Taxable Fixed Income Strategy: Your Tax Bracket Decides Between AGG and MUB

When selecting between two popular bond ETFs—the iShares Core US Aggregate Bond ETF (AGG) and the iShares National Muni Bond ETF (MUB)—the decision ultimately comes down to your tax bracket and how you structure your taxable fixed income portfolio. Both funds offer compelling features for fixed income investors, but they target fundamentally different market segments and deliver sharply different tax outcomes.

Understanding the Core Differences: Expense Ratios and Yield Comparison

AGG and MUB present an interesting study in how similar funds can diverge meaningfully when tax considerations enter the picture. At first glance, AGG appears slightly more attractive: it charges just 0.03% in annual expenses compared to MUB’s 0.05%, and delivers a higher yield of 3.9% versus MUB’s 3.1%. With $136.5 billion in assets under management, AGG also dwarfs MUB’s $42.0 billion, translating to significantly better trading liquidity and tighter bid-ask spreads.

The 1-year return comparison (as of early January 2026) further highlights AGG’s recent strength, with a 4.4% total return over the trailing 12 months against MUB’s 1.9%. For investors focused purely on nominal yields and expense ratios, AGG appears to be the clear winner. However, this perspective changes dramatically when you factor in the tax implications of each fund’s income stream.

Portfolio Composition and Tax Advantages

The fundamental distinction between these two funds lies in what they hold. AGG invests across the entire U.S. investment-grade bond universe, encompassing Treasury securities, corporate debt, and mortgage-backed securities through 13,015 individual holdings. This broad diversification makes it an excellent core holding for building foundational fixed income exposure across multiple bond categories.

MUB takes a narrower approach, focusing exclusively on municipal bonds issued by state and local governments to fund infrastructure, education, and public services. With 6,098 holdings concentrated in this single segment, MUB’s portfolio represents a specialized bet on the municipal bond market.

Here’s where taxable fixed income considerations become critical: AGG’s 3.9% yield is fully subject to taxation at ordinary income rates at both the federal and state levels. Every dollar of interest you receive gets taxed like regular employment income. MUB’s 3.1% yield, by contrast, enjoys federal tax exemption—and often state tax exemption as well if you invest in bonds issued within your home state. For high-income earners, this tax advantage can be substantial.

Risk Profile Over Five Years

Both funds weathered the recent fixed income volatility, but with notably different outcomes. Over the past five years, AGG experienced a maximum drawdown of -17.83%, while MUB’s drawdown reached -11.88%. This deeper decline for AGG reflects its broader exposure to bond market volatility, including the duration sensitivity of Treasury and corporate bonds.

When looking at actual dollar returns, a $1,000 investment in AGG five years ago would have grown to approximately $857 after all price changes and reinvested dividends, while the same amount in MUB would have reached $922. This historical comparison demonstrates that despite AGG’s superior recent returns, MUB has proven more resilient over the longer term—a pattern that often reflects municipal bonds’ relative insulation from broader market swings.

Making the Right Taxable Income Choice by Tax Bracket

The tax bracket mathematics reveal why this isn’t a straightforward choice. For investors in lower federal tax brackets (22% and below) or those using tax-advantaged retirement accounts like IRAs and 401(k)s, AGG’s higher yield and superior diversification make it the logical choice. The 0.8 percentage-point yield advantage (3.9% versus 3.1%) outweighs any tax considerations because your effective tax rate is relatively modest.

However, investors in higher tax brackets face a different calculus. Those in the 32% federal bracket or above using taxable investment accounts should seriously consider MUB. While its headline yield appears lower, the after-tax income tells a different story. MUB’s 3.1% federal tax-free yield effectively becomes worth 4.6% to a 32% bracket investor when comparing apples-to-apples after-tax returns. Add in potential state tax exemption, and the effective yield advantage grows even larger.

The decision becomes even clearer for investors in the 37% top federal bracket: MUB’s tax-exempt yield can deliver after-tax income exceeding 4.9% when the federal tax savings are calculated. This transforms what appeared as a yield disadvantage into a genuine advantage—precisely why municipal bonds have long been the preferred vehicle for building taxable fixed income portfolios among high-net-worth investors.

Key Takeaways for Different Investor Profiles

Lower-income and retirement account investors: Choose AGG for its higher yield, broader diversification across Treasury, corporate, and mortgage-backed securities, and superior liquidity. The tax benefits of municipal bonds don’t justify the narrower portfolio focus.

Middle-bracket professionals ($100K-$200K household income): Evaluate both options carefully. At the 24% marginal tax rate, the breakeven point is closer than it appears. Consider splitting taxable fixed income allocation between both funds—AGG in your core position and MUB for a portion focused on tax efficiency.

High-income earners (32%+ federal bracket): Prioritize MUB for taxable investment accounts. The federal tax exemption transforms its yield structure into superior after-tax returns. Use AGG in tax-deferred retirement accounts only.

The iShares products both offer the institutional-quality management, rock-bottom expense ratios, and trading liquidity that make them superior choices compared to individual bond picking or actively-managed bond funds. The real decision isn’t about which fund is objectively better—it’s about which fund better serves your specific tax situation. Your tax bracket, more than any other factor, should ultimately determine whether taxable fixed income exposure comes through AGG’s broadly diversified approach or MUB’s focused municipal strategy.