Tax-Free Municipal Bonds vs. Fidelity's Taxable Bond ETF: A Detailed Investment Comparison

When evaluating bond investment options, many investors face a fundamental choice: opt for tax-free municipal bonds or diversified taxable bond funds? Two major ETF players—the iShares National Muni Bond ETF (MUB) and Fidelity’s Total Bond ETF (FBND)—exemplify this decision. While both funds target income-seeking investors, tax-free municipal bonds offer distinct tax advantages that may outweigh higher yields in taxable alternatives for certain investors.

Income Potential: Where FBND Pulls Ahead

The headline numbers initially favor FBND, which boasts a 4.7% dividend yield compared to MUB’s 3.13%. Over the trailing 12 months through January 25, 2026, FBND returned 2.6% while MUB delivered 1.22%. However, this performance gap doesn’t tell the complete story.

FBND’s higher income stems from its portfolio composition: the fund concentrates heavily in corporate credit and energy sectors, holding bonds rated across the quality spectrum, including riskier BBB-rated debt that generates superior payouts. MUB, by contrast, maintains a more conservative allocation focused on tax-free municipal bonds, where interest rates inherently run lower than Treasury-backed instruments. So while FBND offers more generous nominal returns, tax-free municipal bonds provide something perhaps more valuable: income free from federal taxation.

The Cost Factor: MUB’s Clear Advantage

One of the starkest differences emerges in annual expenses. MUB charges a mere 0.05% expense ratio—among the lowest in the industry—while FBND’s 0.36% fee is seven times higher. For a $100,000 investment, this translates to $50 annually for MUB versus $360 for FBND. Over decades of investing, these seemingly small differences compound significantly.

MUB’s lean fee structure stems from its focused mandate tracking a specific municipal bond index. FBND, managing a broader universe of 4,459 bond holdings across multiple sectors, naturally incurs higher operational costs. Yet this cost differential becomes less meaningful when you factor in tax-free municipal bonds’ primary advantage: their tax exemption.

Holdings and Risk Profiles: Different Strategies for Different Goals

MUB spreads its $41.85 billion in assets across 6,163 tax-free municipal bonds, maintaining quality through a portfolio weighted approximately 61% in AA-rated bonds, with the remainder split between AAA and A-rated holdings. This conservative construction resulted in a five-year maximum drawdown of just -11.88%.

FBND’s $23.91 billion portfolio takes a broader approach, mixing 4,459 securities with a 67% allocation to AAA-rated debt but deliberately including up to 20% in lower-quality BBB-rated bonds. This strategy amplifies income but also risk—the fund experienced a steeper five-year maximum drawdown of -17.23%. Over five years, a $1,000 investment in FBND would have grown to $862, compared to $922 in MUB.

The Tax-Free Municipal Bonds Advantage Explained

Here lies the crucial consideration: tax-free municipal bonds’ primary benefit isn’t necessarily superior returns—it’s tax efficiency. MUB’s interest income remains exempt from federal income tax, and depending on where you reside, state and local taxes as well. For investors in high tax brackets, this exemption can effectively boost after-tax returns substantially.

Consider a high-income investor in a 37% federal tax bracket. MUB’s 3.13% tax-exempt yield becomes equivalent to roughly 5% taxable income, suddenly competitive with FBND’s 4.7% yield—all while taking on significantly less risk and paying minimal fees. The mathematics shift even more favorably for those subject to state income taxes.

Which Fund Fits Your Strategy?

For aggressive investors seeking maximum current income and comfortable with volatility, FBND’s blend of corporate credit and energy exposure delivers higher nominal payouts. The fund suits those who benefit from losses in high-income years or who expect to be in lower tax brackets in retirement.

Tax-free municipal bonds in MUB serve investors prioritizing tax efficiency, capital preservation, and predictable income streams. High earners, residents of high-tax states, and those nearing retirement typically benefit most from the municipal bond structure.

The choice ultimately hinges on three factors: your tax bracket, risk tolerance, and investment timeline. FBND emphasizes yield; tax-free municipal bonds emphasize tax-adjusted returns. Both play legitimate roles in diversified fixed-income strategies.