MUB vs FBND: Which Tax-Free Municipal Bond Strategy Suits Your Portfolio?

When evaluating bond ETFs for income-generating portfolios, the choice between municipal bonds and diversified taxable bond funds becomes critical—especially when considering tax efficiency. Two prominent options dominating the conversation are the iShares National Muni Bond ETF (MUB) and Fidelity’s Total Bond ETF (FBND). While both cater to income-seeking investors, they diverge significantly in their approach to yields, costs, and most importantly, tax treatment. MUB specializes in tax-free municipal bond holdings, while FBND maintains a broader taxable bond allocation with a tilt toward corporate and energy sectors.

Cost Efficiency vs. Income Generation: The Expense Ratio Dilemma

The most striking difference between these two funds appears in their expense structure. MUB charges just 0.05% annually—among the lowest in the industry—while FBND’s 0.36% expense ratio is considerably steeper. However, raw fees don’t tell the complete story. As of January 25, 2026, FBND delivered a 1-year return of 2.6% compared to MUB’s 1.22%, and more importantly, FBND’s dividend yield sits at 4.7% versus MUB’s 3.13%. Though FBND’s higher yield makes it attractive for income-focused investors, MUB’s lower share price means each municipal bond fund distribution may actually provide larger absolute dollar amounts for equal share counts.

The choice between prioritizing low fees and higher income potential depends on your investment timeline and tax situation. Investors in high tax brackets may find FBND’s higher yield less compelling once the tax advantages of municipal bonds are factored into the equation.

Municipal Bond Tax Exemptions: Why MUB’s Tax Advantages Stand Out

The core distinction separating these funds lies in their fundamental structure. MUB tracks a comprehensive portfolio of investment-grade U.S. municipal bonds, holding 6,163 distinct securities spread across various state and local issuers. The critical advantage: most municipal bond distributions from MUB are exempt from federal income tax, and depending on your state of residence, state income taxes as well. This tax-exempt structure makes MUB particularly valuable for high-income earners seeking to shelter investment income.

FBND, by contrast, takes a different route. Launched in 2014, this diversified fund holds 4,459 bond securities but lacks the municipal focus that generates tax-free income. Instead, it casts a wider net across corporate issuers, energy companies, and government bonds—all of which produce taxable income. The trade-off: FBND’s higher yield partly reflects compensation for this tax liability, whereas a portion of MUB’s lower headline yield is protected from taxation.

For investors in the highest tax brackets, the effective after-tax return of MUB’s tax-free municipal bond strategy may ultimately exceed FBND’s higher pre-tax yield once federal and state tax obligations are calculated.

Bond Quality and Portfolio Composition

Both funds prioritize investment-grade securities but distribute their holdings differently. MUB maintains approximately 61% of assets in AA-rated bonds—the second-highest quality tier—with the remainder split between AAA and A-rated municipal bonds. This conservative structure reflects the risk profile typical of municipal bond funds.

FBND adopts a more nuanced approach to credit quality. Approximately 67% of holdings carry the coveted AAA rating, signaling minimal default risk. However, FBND permits up to 20% allocation to lower-quality debt securities rated in the BBB category—still investment-grade but riskier and typically offering higher yields. This flexibility toward corporate credit risk allows FBND to capture additional income unavailable in the more conservative municipal bond allocation MUB maintains.

Performance Dynamics and Drawdown Risk

Bond markets have trudged through a slow recovery since the 2022 downturn, meaning both funds have experienced extended periods of muted performance. Over five years, MUB experienced a maximum drawdown of -11.88%, while FBND faced a steeper -17.23% decline. A $1,000 investment in MUB five years ago would have grown to approximately $922, compared to $862 in FBND—illustrating both funds’ vulnerability to interest rate movements and credit cycles.

The relationship between interest rates and bond prices moves inversely. If the Federal Reserve dramatically reduces rates in response to economic stress, existing bonds with locked-in higher rates appreciate sharply. Conversely, rising rate environments pressure bond values. Neither fund promises rapid capital gains; instead, both are designed for steady income and capital preservation across extended holding periods.

The Verdict: Choosing Between Yield and Tax Benefits

Your decision between MUB’s tax-free municipal bond advantages and FBND’s higher income potential hinges on three primary factors: your marginal tax rate, risk tolerance, and investment horizon.

Choose MUB if you:

• Fall into a high federal or state tax bracket
• Prioritize capital preservation and steady tax-exempt income
• Prefer the lowest possible expense ratios
• Seek a conservative, highly-diversified municipal bond foundation

Choose FBND if you:

• Benefit from lower marginal tax rates
• Can tolerate greater volatility (17%+ drawdowns)
• Prioritize raw dividend yield over tax efficiency
• Want exposure to corporate credit risk alongside government bonds

The most sophisticated approach may involve holding both—allocating the bulk of taxable accounts to MUB’s tax-free municipal bond structure while maintaining FBND in retirement accounts where tax efficiency matters less. Regardless of your selection, remember that bond ETFs reward patient, long-term investors rather than those seeking quick appreciation in compressed timeframes.