Why Fidelity Bond ETFs Offer Tax Advantages—And When MUB Still Deserves Your Attention

When comparing bond investments, the choice often comes down to yield versus tax efficiency. The Fidelity Total Bond ETF (FBND) and iShares National Muni Bond ETF (MUB) represent two distinct philosophies in fixed income investing. While the Fidelity bond fund appeals to income-maximizing investors, the municipal-focused MUB caters to those prioritizing tax savings. Understanding their differences is essential before making your selection.

Cost and Yield Comparison: Where FBND and MUB Diverge

The two funds sit at opposite ends of the expense spectrum. MUB charges just 0.05% annually—among the lowest in the industry—while FBND carries a 0.36% expense ratio. This fivefold difference matters significantly for long-term investors, as higher fees compound over decades.

Yet FBND compensates with superior income generation. As of late January 2026, the Fidelity bond fund delivered a 4.7% dividend yield compared to MUB’s 3.13%. Over the trailing 12 months, FBND returned 2.6% versus MUB’s 1.22%. However, because MUB’s share price sits roughly twice as high as FBND’s, actual dollar payouts can still favor the municipal option despite its lower yield percentage.

Both funds have grown their asset bases substantially—FBND manages $23.91 billion while MUB oversees $41.85 billion as of early 2026. The size difference reflects MUB’s longer track record and the enduring appeal of municipal bonds to tax-conscious investors.

Risk Profile and Holdings: Understanding the Tradeoff

The bond market’s recovery from 2022’s historic losses has been gradual, meaning investors shouldn’t expect explosive gains unless federal interest rates plummet dramatically. When rates fall, existing bonds with higher coupons appreciate inversely, potentially delivering meaningful price appreciation.

FBND holds 4,459 individual bonds with a diverse tilt toward energy and corporate issuers. Roughly 67% carry AAA ratings—the highest credit quality—but the fund can allocate up to 20% to lower-grade BBB-rated debt. These riskier securities typically offer higher yields but carry elevated default risk.

MUB’s portfolio spans 6,163 municipal bonds with no U.S. government holdings. About 61% of its positions are AA-rated (second-highest quality), while the remainder divides between AAA and A-rated securities. This conservative approach has produced a five-year maximum drawdown of just 11.88%, compared to FBND’s steeper 17.23% decline during the same period.

Over the past five years, $1,000 invested in MUB grew to approximately $922, while the same amount in FBND reached $862. MUB’s superior stability reflects its municipal focus and higher average credit quality.

Tax Efficiency and Returns: Making Your Choice

The defining advantage of municipal bonds lies in their tax treatment. MUB’s interest income qualifies for federal income tax exemption, and depending on your state of residence, state income tax exemption as well. For high-income earners in steep tax brackets, this benefit can be worth more than percentage point differences in gross yield.

The Fidelity bond fund offers no such tax shelter—all distributions face federal income taxation and potentially state taxes. However, FBND’s allocation to corporate and energy credits generates higher pretax yields, which can still outpace MUB on an after-tax basis for investors in moderate tax brackets.

Choosing between them requires honesty about your priorities. Investors seeking maximum current income and willing to accept higher volatility find FBND’s approach compelling. The fund’s tilt toward corporate credit and its larger allocation to below-investment-grade bonds support its yield advantage. However, the higher expense ratio and greater drawdown risk demand careful consideration.

Conversely, MUB serves investors prioritizing tax efficiency, capital stability, and predictable income. Its minimal expense ratio amplifies long-term wealth accumulation, while its municipal focus and conservative credit quality create a softer landing during market downturns.

For tax-advantaged accounts where municipal bond tax exemptions hold no benefit, FBND becomes more attractive. In taxable accounts, particularly for investors in the highest tax brackets, MUB’s exemption from federal and state taxation often justifies accepting a modestly lower yield. The ultimate decision hinges on your tax situation, risk tolerance, and income needs—but both the Fidelity bond option and MUB deserve serious consideration in any fixed income portfolio.