This Tax-Friendly Bond ETF May Have the Edge Over This Corporate Bond ETF

Both the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) and iShares National Muni Bond ETF (NYSEMKT:MUB) are sizable, investment-grade bond funds, but their roles in a portfolio diverge: VCIT focuses on corporate debt for taxable income, while MUB targets U.S. municipal bonds, often appealing to those seeking potential tax advantages. This comparison unpacks their costs, risk profiles, and portfolio details to help investors decide which may fit their needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

VCIT is more affordable in fees and offers a higher dividend yield, which may appeal to investors seeking stronger income potential from their bond allocation.

Performance & risk comparison

What's inside

MUB tracks a broad mix of investment-grade U.S. municipal bonds, spreading across 6,163 holdings. It holds zero U.S. government-issued bonds, but about 61% of its holdings are AA-rated bonds, the second-highest rating, with the rest of the fund’s weight almost evenly split between AAA and A-rated bonds.

VCIT has a narrower investment focus on intermediate-term bonds that mature within 5-10 years. The majority of bonds it holds are BBB-rated, while A-rated bonds are a close second. This bond in nature will likely be more volatile than MUB because of the lower-rated bonds, which have higher interest rates but increased risk.

What this means for investors

For investors, it’s important to know that bond ETFs can move differently from typical stock ETFs, as the bond market is recovering from the 2022 crash, and the recovery has been very slow and gradual. Don’t expect quick gains unless an unforeseeable event occurs, such as a dramatic drop in federal interest rates, which would likely cause prices to rise inversely as bonds with higher rates are already locked in at their current rates.

When it comes to MUB and VCIT, VCIT may offer a higher yield over time because it holds bonds with lower ratings, which are riskier but often yield higher payouts by the time they mature.

And because municipal bonds often have lower interest rates than U.S. government bonds, MUB is more likely to have lower yields over the long term. However, the main benefit of MUB is its exemption from federal income taxes and state income taxes, depending on the state. So, for a higher-risk/higher-reward option, VCIT is ideal, while MUB is the go-to option for more tax benefits.

For more guidance on ETF investing, check out the full guide at this link.

Adé Hennis 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.