Ivy Focused Energy NextShares

Ivy Focused Energy NextShares
09.30.18

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes, with U.S. equity markets again leading the way.
  • The U.S. dollar maintained its strength versus most world currencies. Steady growth in the U.S. economy continued to support the dollar.
  • Global trade and economic activity continued to be strong. Markets generally shrugged off the growing trade tensions between the U.S. and China despite additional tariffs between the two countries. The Trump administration completed a revamp of the North American Free Trade Agreement with Mexico and Canada – named the U.S.-Mexico- Canada Agreement – but trade talks with China did not make similar progress.
  • Oil prices moved higher, with Brent crude oil moving above $80 per barrel, despite Saudi Arabia and Russia increasing their production near all-time highs to help offset lower production in Iran and Venezuela. The Organization of Petroleum Exporting Countries (OPEC) met late in the quarter and made no changes to its output quotas for member states.
  • The new sanctions put on Iran by the U.S. are having a major impact on Iranian oil production. Oil production out of Iran could be down by 1 million barrels per day.

Portfolio Strategy

  • The Fund posted a small positive return for the quarter and slightly outperformed its benchmark index. It was 100% invested in the energy sector with about 82.5% of assets in domestic equities.
  • The Fund’s focus remains on investing in companies that can create value over the full course of the energy cycle. We believe those are 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 RSP Permian, Inc., WPX Energy Inc., Oasis Petroleum, Inc., Ensco PLC and Chevron Corp. (underweight an underperforming stock).
  • The five greatest detractors to relative performance were Exxon Mobil Corp., ConocoPhillips, Core Laboratories, Halliburton Co. and Pioneer Natural Resources Co.

Outlook

  • Our outlook has not changed in the quarter. We believe we are in the early stages of a cyclical recovery, as demand is outpacing supply of oil and inventories continue to fall.
  • Demand growth continues but the global economic recovery is more muted. We expect global economic growth to continue steadily for the remainder of this year and in 2019.
  • We believe the majority of oil production growth will come from U.S. shale oil areas. We estimate U.S. oil output will increase more than 1 million barrels per day in 2018 and 2019. However, we think supply growth outside North America will be modest.
  • We are seeing early signs of an international recovery, perhaps starting in the second half of 2019, as oil prices move higher and capital spending starts to increase. National oil companies are starting to deal with a reserve replacement challenge brought on by the under-investing of the last three years, which was a result of lower oil prices. Global oil discoveries are close to a historic low, replacing only about 15% of production last year.

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, 2018, 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 09/30/2018: Concho Resources, Inc., 8.70%; Continental Resources, Inc., 6.52%; Oasis Petroleum LLC, 5.18%; Pioneer Natural Resources Co., 4.95%; Parsley Energy, Inc., Class A, 4.78%; Schlumberger Ltd., 4.75%; Halliburton Co., 4.73%; WPX Energy, Inc., 4.57%; Anadarko Petroleum Corp., 4.56%; Marathon Petroleum Corp., 4.52%.

IVY000200 01/31/2019

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.