Ivy Energy NextShares


Market Sector Update

  • Stocks around the world continued to post gains in the quarter. Oil stocks generally rose toward the end of the third quarter as oil prices stabilized around $50 per barrel, although the sector overall has been disappointing over the course of 2017.
  • Two major hurricanes made landfall in Texas and Florida during the quarter, causing loss of life and widespread damage. While difficult to estimate with accuracy now, we think there may be a slightly negative effect on third-quarter U.S. gross domestic product (GDP). However, for all the damage to life and property, history shows that natural disasters ultimately have a net positive effect on GDP because of the rebuilding and replacement that follow.
  • Hurricane Harvey’s impact was felt across a wide section of the energy corridor in Texas. About 25% of total U.S. refining capacity was offline, while most of the oil production in the Gulf of Mexico and in Texas was spared. No refineries in the Houston area reported major damage from the storm, although many were hit with flooding and related storm effects. The price of crude oil slumped as demand slowed after Harvey, since refineries could not accept it, while the price of gasoline and other refined products climbed on continuing demand and the reduced supplies.
  • In terms of the U.S. energy industry, we anticipate a relatively short-term impact from Harvey and no long-term damage to refining capacity or the energy infrastructure. Most of the affected parts of the industry were returning to normal operations by the quarter’s end.

Portfolio Strategy

  • The Fund posted a positive return for the quarter that was less than the positive return of its benchmark index.
  • The Fund’s focus remains on owning companies that can create value over the full course of the energy cycle. We target companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.
  • The five greatest contributors to the Fund’s performance relative to its benchmark index in the quarter were RPC, Inc., Continental Resources, Inc., Cimarex Energy Co., WPX Energy, Inc., and Laredo Petroleum Holdings, Inc.
  • The five greatest detractors to relative performance were Chevron Corp., based on an underweight position relative to the benchmark in a stock that outperformed the sector; U.S. Silica Holdings, Inc., Parsley Energy, Inc., Pioneer Natural Resources Co. and Plains GP Holdings L.P.


  • Despite an abundance of supply sources for oil, the industry is in the early stages of a cyclical recovery as oil fundamentals have begun to improve. We think there is the potential for modest revenue growth for energy companies. Margins and returns also are likely to improve from their cycle lows in 2016. We believe the main drivers of this growth will be higher volume, higher capacity utilization and continued improvement in cost efficiency.
  • We expect demand for oil in the short-term to remain solid in a range of 1.0-1.4 million barrels per day. Worldwide oil inventories continue to fall as demand has been better than expected, while supply growth has been constrained by lower oil prices and high compliance by Organization of Petroleum Exporting Countries with output quotas.
  • The world oil market is expected to be heavily influenced by the supply fluctuation from U.S. shale, which has become the de facto swing supplier of oil. Oil supply from U.S. shale is still a small percentage of worldwide demand, but more importantly, it is likely to be about 75% of the supply growth in the world in the next year.
  • Our outlook overall has not changed in the quarter. Demand surprised us the most in the quarter, led by improving emerging markets, and we expect steady global economic growth to continue in the remainder of 2017 and 2018.

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 Sept. 30, 2017, 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 Equity Holdings as a percent of net assets as of 09/30/2017: Halliburton Co., 4.82%; RPC, Inc., 4.65%; Schlumberger Ltd., 4.50%; EOG Resources, Inc., 4.43%; Continental Resources, Inc., 4.26%; Pioneer Natural Resources Co., 3.73%; Parsley Energy, Inc., 3.62%; Cimarex Energy Co., 3.43%; Concho Resources, Inc., 3.29%; Diamondback Energy, Inc., 3.03%.

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 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. 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.

Ivy Nextshares are a new type of fund. NextShares funds have a limited operating history and may not be available at all broker/dealers. There is no guarantee that an active trading market for NextShares funds will develop or be maintained, or that their listings will continue or remain unchanged.

About NextShares: Shares of NextShares funds are normally bought and sold in the secondary market through a broker, and may not be individually purchased or redeemed from the fund. In the secondary market, buyers and sellers transact with each other, rather than with the fund. NextShares funds issue and redeem shares only in specified creation unit quantities in transactions by or through Authorized Participants. In such transactions, a fund issues and redeems shares in exchange for the basket of securities, other instruments and/or cash that the fund specifies each business day. By transacting in kind, a NextShares fund can lower its trading costs and enhance fund tax efficiency by avoiding forced sales of securities to meet redemptions. Redemptions may be effected partially or entirely in cash when in-kind delivery is not practicable or deemed not in the best interests of shareholders. A fund’s basket is not intended to be representative of the fund’s current portfolio positions and may vary significantly from current positions. As exchange-traded securities, NextShares can operate with low transfer agency expenses by utilizing the same highly efficient share processing system as used for exchange-listed stocks and ETFs. Trading prices are linked to the NextShares next-computed NAV and will vary by a market-determined premium or discount, which may be zero; may be above, at or below NAV; and may vary significantly from anticipated levels. Purchase and sale prices will not be known until the NextShares NAV is determined at the end of the trading day. NextShares do not offer the opportunity to transact intraday based on current (versus end-of-day) determinations of a fund’s value. Limit orders can be used to control differences in trade prices versus NAV (cost of trade execution), but cannot be used to control or limit execution price. Buying and selling NextShares may require payment of brokerage commissions and expose transacting shareholders to other trading costs. Frequent trading may detract from realized investment returns. The return on a shareholder’s NextShares investment will be reduced if the shareholder sells shares at a greater discount or narrower premium to NAV than he or she acquired the shares.

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Ivy NextShares funds are managed by Ivy Investment Management Company and are distributed by ALPS Distributors, Inc.

ALPS Distributors, Inc., NextShares Solutions LLC, and Ivy Investment Management Company or Ivy Distributors, Inc. (or their affiliates) are all unaffiliated companies.