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Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) offers a higher yield and lower expense ratio than iShares National Muni Bond ETF (NYSEMKT:MUB), but it introduces corporate credit risk and historically higher volatility.
Fixed-income investors often choose between the tax advantages of municipal bonds and the higher yields available in the corporate debt market. While both funds provide relative stability compared to equities, their tax treatments and risk profiles differ significantly due to the nature of their underlying issuers.
Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.
VCIT is the slightly more affordable option with an expense ratio of 0.03% versus 0.05% for MUB. This cost advantage is paired with a much higher payout, as the Vanguard fund maintains a 1.92 percentage point yield lead.
Vanguard Intermediate-Term Corporate Bond ETF invests in U.S. dollar-denominated investment-grade fixed income securities issued by industrial, utility, and financial companies. The fund contains 2,342 holdings with maturities between five and 10 years and tracks its index using a representative sampling technique. No single position in the portfolio exceeds 0.29% of assets. It was launched in 2009. The Vanguard fund has paid $4.34 per share over the trailing 12 months, which on its recent ~$79.24 share price works out to a 5.5% yield.
iShares National Muni Bond ETF focuses on high-quality municipal bonds issued across the United States by state and local governments. Its massive portfolio includes 7,938 holdings, ranging from money market instruments to long-term revenue bonds for universities and water utilities. It was launched in 2007. The iShares fund has paid $3.70 per share over the trailing 12 months, which on its recent ~$103.90 share price works out to a 3.6% yield.
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Both of these investment vehicles offer relatively safe options for investors looking to generate income from the bond market. But there are differences between the two. The better choice for an individual will come down to whether they prioritize a higher yield or a lower credit risk, as well as their individual tax picture.
VCIT holds more than 2,000 investment-grade corporate bonds. Its 5.5% dividend yield trounces MUB's 3.6%, not to mention the S&P 500's 1.07% payout. But corporate bonds carry higher credit risk, and VCIT has a sharper five-year maximum drawdown.
MUB holds municipal bonds, which are debt issued by states, cities, and other local and regional government entities. While this fixed-income fund still returns more yield than the broader market, it lags VCIT's payout. But it does have one thing going for it: The fund's income is federally tax-free for most investors. Depending on your tax situation, that means you may actually get to keep more of the dollars paid out by MUB than by VCIT.
Both funds are solid bond options for conservative investors seeking reliable income, and your choice between the two may require you to do some math. If you're in a higher tax bracket, you may have a higher effective yield with MUB than VCIT, with less volatility to boot.
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Does Vanguard Corporate Bond ETF (VCIT) Really Offer a Higher Yield Than Municipal Bonds? It Depends. was originally published by The Motley Fool
