VWIUX vs. FMBIX: Which Bond Fund Is Best?

By Eric Rosenberg, WCI Contributor

By Dr. Jim Dahle, WCI Founder

Municipal bonds, or muni bonds, offer a unique method of investing with a considerable tax benefit. Income earned from municipal bonds is typically tax-free on your federal income tax return, giving you an instant boost compared to federal bonds, corporate bonds, and other investments. If you’re looking for a broad fund focused on municipal bonds, you may have come across VWIUX and FMBIX—municipal bond funds from Vanguard and Fidelity, respectively.

However, the two funds are very different, with different minimum investments and expense ratios. Here’s a closer look at VWIUX vs. FMBIX to help you understand which may be better for your investment goals.

What Is a Municipal Bond Fund?

As the name implies, a municipal bond fund is a mutual fund or Exchange Traded Fund (ETF) focused on municipal bond investments. Just like direct municipal bond investments, returns from a muni bond fund are typically tax-exempt at the federal level. That means you can earn a little less than other investments and still see the same effective return, assuming you’re investing in a taxable account.

As with other diverse investment funds, some follow a specific index—such as the Bloomberg Municipal Bond Index—while others are actively managed and attempt to beat the market.

Important areas to consider when comparing muni bond funds include the underlying index, the fund’s performance compared to the index and similar funds, and fund fees (expense ratios). When looking at VWIUX vs. FMBIX, we’ll look at these and other features to zero in on the better fund for most white coat investor portfolios.

More information here:

Why Buying Individual Municipal Bonds Doesn’t Boost Your Return Over a Bond Fund

Should I Use a State-Specific Municipal Bond Fund?

What Is VWIUX?

Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) is an actively managed municipal bond fund from one of the largest fund managers worldwide. As an “Admiral Fund,” Vanguard requires a high minimum investment, but management fees are typically lower with Admiral funds than other Vanguard funds and many competitors.

• Fund name: Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares

• Ticker symbol: VWIUX

• Expense ratio: 0.09%

• Minimum investment: $50,000

When looking at cumulative performance compared to the Bloomberg 1-15 Year Municipal Index, Vanguard’s fund tends to outperform by a percent or two, which can add up to significant gains over a long enough period.

With a hefty minimum investment, however, it’s out of reach for all but high net worth investors. After all, putting too high of a percentage of your taxable investments in municipal bonds likely isn’t the best decision. But if you have a large portfolio where a $50,000 investment is reasonable, VWIUX is a tax-efficient fund that typically beats the index.

For what it's worth, Morningstar gives VWIUX four stars.

What Is FMBIX?

Fidelity Municipal Bond Index Fund (FMXIX) is a mutual fund that mirrors the Bloomberg Municipal Bond Index. Instead of choosing between different municipal bonds, FMBIX managers buy what Bloomberg adds to the index and keep it weighted toward the larger funds, called market cap weighting.

There’s no minimum investment amount, and the expense ratio is low. But its performance may leave something to be desired.

• Fund name: Fidelity Municipal Bond Index Fund

• Ticker symbol: FMBIX

• Expense ratio: 0.07%

• Minimum investment: $0

If you want to dip your toe in the muni bond waters, FMBIX is an option. You can start small and build a position over time, helping keep your portfolio diversified and weighted the way you want. But performance isn’t a slam dunk. It has trailed its benchmark index since its inception. While it’s relatively cheap, the expense ratio is higher than many other Fidelity index funds. When looking at how all factors—including cost and performance—stack up, we'll call this a mixed bag.

Morningstar gives just one star to FMBIX.

VWIUX vs. FMBIX: Which Should I Choose?

Which should you choose when comparing VWIUX vs. FMBIX? Here’s how they compare when going head to head.

Jim has flip-flopped on his message about muni bonds. As he wrote in December 2023:

“In no other area of investing have my views shifted as much as they have on muni bonds . . . My first blog post about muni bonds basically said, “Why bother? Your bonds belong in tax-protected accounts anyway.” When I realized a few years later that, at very low interest rates, it absolutely could make sense to hold bonds in a taxable account so your stocks could grow faster in a tax-protected account, I wrote an extremely controversial post called Bonds Go in Taxable.

Then, due to the evolution of my own portfolio, I was forced to hold at least some of my bonds in a taxable account . . . I went from thinking, “Why would anyone own muni bonds?” to actually having a large and ever-increasing percentage of my bonds in a muni bond fund.

As I write this, 40% of my bonds (and 80% of my nominal bonds) are in a Vanguard muni bond fund with intermediate duration. I use VWIUX (Vanguard Intermediate Tax-Exempt Bond Fund) and, after 2022 when it became necessary, I used a very similar tax-loss harvesting partner in VTEAX (the Vanguard Tax-Exempt Bond Index Fund).”

VWIUX may technically be actively managed, but given its low costs and low turnover, it might as well be an index fund. Thus, it is no surprise to see in this comparison that the Vanguard fund is about 440 times larger than the Fidelity fund. It has seven times as many securities in it, has a dramatically longer track record, and has outperformed the Fidelity fund for as long as the Fidelity fund has been around. There's a reason VWIUX is in Jim's portfolio (he had never even heard of FMBIX before comparing these two funds for this post).

At any rate, the most important differences between these two funds are found under the hood. FMBIX has a duration of 6.1 years and Vanguard has a duration of 5.5 years. Also, 78% of the bonds in FMBIX are AAA or AA, while only 60% of the bonds in VWIUX are in those top two categories. In essence, Fidelity is taking on more term risk and Vanguard is taking on more credit risk.

Based on performance, VWIUX is a stronger choice for investors with enough cash to meet the hefty minimum. But for everyone else, FMBIX offers a lower hurdle to enter the markets and a slightly lower expense ratio. But, at least in the past, that access came at the cost of performance.

More information here:

How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?

Vanguard vs. Fidelity — Which Is Best for Your Investments?

The Nuts and Bolts of Investing

VWIUX vs. FMBIX: Which Is Better?

First, Vanguard is the world's leader when it comes to bond mutual funds. As Jack Bogle pointed out, the most important thing in bond investing is to keep expenses low, because bonds don't return much as it is. Giving up 1% of a 3% return to a fund manager is a monstrous hurdle to overcome. Thus, Vanguard's low-cost approach has proved to be superior over the years, so much so that companies like Fidelity are now trying to emulate it to avoid becoming irrelevant.

If you have $50,000 or more to invest in a taxable investment account, VWIUX is a better option due to the fund’s performance history. While it’s more expensive, the difference in investment results makes it a winner compared to FMBIX.

Plus, the high minimum investment is easy to work around, and it shouldn't even be considered much of a drawback. For example, VWIUX is the Admiral share class. There is also an Investor share class for this fund with a minimum investment of $3,000. If that's a problem for you, why are you investing in muni bonds in the first place? While not technically designed for high net worth investors, they are designed for high-income investors who have significant assets above and beyond retirement accounts, which usually means high net worth. While $3,000 is still more than the minimum Fidelity investment, Vanguard has another muni bond fund with an intermediate duration, VTEAX (which Jim also uses as a tax-loss harvesting partner for VWIUX, although the VTEAX duration is 6.4 years with 79% of bonds in the two highest credit categories). That one is technically an index fund, but more importantly, it also has an ETF share class (VTEB) with a minimum investment of one share, about $50. So, there's no reason to go to Fidelity for your bond funds just to get a lower minimum investment.

While we're sure the Fidelity fund is fine to use and that it will grow over time, Vanguard deserves its crown when it comes to bond funds. If you want the older established fund, use VWIUX. If you want one with a longer duration and better quality, use VTEAX. If you need a very low minimum investment with the lowest possible fees, use VTEB. We see no role at all for FMBIX unless your account is captive at Fidelity for some reason and you have an aversion to using ETFs.

Do you invest in muni bond funds? Do you prefer VWIUX or FMBIX? Why? Have you considered switching?