Ivy ProShares Interest Rate Hedged High Yield Index Fund

Market Sector Update

  • The corporate bond market fell 4.7% during the quarter. Rising longer-term yields proved to negate the impact of tightening credit spreads for corporate bonds in general. Five- and 10-year Treasury yields posted sharp upticks of 58 basis points (bps) and 83 bps, respectively as investors evaluated the potential impact of an expanding economy and a rise in inflation.
  • The high-yield bond market, however, posted positive returns of 0.85% and benefited from the risk-on approach taken by investors, with high-yield credit spreads tightening 51 bps during the period. Optimism over accelerated vaccine distribution, positive economic data trends and additional fiscal stimulus bolstered confidence in the markets during the first quarter.

Portfolio Strategy

  • A passively managed index fund, the Fund posted a positive return and performed in line with its benchmark for the quarter.

Outlook

  • The Fund consists of a portfolio of diversified high yield bonds combined with positions in short Treasury futures that are designed to offset the interest rate risk inherent in high yield bonds. The Fund’s performance can be broken into these components: 1) high yield bond yields; 2) the cost of the Treasury hedge; 3) the impact of credit spread changes; and 4) the impact of interest rate changes.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

The Fund is a passively managed index fund designed to track the performance of its stated benchmark index. It does not invest in securities based on the managers' view of the investment merit of a particular security or company, nor does it conduct conventional investment research or analysis or forecast market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities that, in combination, provide exposure to its respective benchmark Index without regard to market conditions, trends or direction.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Index (and, therefore, the Fund) seeks to mitigate the potential negative impact of rising Treasury interest rates on the performance of high yield bonds by taking short positions in U.S. Treasury Securities. Such short positions are not intended to mitigate credit risk or other factors influencing the price of high yield bonds, which may have a greater impact than rising or falling interest rates, and there is no guarantee that the short positions will completely eliminate the interest rate risk of the long high yield bond positions. The Fund's use of derivatives presents several risks, including the risk that these instruments may change in value in a manner that adversely affects the Fund's net asset value and the risk that fluctuations in the value of the derivatives may not correlate with the reference instrument underlying the derivative. A number of factors may affect the Fund's ability to achieve a high degree of correlation with the Index, and there is no guarantee that the Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Ivy Corporate Bond Fund

Market Sector Update

  • The first quarter saw a continued recovery in risk assets as anticipation of a growth inflection due to reopening and further stimulus measures resulted in domestic equities rallying more than 6%.
  • The positive news and sentiment drove U.S. Treasury yields dramatically higher in the period. The yield on the 10-year U.S. Treasury rose 83 basis points (bps) to 1.74%, while the yield on the 2-year U.S. Treasury rose 4 bps to 0.16%. During the quarter, the yield curve steepened significantly as the difference between the 10-year U.S. Treasury and the 2-year U.S. Treasury rose 79 bps to 158 bps.
  • The positive risk sentiment in the quarter led to the spread on the Fund’s benchmark, the Bloomberg Barclays U.S. Credit Index, falling slightly from 92 bps to 86 bps. High yield gained 0.85% as the spread on the Bloomberg Barclays U.S. Corporate High Yield Index fell from 360 bps to 310 bps, while leveraged loans gained 2% as their low duration helped support the asset class relative to investment grade and high yield.
  • Investment-grade gross issuance fell 3% from the first quarter of 2020, to $524 billion as heavy issuance throughout 2020 bolstered balance sheets and allowed for ample refinancing of existing debt. Issuance net of maturities fell 18% to $217 billion this quarter versus $264 billion of net issuance in first quarter 2020.
  • Ratings actions improved in the first quarter with Standard & Poor’s upgrade-to-downgrade ratio in investment grade at 0.57 versus 0.33 in the fourth quarter of 2020 and 1.23 for 2019. Fallen angel activity decreased markedly to $1.2 billion in the quarter from roughly $23 billion in the fourth quarter of 2020.

Portfolio Strategy

  • The Fund had a negative return but outperformed its benchmark.
  • The Fund’s duration rose during the period. After having been moderately under the benchmark’s duration, it is now close to the benchmark’s duration of 8.23 years. Higher duration means higher price volatility for a given change in spreads as well as interest rates.
  • The Fund increased its allocation to BBB and BB rated securities, while decreasing its exposure to A and AA rated securities.
  • The largest changes in sector positioning were increases in the technology and industrial sectors and decreases in the financial and consumer non-cyclical sectors.

Outlook

  • As we entered 2021 it became clear that this year will be one of extremely robust growth as the reopening of the economy coincides with massive fiscal and monetary stimulus. Additionally, markets have priced in the presumption that excess savings accumulated during the pandemic will be spent. This has resulted in a significant rise in yields as growth and inflation expectations have risen.
  • Going forward the principal question is: of the recent increase in growth and inflation expectations, how much will be durable versus transitory? We believe that much of the growth expected this year will be transitory. While we think inflation will certainly remain higher than it was this past year, the secular trends keeping inflation low, such as technology and demographics, are likely to persist and prevent a meaningful rise in longer term inflation.
  • Last year saw a historically high level of uncertainty as individuals, companies and governments grappled with a once-in-one-hundred-year pandemic. We believe uncertainty will remain high. This year we’ve already seen significant issues with supply chains and uncertainty over the reopening, regulatory, fiscal and monetary policy, which is likely to persist for the remainder of the year.
  • While credit spreads have modestly tightened this year, the tightening hasn’t been linear and we’ve experienced some volatility in spreads. Between mid-February and mid-March, credit spreads on the benchmark widened 11 bps on supply, volatility and rising U.S. Treasury yields. The breakeven spread, meaning the level of spread widening that wipes out a full year of spread carry is just over 10 bps, a level we’ve already exceeded within the first quarter. For the remainder of the year we see the potential for such volatility to persist due to weak credit fundamentals, an uncertain outlook as well as the potential for higher issuance and re-leveraging events.
  • We think investment-grade fundamentals are likely to improve as substantial earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash-flow growth will result in deleveraging on balance for the investment grade marketplace. Overall, however, we think fundamentals will continue to be weak, with leverage remaining near record highs and duration in the market being near a record high. Despite this, credit spreads sit at 86 bps for investment grade, well below their 20-year average of 145 bps.
  • We continue to believe there is significant excess risk taking in the marketplace and it is during these times of euphoria that credit markets become impacted by increases in financial engineering and mergers and acquisitions (M&A). Lagging equities likely feel obliged either under their own volition or under pressure of activists to borrow at low rates to repurchase stock, pay dividends or embark on M&A. Such activity impacts specific credits and has macro implications by creating an increased risk premium for re-leveraging conditions, as well worsening the supply and demand technicals.
  • The technical backdrop continued to be supportive and is likely in our view, to persist for some time. Fund flows have weakened recently but still surpass what many would have predicted given the negative asset class returns year to date. Weaker flows are counterbalanced by supply which remains manageable and increasing levels of foreign demand driven by rising hedged yields available in the US as well as incremental demand from insurance, pension and other participants attracted to higher overall yields.
  • Going forward, we believe that poor fundamentals and valuations for investment grade, continued uncertainty in economies, as well as the potential for an increase in shareholder friendly activity, will result in frequent periods of volatility and prevent spreads from rallying materially in the coming year. Our conservative positioning is designed to allow us to opportunistically take incremental risk to capitalize on the volatility as it presents itself. In environments like these the cost of being defensive is very low.
  • We believe credit selection will continue to be paramount as the pandemic hopefully recedes and economies reopen. We continue to expect many mispriced credit situations as various industries, geographies and companies will differ dramatically in how they are affected by and respond to the reopening, as well as the evolving monetary and fiscal policy going forward.

The opinions expressed are those of the Fund's managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non- U.S. agencies, sovereigns, supranationals and local authorities. It is not possible to invest directly in an index.

Bloomberg Barclays U.S. Corporate High-Yield Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. It is not possible to invest directly in an index.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy ProShares S&P 500 Dividend Aristocrats Index Fund

Market Sector Update

  • The S&P 500 Index started the new year by posting solid returns of 6.2% during the first quarter. The market continued to be supported by optimism over the accelerated vaccine distribution and economic data trending in a positive direction. Additional stimulus delivery further bolstered markets, but concerns over the potential for higher inflation pushed the 10-year Treasury yield higher by 80 basis points and contributed to volatility during the period.
  • A notable change in style leadership emerged during the quarter as previously lagging value stocks significantly outperformed richly valued technology shares. Best performing sectors were the cyclical energy (30.9%), financials (16.0%) and industrials (11.9%) stocks. Underperformers for the quarter were consumer staples and information technology stocks which produced returns of under 3%.

Portfolio Strategy

  • The Fund delivered a positive return, and outperformed its benchmark for the quarter. Favorable stock screening and sector allocation impacts drove outperformance.
  • The largest relative contributors at the sector level were information technology, consumer discretionary, and industrials stocks. A sizeable underweight (over 20%) to information technology stocks drove most of the relative outperformance as the sector meaningfully underperformed the broader market for the period, thus helping relative performance.
  • Further adding to results was strong stock performance within the Fund’s discretionary stocks, which outperformed those from the broader market sector, and an overweight to industrials names, which were among the market’s best performers. Partially offsetting these results was the Fund’s overweight to staples stocks which were the market’s weakest performers during the quarter. An underweight to communication services also detracted, which turned in market beating performance.

Outlook

  • The Fund remains focused exclusively on companies within the S&P 500  Index that have grown dividends for at least 25 consecutive years. While not necessarily providing the highest dividend yield, the strategy is based on highquality companies with a consistent track record of dividend growth and provides the potential for attractive long-term outperformance.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The S&P 500® Dividend Aristocrats® Index measures the performance S&P 500® Index companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

The Fund is a passively managed index fund designed to track the performance of its stated benchmark index. It does not invest in securities based on the managers' view of the investment merit of a particular security or company, nor does it conduct conventional investment research or analysis or forecast market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities that, in combination, provide exposure to its respective benchmark Index without regard to market conditions, trends or direction.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. Large capitalization companies in which the Index and, by extension, the Fund are exposed may go in and out of favor based on market and economic conditions. The Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund entails other risks, including imperfect benchmark correlation and market price variance that may decrease performance. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the Index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Ivy VIP Limited-Term Bond

Market Sector Update

  • An improving economic outlook caused yields to rise across the maturity curve in the first quarter. While the yield on the 2-year U.S. Treasury note increased just under four basis points (bps) to 16 bps, the 3- and 5-year maturities saw yields move more dramatically from 18 and 57 bps to 35 and 94 bps, respectively.
  • The third round of stimulus combined with a successful vaccine rollout has increased both optimism and the prospects of a return to normalcy sooner rather than later. Employment rose 1.6 million in the quarter. While unemployment remains higher than pre-pandemic, the reopening of our communities has helped to recover about 62% of the jobs lost in the pandemic. Near the end of the quarter, the Biden administration announced an infrastructure wish-list to help build and repair highways, bridges, airports, water systems, electric grids and increase broadband access across the country. These are some factors leading to the greatly improved economic outlook and expectations for growth in 2021 after an unprecedented drop of -2.4% gross domestic product growth in 2020.
  • The Federal Reserve (Fed) was dovish at its March meeting and does not expect to taper its purchases of securities or to hike soon. The rise in yields was not a great concern as the prospects of growth naturally lead to a rise in yields. While it is anticipated that inflation will be elevated this year, Fed Chairman Jerome Powell expects it to be temporary. He noted the Fed wants to see inflation overshoot the 2% target for an extended period before taking action.
  • Credit spreads were subdued in the quarter. The Bloomberg Barclays U.S. Credit Index, a good gauge of credit spreads, a subset of which is part of the Portfolio’s benchmark, traded in an 11 bps range over the quarter and ended the quarter at 86 bps, six bps tighter than at year-end.

Portfolio Strategy

  • The dramatic rise in yields and the steepening of the yield curve presented an attractive opportunity to increase duration and the Portfolio’s allocation to intermediate maturities.
  • We added approximately 8-9% to our overall weighting in the 3- to 5-year part of the curve, raising duration slightly over the benchmark.
  • Most of the purchases in the Portfolio were in investment-grade corporate bonds. The decision to own any bonds beyond the maturity of those in the benchmark, however, caused the Portfolio’s underperformance in the quarter.

Outlook

  • Rising yields can be unsettling to bond markets because they can lead to losses. We believe these rate moves present opportunities to add yield to the Portfolio at a time when it is relatively cheap. We don’t think rates will go materially higher and remain there. We believe the Fed has plenty of tools to use if it feels the need to calm the markets. While we don’t know what level would cause Fed action, we feel it will act to lower yields should it be necessary. The Fed has said it will be keeping rates low for a long time. We believe the portfolio is now better positioned to participate in the carry trade in the market.
  • We are still in the throes of a pandemic that has brutally taken so many lives and livelihoods. While it has been a difficult year, many people have been vaccinated and some level of normalcy is beginning to return. Both the desire and the ability to return to a sense of normal are necessary for the economy to begin to return to growth.
  • Our first responsibility is capital preservation. With that responsibility always in view, we will look for opportunities to invest in securities in which we have high conviction that their addition will positively contribute to the Portfolio’s total return over the life of the investment.

The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non- U.S. agencies, sovereigns, supranationals and local authorities. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rate rise. These and other risks are more fully described in the Portfolio's prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy Government Securities Fund

Market Sector Update

  • An improving economic outlook caused yields to rise across the maturity curve in the first quarter. While the 2-year U.S. Treasury note increased just under four basis points (bps) to yield 16 bps, the 10-year and 30-year maturities saw their yields move dramatically by 83 and 77 basis points to yield 1.74% and 2.41%, respectively. The yield curve steepened from 79 bps at year end to 158 bps at the end of March.
  • The third round of stimulus combined with a successful vaccine rollout has increased both optimism and the prospects of a return to normalcy sooner rather than later. Employment rose 1.6 million in the quarter. While unemployment remains higher than pre-pandemic, the reopening of our communities has helped to recover about 62% of the jobs lost in the pandemic. Near the end of the quarter, the Biden administration announced an infrastructure wish-list to help build and repair highways, bridges, airports, water systems, electric grids and increase broadband access across the country. These are some factors leading to the greatly improved economic outlook and expectations for growth in 2021 after an unprecedented drop of -2.4% gross domestic product growth in 2020.
  • The Federal Reserve (Fed) was dovish at its March meeting and does not expect to taper its purchases of securities or to hike soon. The rise in yields was not a great concern as the prospects of growth naturally lead to a rise in yields. While it is anticipated that inflation will be elevated this year, Fed Chairman Jerome Powell expects it to be temporary. He noted the Fed wants to see inflation overshoot the 2% target for an extended period before taking action.
  • The spreads of agency mortgage bonds continued to tighten in the quarter across the residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collateralized mortgage obligations (CMO) asset classes. Prepayment speeds continued to increase during the period, despite the large move in rates in the long end of the curve.

Portfolio Strategy

  • The dramatic rise in yields and the steepening of the yield curve presented an attractive opportunity to increase the Fund’s duration and the allocation to longer maturities.
  • We added approximately 3% in longer duration U.S. Treasuries, raising duration relative to the benchmark from 91% to 101%.
  • We believe prepayment risk in mortgages will decrease soon because of the recent 40 bps rise in mortgage rates. We continue to favor agency CMBS bonds and short-duration agency CMOs with strong current yield and prepayment protections.

Outlook

  • Rising yields can be unsettling to bond markets because they can lead to losses. We believe these rate moves present opportunities to add yield to the Fund at a time when it is relatively cheap. We don’t think rates will go materially higher and remain there.
  • We believe the Fed has plenty of tools to use if it feels the need to calm the markets. While we don’t know what level would cause Fed action, we feel it will act to lower yields should it be necessary. The Fed has said it will be keeping rates low for a long time. We believe the portfolio is now better positioned to participate in the carry trade in the market.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Mark Beischel
Susan K. Regan

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Ivy California Municipal High Income Fund

Market Sector Update

  • The municipal market posted negative returns in the quarter. However, returns across the credit spectrum and the yield curve were not uniform. Higher quality returns were more negative the further one moved out on the curve, while performance was enhanced by bearing additional credit risk; A-rated, BBB-rated, below investment grade, and nonrated bonds posted positive returns with higher returns realized the further one moved down the credit spectrum. Credit spreads continued to tighten with the magnitude of compression incrementally greater the further out on the credit curve, while the yield curve steepened significantly. California municipal bonds returned -0.67%, underperforming the Bloomberg Barclays Municipal Bond Index.
  • Mutual fund flows into the asset class continued to be robust, as well as high levels of reinvestment flows from bond maturities, bond calls and coupon income. Tax-exempt new issue supply was not enough to satisfy the insatiable investment demand.
  • As yields on the highest quality bonds hovered near all-time low levels, investors moved further out on the credit spectrum, including high yield, in search of higher absolute yields. Credit spreads on BBB-rated bonds declined 37 bps while spreads on high yield bonds compressed 61 bps. President Joe Biden's American Rescue Plan, which included over $500 billion in aid to states, cities, public transit, education and airports, has materially enhanced the credit profile of many municipal issuers. Creditor protections in many lower quality new issues continue to be relaxed substantially. In the current yield-seeking environment, investors are showing little concern for bearing this increased credit risk, which is now lower for some as a result of the massive stimulus funding.
  • Defaults in the municipal bond asset class continue to be rare and tend to be highly concentrated in the high yield space. We are beginning to see distressed situations in the high yield space with more frequency; to date, these have been heavily concentrated in the continuing care retirement communities, speculative project finance, student housing, and hotel/convention center sectors. This will need to be monitored closely, and we will continue to exercise high levels of surveillance on our below investment grade and non-rated holdings. However, we expect the overall municipal market default rate to remain significantly lower than the corporate default rate, as has been the history between these markets.

Portfolio Strategy

  • The Fund posted a positive total return for the quarter, outperforming its peer group while underperforming both the benchmark and the Bloomberg Barclays 65% High Grade/35% High Yield Composite. The portfolio's duration is slightly shorter than its benchmark, and the portfolio is defensively structured with a higher quality emphasis.
  • At quarter-end, exposure to non-rated bonds was approximately 22%. While admittedly off the low spread level observed in early 2020 (pre-COVID-19 pandemic), high yield spreads are currently well below both 5-year and 10-year averages.
  • The Fund is underweight tobacco with an 8.23% allocation versus 12.3% in the Bloomberg Barclays Municipal High Yield Index. The Fund’s strategy is to seek attractive income with low volatility. We intend to increase exposure over time but expect to remain underweight tobacco versus the benchmark.
  • The Fund continues to have a relatively small exposure to insured Puerto Rico bonds (1.0%), which are exempt from both California and federal taxes. However, we continue to stay away from unenhanced exposure to the territory.
  • Persistent credit surveillance will be critical in this environment.

Outlook

  • We remain confident in our belief that investment grade municipal bond defaults will continue to be much lower than any other fixed income alternatives except U.S. Treasuries. The massive stimulus infusion from the American Rescue Plan has been a large credit positive for the overall municipal bond market. The State of California will receive approximately $26.2 billion in direct aid and localities are expected to receive an additional $14.97 billion.
  • We continue to take a long-term approach with credit selection. We will not compromise the overall credit quality of the Fund by chasing lower quality opportunities with poor bondholder protections and deteriorating credit profiles.
  • The Municipal Liquidity Facility (MLF) expired at year-end. While not widely utilized, it should be noted that the Federal Reserve is no longer in a position to be the lender of last resort in a crisis.
  • At this juncture, the municipal bond market is very expensive relative to taxable fixed income alternatives. There is euphoria as a result of the massive stimulus funds provided by the American Rescue Plan. Expected corporate and personal income tax rate increases on the horizon are also adding to the exuberance. Large investor flows into a negative supply market is also a tailwind. However, credit spreads are rapidly approaching the all-time lows observed last spring, and are well inside both 5-year and 10-year averages. While the market has recently decoupled from the U.S. Treasury market, we do not believe that this situation will be sustainable in the long run. Continued pressure on U.S. Treasury market yields will eventually have to be acknowledged by the municipal bond market, as has been the historical relationship between these markets.
  • One concern we have is the heavy concentration of assets in a select few high yield municipal bond funds. As of last year, five fund families controlled 80% of all high yield assets. That level of concentration has been a contributor to high levels of volatility in prior stressed market episodes, and we believe that this is a risk that needs to be monitored closely moving forward.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Bloomberg Barclays 65% High Grade/35% High Yield Composite is an unmanaged composite comprised of 65% investment grade municipal bonds (Bloomberg Barclays Municipal Bond Index) and 35% non-investment grade municipal bonds (Bloomberg Barclays Municipal High Yield Index).

The Bloomberg Barclays Municipal Bond Index is an unmanaged index comprised of securities that represent the long-term municipal bond market.

The Bloomberg Barclays Municipal High Yield Index is an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year. It is not possible to invest directly in an index.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. Because the Fund invests predominantly in California municipal securities, events in California are likely to affect the Fund’s investments and its performance. As with California municipal securities, events in any of the U.S. territories, such as Puerto Rico, Guam and the U.S. Virgin Islands, where the Fund is invested may affect the Fund’s investments and its performance. These events may include economic or political policy changes, tax base erosion, constitutional limits on tax increases, budget deficits and other financial difficulties, and changes in the credit ratings assigned to municipal issuers of California or U.S. territories. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Ivy Wilshire Global Allocation Fund

Market Sector Update

  • The U.S. stock market, represented by the Wilshire 5000 Total Market Index, was up 6.49% for the quarter. Inflation indexes have been on the rise during the past few months, with growth rates meaningfully above 2%. Part of the jump in prices is due to depressed prices six months earlier, but the most recent observations suggest that there are new inflationary pressures within the U.S. economy. Investors are expecting at least some continued inflation as the 10-year breakeven inflation rate equaled 2.38% at quarter-end, the highest level in more than five years. U.S. Federal Reserve (Fed) Chair Jerome Powell does not expect much higher inflation in the near-term and the Fed will likely remain patient regardless of price increases above their 2% target.
  • All eleven sectors were in positive territory with energy (+31.7%) and financials (+16.7%) representing the best performing sectors. The main laggard this quarter – information technology (+1.4%) – is also the largest U.S. sector at 25% of the Index. There was meaningful return dispersion between size and styles this quarter as the large-cap value index outperformed growth by 7.8% and small-cap outperformed large-cap by 7.7%.
  • Equity markets outside of the U.S. also enjoyed a strong quarter, with emerging markets trailing developed markets. Economic indicators out of the U.K. have been encouraging recently, although a slight contraction in growth is expected for the first quarter. Prime Minister Boris Johnson announced a “roadmap” for reopening the economy from the U.K.’s third lockdown, with restrictions being lifted entirely by midsummer. Conditions in Germany are more concerning as AstraZeneca’s COVID-19 vaccine has been suspended due to concerns about serious complications.
  • The U.S. Treasury yield curve was up significantly across most maturities during the first quarter, with the long end approaching pre-COVID levels. The 10-year Treasury yield ended the quarter at 1.74%, up 82 basis points from December. Credit spreads tightened with the spread on the broad high-yield market closing the quarter at 3.10%. The Federal Open Market Committee met twice during the quarter, as scheduled, with no change to their overnight rate.

Portfolio Strategy

  • The Ivy Wilshire Global Allocation Fund uses a “fund-of-funds” structure that allocates assets among affiliated equity and fixed-income mutual funds with both domestic and foreign investment strategies. As of quarter end, Ivy International Core Equity Fund was the largest underlying fund allocation at about 13.4%, followed by Ivy Value Fund at 10.8%.
  • The Fund recorded a positive gain for the quarter, outpacing its blended benchmark return. Global equity markets continued to rally during the quarter, spurred by improving economic results, a massive $1.9 trillion U.S. COVID spending package, and improving COVID infection and health outcomes. Virtually every major equity asset class rallied during the quarter, while fixed-income markets faced a more difficult road as the expected supercharged economic growth increased inflation fears and led to a rapid increase in U.S. Treasury yields. The U.S. dollar strengthened during the quarter, weighing on returns of unhedged foreign equity and fixed-income investments.
  • The Fund ended the quarter with approximately 33.4% allocated to fixed-income funds, 35.4% allocated to domestic equity funds, about 31.1% allocated to foreign equity and global real estate funds, and 0.1% allocated to private placement investments.
  • The three largest contributors to performance in the quarter were the allocations to Ivy Value Fund, Ivy International Core Equity Fund, and Ivy Pzena International Value Fund. Ivy Small Cap Core Fund was again the underlying allocation with the strongest absolute performance during the quarter, returning 15.67% on a stand-alone basis, while Ivy ProShares Russell 2000 Dividend Growers Index Fund generated a stand-alone return of 14.23%. Ivy Pictet Emerging Markets Local Currency Debt Fund recorded the worst stand-alone performance for the quarter, losing -5.56% as the combination of rising interest rates and a strengthening U.S. dollar weight on returns. Of the underlying funds that recorded negative results for the quarter, all are fixed-income funds.
  • The Fund’s largest position, Ivy International Core Equity Fund, was a material contributor to returns, adding 0.82% to Fund results on stand-alone performance of 6.32%. Overall, exposure to equity and real estate funds contributed 4.44% to the Fund for the quarter on stand-alone performance of 6.82%. The Fund’s allocation to fixed-income funds detracted -0.79% to Fund results on stand-alone performance of -2.25%.

Outlook

  • The Fund’s allowable allocation ranges are accommodating, but we anticipate equity-oriented investments will range from 55-75% and fixed income-oriented investments will range from 25-45% during most market environments. The Fund’s long-term strategic target is a 65% allocation to global equities and 35% to global fixed income.
  • The rapid expansion of the COVID vaccine rollout within the U.S. should help the economy continue its reopening, even if a dreaded fourth infection surge occurs. This re-opening, coupled with the latest round of stimulus checks and other aspects of the latest stimulus bill, is likely to propel domestic economic growth and rapidly improve corporate profitability. While meaningful profit growth is already priced into equities, there is a strong likelihood that growth may be even better than expected, which would continue to push equity prices higher.
  • The pace of the vaccine rollout in Europe and much of the developing world is disappointing, but in countries where vaccinations have surpassed a meaningful level, the various vaccines appear to be working well to improve health outcomes, so as countries improve their vaccination rates, hurdles to economic growth should be reduced and those countries may begin to experience meaningful economic growth later in 2021 and into 2022.
  • Although we did not expect interest rates to fall during the first quarter, we were surprised by how rapidly interest rates increased. Continued economic expansion, expected increases in inflation, and any additional government spending may continue to put upwards pressure on interest rates, but the Federal Reserve is unlikely to allow treasury yields to rise to pre-pandemic levels in the coming months, so there is an implied ceiling on interest rates that is likely well below 3% for the 10-year Treasury.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

Wilshire Associates sub-advises a portion of the Fund consisting of the multi-asset segment, which invests in affiliated mutual funds, and shall have no responsibility over any other assets or segments of the Fund.

The Wilshire 5000 Total Market Index is an unmanaged index that represents the total U.S. equity market. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. The performance of the Fund will depend on the success of the allocations among the chosen underlying funds. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in small-capitalization stocks may carry more risk than investing in stocks of larger more well-established companies. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large-capitalization companies could trail the returns on investments in securities of smaller companies. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Chace Brundige
W. Jeffery Surles, CFA

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Ivy Securian Real Estate Securities Fund

Market Sector Update

  • The big story in the first quarter was a continued shift to strategies that are poised to capitalize on better growth this year. This propelled strong returns for previous laggards like small caps, cyclical stocks and value strategies. Real estate stocks were no different, with an elongation of the rotation that started in December 2020 as a result of the Pfizer vaccine announcement. Simply put, last year’s losers continue to be the winners so far this year. Hotels and retail, last year’s laggards, widely outstripped real estate investment trust (REIT) returns.
  • The economy built on fourth quarter momentum and accelerated early this year. The Federal Reserve (Fed) and President Joe Biden’s administration are doubling down on policy support to make sure the economy takes off. New relief measures and a clearer path to lifting restrictions laid the foundation for the fastest expected growth in decades.
  • Despite the forecast for eye-popping growth, the Fed is steadfast in its commitment to keep a lid on rates until there is clear evidence of full employment and realized inflation. Members of the Federal Open Market Committee (FOMC) predict this process will take at least two years. Policymakers expect easy money to spur investment and better productivity, increasing sustainable growth. This risks an overshoot, but Fed officials are confident in their ability to slow the economy with available monetary tools if needed.
  • While longer interest rates have risen on faster growth, the current movement isn’t alarming. Long-term rates rose while short rates remained anchored near zero, in line with Fed guidance. Long-term expectations remain in check, near the Fed’s 2% target. The recent increase in rates isn’t enough to slow the economy and reflects expectations for a return to normal growth and inflation in years to come.

Portfolio Strategy

  • Despite a quarter characterized by deep-value, smaller-cap stocks being in favor, the Fund outperformed the FTSE NAREIT Equity REIT Index. We found quality names trading at significant discounts, which offset the drag from the Fund’s otherwise larger cap, growth-biased profile. Favorable decisions were a move to overweight senior housing, retail and hotel owners. The most significant drags on performance came from not owning last year’s laggards, such as New York City office owners and Net Lease companies who own paper document storage facilities, movie theaters and outdoor billboards. Five companies out of the index that fall into this esoteric group caused a 0.5% drag on performance.
  • Office stocks were the biggest detractors to performance in the quarter. Many office stocks returned 15%-25%. Investors flocked to beaten up office names and have come to embrace the notion that office usage isn’t dead. We agree that offices are not obsolete but believe that work-from-home will alter office demand and operating costs in significant ways.
  • With vaccinations beginning, investors could finally estimate a trough in senior housing occupancies and look forward to resumed earnings growth. With occupancies hovering in the high-70% to low-80%, these companies have an attractive runway for future earnings growth.
  • Retail REITs were a top performer with the mall and shopping center subsectors leading. While tenant health took a step back in 2020, valuation in the space was very compelling entering the quarter and increasing optimism led to outperformance in the quarter. The portfolio had a substantial overweight to the retail space entering the period, but valuations became less compelling as the quarter progressed and we have now shifted to an underweight position for malls and shopping centers.
  • Hotel REITs were one of the largest beneficiaries of vaccine rollouts and economic reopening. A combination of an overweight to the sector and favorable stock selection aided relative performance in the quarter. We remain overweight to the space.
  • Datacenter and tower REITs, which were some of the top performers in 2020, lagged the broader REIT sector. Neither sector contributed significantly to relative performance, but as valuations became more compelling in the period, the Fund shifted to an overweight by the end of the quarter. We continue to see strong growth prospects for this space.

Outlook

  • We must consider whether the beneficiaries of the reopening have run too far, too fast. We believe some have and we made several portfolio changes to reflect our conviction that high quality, larger cap growth stocks will again be favored as we move through the balance of the year.
  • Recent fiscal and monetary policies are unprecedented. The levels of fiscal support and easy money already in place are each considerable. Together, these policies – and proposed programs - are taking us into the unknown. The economy is poised for takeoff with plenty of liquidity as an accelerant. We’re likely to exceed pre-pandemic trend growth by the end of this year, and new businesses are forming at a rapid pace. For now, the potential benefits to the economy, and more importantly, to people, seem to outweigh the risks. But it would be imprudent to think that there isn’t a potential downside as well.
  • While it appears a real estate recovery has begun alongside the economic recovery, we doubt all property types will return to pre-pandemic cash flow levels in lockstep. Those with short duration lease profiles such as apartments, single family rentals, and self-storage should fare well in a rising inflation environment. Others, such as retail and hotels may take years before they reach 2019 earnings.
  • The pandemic accelerated trends that were already in place and put a spotlight on those with strong and bleak futures. Work-from-home is here to stay, and demand for office space and business travel will likely face a long recovery; as will bricks and mortar retail. Meanwhile, we believe strongly in “new economy” sectors such as data centers and cell towers. Although we selectively exploited several obvious public market pricing anomalies, we have largely avoided companies that we believe are more exposed to these post-pandemic trends. We have continued to focus the portfolio’s positioning to take advantage of those we believe will recover and thrive in a post-COVID-19 world.
  • REIT stocks remain attractively valued, particularly against the backdrop of Fed actions, improving economic growth, and forever low interest rates. Indeed, one could characterize an environment where the 10-year U.S. Treasury rate remains range-bound, coupled with steadily improving economic growth as nirvana for real estate. New vaccine-resistant strains, and persistently higher 10-year U.S. Treasury rates represent two primary risks that could cause the group to deliver uninspiring returns again in 2021.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The FTSE NAREIT Equity REITs Index is designed to present investors with a comprehensive family of REIT performance indexes that spans the commercial real estate space across the U.S. economy. The FTSE NAREIT Equity REITs index contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. These and other risks are more fully described in the fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy ProShares S&P 500 Bond Index Fund

Market Sector Update

  • The U.S. yield curve continued to steepen as long end rates rose to pre-pandemic levels driven by strong economic signals and inflationary concerns. The 10-year yield increased 84 basis points (bps) ending the quarter at its highest level since January of 2020.
  • Demand for investment-grade corporate credit fell across the board. Nearly all maturity ranges and credit tiers fell out of favor as markets repositioned risk levels.
  • A strong employment report and the announcement of additional fiscal stimulus propelled U.S. equity markets to all time records. The successful roll out and progress of vaccination efforts buoyed beliefs that global gross domestic product (GDP) was positioned for a significant rebound in 2021.

Portfolio Strategy

  • Nearly all maturity ranges were negative for the quarter with only the shortest duration bonds posting modest gains. In a sharp reversal from last year, all eleven sectors were negative; utilities, information technology and telecommunications produced the worst performance while energy and industrials fared the best.
  • Investment-grade corporate spreads widened throughout the quarter with higher quality corporate bonds performing worse than lower quality bonds.
  • Given the relatively unreceptive market uptake, corporate bond issuance slowed during the quarter compared to prior years.

Outlook

  • With the latest release of President Biden’s “American Rescue Plan”, focus has shifted to the impact of the $1.9 trillion relief package. Consensus now points to increased government spending, higher corporate tax rates, a weaker U.S. dollar and inflationary pressures that could have the U.S.Federal Reserve acting sooner than previously anticipated.
  • Credit rating downgrades and default risk have plateaued. Issuance is most likely to slow as corporate issuers have taken advantage of the funding/refinancing opportunities that 2020 presented.
  • Despite an uptick in inflation expectations, interest rates will most likely remain low for some time. Yield starved investors will continue to chase higher returns by moving into riskier securities which could present opportunities for high quality corporate bonds.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The S&P 500® /MarketAxess® Investment Grade Corporate Bond Index seeks to measure the performance of corporate debt issued in the U.S. by S&P 500 companies. It is a market value-weighted subset of the S&P 500 Investment Grade Corporate Bond index that seeks to measure the performance of corporate debt issued in the U.S. by companies (and their subsidiaries in the S&P 500), subject to additional liquidity rules. Indexes are unmanaged and one cannot invest directly in any index.

The Fund is a passively managed index fund designed to track the performance of its stated benchmark index. It does not invest in securities based on the managers' view of the investment merit of a particular security or company, nor does it conduct conventional investment research or analysis or forecast market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities that, in combination, provide exposure to its respective benchmark Index without regard to market conditions, trends or direction.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. As of November 30, 2018, the index was concentrated in the financial industry group; therefore, the Fund is subject to the same risks faced by companies in the financials industry to the same extent as the index is so concentrated. Such risks include extensive government regulation, fluctuation of profitability, and credit losses resulting from financial difficulties of borrowers. A number of factors may affect the Fund's ability to achieve a high degree of correlation with the Index, and there is no guarantee that the Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Ivy Mid Cap Income Opportunities

Market Sector Update

  • The Russell Midcap Index (the Fund’s benchmark) rose 8.1% in the quarter, continuing a strong ascent. All sectors produced positive absolute returns, but a decisive pro-cyclical undercurrent was present in the quarter. Energy rebounded from dismal performance throughout the majority of 2020. The communications services, financials, consumer discretionary, materials and industrials sectors all bested the benchmark’s strong return. Stability was an area of underperformance for the utilities and consumer staples sectors. Information technology and health care also underperformed as these sectors saw the greatest benefit from the pandemic. Throughout the quarter, long-term interest rates moved decisively higher (almost doubling), increasing 0.80% to end the quarter near 1.7% on the 10-year US Treasury. Dividend payers nicely outperformed during the quarter, reversing a multi-quarter headwind.

Portfolio Strategy

  • The Fund returned double-digit performance, outperforming its benchmark for the quarter. Dividend income added slightly to performance in the period. The quarter benefited from both positive sector allocation and security selection, with allocation contributing the lion’s share. While our overweight position in financials lead to the greatest allocation contribution, we benefited across almost every sector allocation position. Our security selection outperformance, highlighted by consumer discretionary, industrials and information technology, was slightly offset by materials and financials. The overall market environment was favorable to our investment strategy that adheres to a level of valuation discipline by focusing on dividend-yielding companies.
  • Consumer discretionary was our largest overall contributor in the quarter. We were significantly overweight this outperforming sector and benefited from strong stock selection. Polaris has seen demand for its products remain exceptionally strong. This has driven the need for a significant increase in production for the company. Travel + Leisure also experienced nice appreciation as investors grew more optimistic about travel. It appears there is a lot of pent-up demand for leisure travel and the consumer is flush with significant savings accounts. This environment also benefited Cracker Barrel, a long-term Fund holding. Information technology and health care were areas of relative strength for the Fund. Performance in these sectors was more about significant underweight positions driven by lack of dividend payers in these areas. In addition, our ownership is skewed toward more reasonably priced securities versus those with significant revenue or earnings multiples. The other positive standout in the quarter was industrials. Snap-on, a manufacturer of tools for transportation industries, saw significant growth in its tools division, an area of historic concern for investors. nVent Electric, a supplier of electronic equipment, also contributed to performance as the company saw its valuation discount relative to its peers begin to close. The energy sector was an opportunity cost during the quarter. Our sole holding was unable to keep up with the strong returns seen across the sector as oil prices appreciated.

Outlook

  • We continue to watch several key variables to determine Fund positioning. These variables (domestic economic growth, change in interest rates, change in commodity prices and foreign economic growth) have remained consistent since the Fund’s inception and continue to be monitored.
  • We have strong confidence in robust economic activity as 2021 unfolds. Following a year spent in our respective cocoons and following the inoculation of much of the population, we believe communities will be ready to party, entertain and travel. While unemployment will likely remain above levels seen in 2019, those that have jobs have built up significant levels of savings, partially supported by government stimulus checks. Just as second quarter 2020 saw a historic decline in year-over-year gross domestic product (GDP) growth, we expect second quarter 2021 to experience a historic increase in GDP growth. Given the length and uncertainty of the pandemic, we saw inventory levels decrease across the U.S. economy and as sales have returned, many industries have struggled to rebuild to acceptable safety stock levels. This should also nicely contribute to overall growth. Said differently, we are expecting a very strong domestic economy. While this would normally translate into a more optimistic view of the equity markets, we are more cautious. We believe, with the strength in overall equities in 2020 despite a difficult economic backdrop, much, if not all, of this strength has been discounted into the market. Multiples have been ever-increasing, particularly in the more forward-facing information technology sector. Innovation is robust and business models are enviable; however, we believe much of the future has been discounted in these areas. There are also many companies, in technology as well as other sectors, that saw their sales significantly benefit from the pandemic. The lengths of this benefit are unknown at this point but many of these companies have significant forward expectations implied by their valuations. While there will be some that are able to prove their worth as they deliver results despite more difficult comparisons, it may be more difficult for others and that could create an anchor for the overall market. As the vaccine is distributed globally, the pandemic moves to the rear-view mirror and we return to some level of normalcy, there is some potential for upward pressure on long-term rates given the significant government spending put in place to combat the economic pressures. We believe many companies that saw a benefit to their business models in 2020 chose not to take advantage of the increased pricing power. As time passes, we would expect many companies to begin raising prices where demand has been strong. While slow to work its way into the economic numbers, we are experiencing significant inflation in the housing market. As time passes, our expectation would be for rates to move higher off the current low base, but are unlikely to return to pre-virus levels given the anchoring put in place by the Federal Reserve. We anticipate being able to provide investors with a very competitive yield relative to the fixedincome markets over the near to medium term. With expanding production in many end markets, we should see some inflationary pressures, but broadly believe we remained well supplied. This includes areas like oil where there remains significant excess capacity. While not a specific commodity, we do expect significant inflation from increased logistics costs with curtailed global airline capacity and a tightening truck market. While pressures exist, it is unlikely to pose an issue to corporate profit margins given inherent pricing power. With major global issues similar to those in the U.S., we expect many of the world’s economies to closely mirror that of ours. We are watchful for what a new administration in the White House brings to foreign relations, particularly with China. Early indications suggest limited economic changes should be expected, but rhetoric does appear more supportive toward fostering better relations and potentially better foreign growth.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings as a % of net assets as of 03/31/2021: Snap-On Inc. 3.0, Broadridge Financial Solutions, Inc. 3.0, Tractor Supply Co. 2.9, Stanley Black & Decker, Inc. 2.9, Garmin Ltd. 2.9, Clorox Co. 2.9, Watsco, Inc. 2.9, Cracker Barrel Old Country Store, Inc. 2.9, American Campus Communities, Inc. 2.9 and Packaging Corporation of America, 2.8.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It is not possible to invest directly in an index. All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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Article Related Management: 

Kimberly A. Scott, CFA
Nathan A. Brown, CFA

Article Type: 

Quarterly Fund Commentary

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