Treasury vs. Municipal Bonds: Building a Conservative Investment Portfolio with VGIT and MUB

When constructing a conservative investment portfolio, the choice between government-backed securities and tax-advantaged municipal bonds represents a fundamental decision. The Vanguard Intermediate-Term Treasury ETF (NASDAQ: VGIT) and iShares National Muni Bond ETF (NYSEMKT: MUB) each offer distinct pathways to income and stability, yet they appeal to different investor priorities. Understanding how these funds differ—in cost structure, after-tax returns, and portfolio composition—is essential for building a solid fixed-income foundation.

Both funds rank among the lowest-cost fixed-income vehicles available, making them accessible options for conservative investors. However, their underlying strategies diverge significantly. VGIT concentrates exclusively on U.S. Treasury securities, providing straightforward interest-rate exposure. MUB, by contrast, spans over 6,100 investment-grade municipal bonds, offering potential federal tax exemption on distributions. This comparison examines the trade-offs between simplicity and tax efficiency, helping you evaluate which approach aligns with your financial goals.

Understanding the Core Differences: Cost and Yields

The expense ratios for both funds are remarkably low, reflecting the competitive landscape of fixed-income investing. VGIT charges just 0.03% annually, while MUB comes in at 0.05%—a negligible difference for most investors. What distinguishes them more meaningfully is the income they generate. As of January 23, 2026, VGIT offered a 3.8% dividend yield compared to MUB’s 3.1%, giving the Treasury fund an edge for those prioritizing raw income. Over the trailing 12 months, VGIT returned 3.2% while MUB returned 1.5%, reflecting the different interest-rate sensitivity of their underlying holdings.

Assets under management tell another story about scale and liquidity. VGIT manages $44.6 billion, while MUB oversees $41.8 billion, making both substantial players in the ETF space. This size ensures tight bid-ask spreads and the ability to move in and out of positions without moving markets—a critical consideration for conservative investors who value stability and liquidity above all else.

Inside the Portfolios: What Each Fund Actually Holds

The composition of these funds reveals their fundamental approach to conservative fixed-income investing. VGIT maintains 76 holdings, all allocated to U.S. Treasury notes and bonds. Its largest positions include instruments like the United States Treasury Note/Bond 4.38% maturing on 05/15/2034, providing exceptional credit quality and zero default risk. Every dollar in VGIT moves with the Treasury market, unaffected by corporate or municipal credit deterioration.

MUB takes the opposite approach to diversification. With more than 6,100 holdings spanning thousands of U.S. municipalities and agencies, the fund distributes credit risk across dozens of state and local issuers. Top allocations include positions in municipal money market funds, USD cash instruments, and university revenue bonds like the University of Texas offering maturing in 2036. This broad dispersion means no single issuer—whether a city, county, school district, or utility—dominates portfolio risk. The fund’s 18-year track record demonstrates the stability of this diversified municipal approach.

The contrast matters for tax planning. VGIT’s Treasury distributions remain subject to federal income tax, though exempt from state and local taxes. MUB’s municipal distributions are typically exempt from federal taxation and, for many residents, from state and local taxes as well—making it particularly valuable for high-income earners in high-tax states.

Five-Year Performance: Risk and Drawdown Comparison

Historical performance illuminates how these strategies behave during market stress. Over the past five years, both funds experienced significant drawdowns as interest rates rose, yet they handled adversity differently. VGIT’s maximum drawdown reached -15.13%, reflecting the duration risk inherent in intermediate-term Treasury bonds. MUB’s maximum drawdown was -11.88%—roughly 3.25 percentage points shallower—suggesting that municipal credit exposure, paradoxically, provided some cushion during the rate-hiking cycle.

This divergence continued in cumulative returns. A $1,000 investment in VGIT over five years grew to $864, while the same amount in MUB reached $917. The $53 difference reflects MUB’s lower drawdown and the income advantage of tax-exempt distributions for taxable accounts. For investors in the 37% federal tax bracket, MUB’s tax exemption becomes especially material, potentially outweighing VGIT’s slightly higher nominal yield.

Choosing Between Treasury Stability and Tax-Exempt Income

The selection between these funds hinges on three questions: What is your tax situation? How much do you value simplicity? And what role should municipal credit risk play in your conservative portfolio?

VGIT suits investors who prioritize uncompromised credit quality and straightforward interest-rate exposure. The fund’s laser focus on government debt eliminates municipal credit concerns, making it ideal for those building a risk-free anchor within their conservative holdings. Its higher nominal yield compensates in taxable accounts unless you fall into lower tax brackets. Treasury bonds also offer superior liquidity and tighter trading spreads in secondary markets.

MUB appeals to those willing to accept municipal credit risk in exchange for tax-exempt income. High-income earners—particularly those in high-tax states—often find the after-tax return of MUB exceeds VGIT’s nominal yield significantly. The broad municipal diversification protects against idiosyncratic issuer risk, and the fund’s depth of holdings ensures you can scale in and out without slippage.

Building Your Conservative Investment Framework

For conservative investors evaluating these options, consider your broader portfolio context. If you’re constructing a safe harbor for fixed-income capital—perhaps the foundation of a multi-asset conservative investment approach—VGIT’s simplicity and credit quality justify its position. If you’re seeking to optimize after-tax returns and your tax bracket warrants it, MUB’s municipal exposure may deliver superior results.

Both funds exemplify what makes conservative fixed-income investing accessible today: ultra-low costs, deep liquidity, and transparent pricing. Neither fund employs leverage, derivatives, or complex strategies that obscure risk. Whether you choose the straightforward path of Treasury bonds through VGIT or the tax-optimized universe of municipal bonds through MUB, you’re making a deliberate choice between two of the market’s most established, cost-effective vehicles for building a portfolio designed to weather market cycles while delivering steady income.