163 holdings span investment-grade municipal bonds across the country, with zero exposure to U.S. government bonds. The fund concentrates about 61% of assets in AA-rated municipals, with the remainder split between AAA and A-rated securities.

The Numbers Behind These Muni Bonds ETF Options

A side-by-side data snapshot (as of January 25, 2026) illuminates the trade-offs:

FBND commands a significantly higher expense ratio—0.36% versus MUB’s bargain-basement 0.05%. Despite this cost disadvantage, FBND delivers superior returns: a 2.6% one-year performance versus MUB’s 1.22%. The dividend yield gap widens even further, with FBND paying 4.7% annually compared to MUB’s 3.13%.

Yet the higher nominal yield of FBND masks an important reality: MUB’s shares trade at roughly double FBND’s price point, meaning MUB delivers substantially larger dividend payments in absolute dollar terms despite its lower percentage yield.

Risk metrics reveal divergent volatility profiles. MUB’s beta of 0.24 indicates its price movements correlate weakly with broader market swings, while FBND’s 0.29 beta shows slightly greater market sensitivity. Over five years, MUB experienced a maximum drawdown of -11.88%, whereas FBND suffered a steeper -17.23% decline during its worst peak-to-trough period. A $1,000 investment in MUB five years ago would have grown to approximately $922, while the same amount in FBND would have reached roughly $862—reflective of FBND’s higher risk exposure.

Tax Benefits Make Muni Bonds ETFs Attractive for Specific Investors

The taxation framework fundamentally shapes the case for muni bonds etf holdings. Municipal bonds offer a distinctive advantage: their interest income escapes federal taxation and potentially state and local taxation depending on your residence. This tax exemption represents their primary appeal, particularly for high-income earners facing steep marginal tax rates.

FBND, holding primarily taxable corporate and energy sector bonds, generates fully taxable income to shareholders. This means investors pay ordinary income tax on all distributions, making it most advantageous for accounts shielded from taxation—such as IRAs or 401(k)s—or for investors in lower tax brackets where the tax efficiency gains prove marginal.

The bond market’s recovery trajectory following the 2022 downturn has been gradual and measured. Investors shouldn’t anticipate rapid gains unless unforeseen catalysts emerge—such as a sharp drop in federal interest rates, which would send bond prices upward as previously-locked-in higher rates become relatively more attractive.

Which Muni Bonds ETF Suits Your Investment Goals?

The selection ultimately hinges on your specific circumstances and objectives.

For higher-risk tolerance with an appetite for yield: FBND represents the compelling option. Its exposure to lower-quality corporate debt and energy sector bonds typically commands higher yields than their safer counterparts. The fund’s 4.7% dividend yield significantly outpaces MUB’s 3.13%, rewarding investors comfortable with elevated volatility. The 5-year maximum drawdown of -17.23% illustrates that this higher income comes at the cost of greater price fluctuation.

For tax-efficient growth and stability: MUB becomes the default selection. Its muni bonds etf structure delivers federal tax-exempt income, particularly valuable for investors in elevated tax brackets. The 0.05% expense ratio—among the lowest in the industry—preserves more capital for compound growth. MUB’s -11.88% maximum drawdown shows materially lower volatility than FBND, suiting conservative investors prioritizing capital preservation. The tax advantages frequently outweigh the lower stated yield for investors seeking tax-protected income.

The distinction between these funds ultimately reflects a classic risk-return and tax-efficiency spectrum. FBND appeals to risk-tolerant investors seeking maximum current income, while municipal bonds etf options like MUB serve those prioritizing tax-sheltered returns and downside protection. Your portfolio composition, tax situation, and risk tolerance should guide the selection between these two competent but distinctly-positioned bond vehicles.

For investors beginning their bond ETF journey or seeking comprehensive guidance on allocation strategies, exploring the full landscape of available options proves worthwhile. The bond market offers sophisticated instruments for building diversified, income-producing portfolios—whether through the tax-advantaged structure of municipal offerings or the higher-yield corporate exposures that appeal to tax-sheltered accounts.