Ivy Focused Energy NextShares

Ivy Focused Energy NextShares
12.31.18

Market Sector Update

  • World equity markets posted double-digit negative returns in broad market indexes in the fourth quarter with significant volatility again unsettling investors.
  • Volatility hit the oil markets in the quarter, with oil prices rising to a four-year high in October before collapsing more than $30 per barrel in the fourth quarter. Strong supply and demand fundamentals started to deteriorate in the second half of 2018, with concerns about slower global economic growth and its effect on demand; oversupply from OPEC and other producing countries; and stronger-than-expected growth in U.S. shale oil production.
  • The oil market was surprised in the quarter when the U.S. granted waivers for Iranian oil exports to many countries. The waivers and stronger-than-expected U.S. production growth led to the market oversupply.
  • OPEC and non-OPEC partners decided in December to cut production starting in January 2019 by 1.2 million barrels per day for a period of six months. We believe oil demand will continue to grow despite slower global economic growth and the production cuts by OPEC and partner states. We also think the reversal of some of the Iran sanction waivers will help rebalance the world oil market and support oil prices in 2019.
  • Global trade began to slow during the quarter, driven by a variety of factors. It is expected that the U.S. economy will continue to grow in 2019 but at a materially slower rate.

Portfolio Strategy

  • The Fund posted a negative return for the quarter and underperformed the negative return of the energy benchmark index. It was 100% invested in the energy sector with about 83% of net assets in domestic equities.
  • Stock selection in the energy sector was the key detractor to performance. Key detractors from performance relative to the benchmark index included Continental Resources, Inc., Oasis Petroleum, Inc., Parsley Energy, Inc., and Ensco PLC.
  • About 44% of the portfolio was allocated to holdings in the Oil & Gas Exploration & Production industry segment, followed by about 20% to Oil & Gas Equipment & Services. Those industry segments underperformed the index and its heavier weighting to integrated oil companies by 6.8% and 14.0%, respectively, which also detracted from relative performance.
  • The focus of the energy strategy remains on investing in companies that can create value over the full course of the energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

Outlook

  • We believe volatility in the oil markets will continue in 2019. The oil markets are concerned about a wide range of market and geopolitical issues, including:
    • Demand growth because of slower worldwide economic growth and the effect of the U.S.-China trade dispute, as well as greater supply growth because of U.S. shale oil production;
    • Uncertainty about how much OPEC and Russia will cut production, based on the December 2018 agreement, as well as OPEC’s long-term viability as a production cartel;
    • The eventual results in 2019 of the U.S. sanctions on Iran, the impact of reduced production from Venezuela, and the political stability of Libya and the Middle East in general;
    • The fact that very little production is coming off the market when compared to 2018; the U.S., Russia and Saudi Arabia are at all-time highs, and output from Libya and Nigeria has rebounded;
    • Uncertainty about whether U.S. shale companies will demonstrate capital discipline in an environment of lower oil prices;
    • The potential oil market impact of “IMO 2020,” which is the International Maritime Organization’s plan to enforce a lower global sulphur cap on fuel content beginning Jan. 1, 2020, in response to environmental concerns about harmful emissions from ships.
  • We believe OPEC took a positive step toward rebalancing the world oil market with its production cut and we think the move will help support prices in 2019. We believe these supply cuts along with continued oil demand growth will lead to a balanced market in 2019.
  • We also think OPEC’s decision gives U.S. exploration & production companies (E&Ps) the “all-clear” to continue maximizing oil production and taking market share, provided they have the cash flow. The U.S. has been the main supplier of new capacity over the last five years, and this is likely to continue for the foreseeable future.

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 Dec. 31, 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 12/31/2018: Concho Resources, Inc., 6.45%; Continental Resources, Inc., 6.09%; Pioneer Natural Resources Co., 5.93%; Marathon Petroleum Corp., 5.29%; Chevron Corp., 5.03%; Halliburton Co., 4.93%; EOG Resources, Inc., 4.88%; Anadarko Petroleum Corp., 4.71%; Enterprise Products Partners L.P., 4.50%; Schlumberger Ltd., 4.46%.

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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.

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