The Federal Reserve's decision to lower interest rates has presented a significant opportunity for investors. One such option is the Fidelity Total Bond ETF (FBND), an actively managed bond exchange-traded fund that has been making waves in the Kiplinger ETF 20. Over the past 12 months, this fund has achieved a remarkable 12.5% return, outperforming the Bloomberg U.S. Aggregate Bond Index by about one percentage point. This feat was accomplished by Ford O’Neil, along with Celso Munoz and four co-managers.

Outperforming the Benchmark and Beyond

The Fidelity Total Bond ETF has not only outperformed the benchmark over the past 12 months but has also shown its mettle over the past three and five years. Like many intermediate-term, high-quality bond funds, it holds a diverse mix of U.S. government debt, corporate bonds, and mortgage-backed or asset-backed securities. However, it is the managers' strategic tilts in these sectors that have truly set it apart.For instance, over the past year, the managers favored medium-maturity government debt over short- or long-term bonds. This decision paid off as medium-maturity government debt performed well in the market. They also leaned into high-yield debt (IOUs rated double-B to triple-C) and emerging-markets bonds, which have been on a roll in recent months. These sectors have added significant value to the fund's performance.The fund can invest up to 20% of its assets in lower-quality debt securities. In the investment-grade (rated triple-A to triple-B) corporate-bond arena, the managers emphasized financial IOUs, particularly those issued by big money-center banks such as JPMorgan Chase, Deutsche Bank, and Barclays. The regulatory environment in the banking sector remains strong, which helps to maintain credit quality.

Managing Risk in a Changing Market

Despite not expecting a recession in the coming year, the managers have been proactive in reducing risk. They are cautious about corporate bonds given the sector's recent strong performance. "There's not a lot of opportunity there," says O’Neil. As a result, they have been modestly paring back the fund's corporate-debt holdings and increasing its holdings in Treasuries. This approach will allow the fund to be more nimble and seize opportunities (or navigate volatility) in other sectors when they arise.By diversifying across different asset classes and sectors, the Fidelity Total Bond ETF provides investors with a balanced and resilient portfolio. It offers the potential for stable returns while also managing risk effectively. Whether you are a conservative investor looking for income or a more aggressive investor seeking diversification, this fund may be worth considering.Subscribe to Kiplinger's Personal Finance to stay informed and make more informed investment decisions. Sign up for Kiplinger's Free E-Newsletters and receive expert advice on investing, taxes, retirement, personal finance, and more directly in your inbox. Profit and prosper with the best of expert advice – it's just a click away.