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I want to choose one broad index fixed-income fund ETF for the fixed-income allocation of my portfolio (because I feel one should suffice). I would like to estimate of course, statistically speaking, my return over a few years of investing in each fund considered.

I can look at MER, the tracking error with the underlying index, etc. I also think taxation on returns should be an influencing factor, but I'm not sure how to account for that when consulting the advertised annualized returns or fact sheets.

(And if that helps to constrain the problem, I'm okay with assuming that past performance of the funds being compared will be a predictor of their future performance.)

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  • I don't think it is worth the effort. Bonds are for stability and not growth. I would just pick a popular one from Vanguard or your preferred ETF provider.
    – minou
    Aug 18, 2022 at 21:03
  • There's so many of them, it's hard to believe it's a one size fits all. I got into this questioning because I discovered fixed-income funds that offered a "low-dividend" alternative, and I wondered whether it would make a noticeable difference, e.g. HBB vs XQB. The gains are pretty slim in general, so I thought it might make sense to try to squeze a bit more juice out of them.
    – pf_init_js
    Aug 20, 2022 at 1:29

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From a US tax standpoint:

  • Gains in the value of Bond ETFs are generally taxed the same as equity ETFs - you pay tax on the gain (or deduct the loss) when you sell the ETF.
  • Distributions from the ETF may be taxable. If the ETF holds non-taxable bonds like US Treasuries and US Municipal bonds, they will be tax free (at least federally; some states may tax interest on out-of-state munis). Interest from corporate and international bonds are taxable.
  • Taxable interest is treated as ordinary income, not dividend income.
  • Bond ETFs can have some capital gain distributions through the year, since they have turnover when bonds mature, but they are typically small compared to the interest

If you are comparing multiple ETFs, you can look at their prospectuses or other marketing documentation to see if they outline the tax ramifications of their distributions. I suspect any differences would be marginal (unless you're comparing, say, a MUNI ETF and a Corporate high-yield ETF).

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  • thanks. I have a followup on the tax question ... if the fund mixes bonds from different states, can you claim partial tax credit for the portion of the distribution that is attributable to your local state? or is it all or nothing
    – pf_init_js
    Sep 8, 2022 at 7:02
  • It depends on the laws of the state whether they allow a deduction for ETFs that contain bonds from that state. The fund would also have to break out the income by state.
    – D Stanley
    Sep 9, 2022 at 13:06

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