Ivy Focused Growth NextShares

Ivy Focused Growth NextShares
06.30.18

Market Sector Update

  • Second quarter equity performance was strong across all styles and capitalization ranges. Growth styles continued to outperform value styles while small-cap styles outperformed all capitalization styles according to broad market indices.
  • Most of the market gains in the quarter came in May as the technology sector pushed higher. However, during the quarter, especially in June, there was a clear underlying rotation to more defensive positions, specifically dividend payers and securities at lower valuation levels. This likely stems from falling bonds yields, concerns over global growth and progress toward implementation of trade tariffs.
  • Although trade war rhetoric was not expected to disappear, it unfortunately intensified during the quarter as the U.S. threated additional tariffs on China but also on several U.S. allies.
  • As the quarter closed out there were emerging signs that the trade war uncertainty was beginning to find its way into business and consumer confidence, supply chain lead times and Federal Reserve (Fed) outlook commentary.
  • The Fed increased rates in June, marking the second this year and seventh since the first hike back in December of 2015. The front end of the yield curve moved higher during the quarter while the 10 year, despite some notable swings, moved only slightly higher resulting in a further flattening in the yield curve.
  • Momentum and growth factors outperformed while value and quality underperformed. It is notable that more defensive factors, such as dividend yield, strongly outperformed momentum toward the end of the quarter.

Portfolio Strategy

  • For the quarter ended June 30, 2018, the Fund outperformed the Russell 1000 Growth Index, its benchmark. The outperformance was driven by favorable stock selection in technology and consumer discretionary. The Fund also benefited from having no exposure to consumer staples as that sector underperformed the benchmark.
  • Outperformance in technology was driven by overweight positions in salesforce.com, Adobe and MasterCard. These stocks benefited from a strong and sustained level of sales and earnings growth.
  • Consumer discretionary strength was driven by Ferrari and Home Depot. Ferrari posted continued earnings and revenue beats while preparing the company to move into electrification. Home Depot saw a rebound in performance post a slower, weather impacted first quarter.
  • Although modest in impact, the main detractors were financials and industrials. CME Group and Charles Schwab underperformed as volatility came off highs hit in the first quarter and similarly, short-term yields moved down from recent highs. Within industrials, Lockheed Martin and Caterpillar both underperformed on a mix of late cycle worries, trade war concerns and a stronger U.S. dollar.

Outlook

  • U.S economic data remained supportive of gross domestic product growth, likely 2.5%-3.0%, with few apparent excesses. Unemployment should continue to move lower while inflationary pressures continue to build. Fed tightening will continue as policy moves from accommodative to neutral. The general set-up is a move toward late cycle with increasing risk and volatility.
  • A full-blown trade war remains the biggest threat to markets. Globalization has been a boon to sales growth and profit margins for many U.S. companies. Many of these companies have also been revalued higher based on the stability and consistency in profitability given a global business model.
  • This highlights that not only would a trade war unwind some of the margin benefits accrued by globalization over the past several decades, but it could also lead to a revaluation lower in those equities that benefited.
  • Economist project limited first order impacts from tariffs, but clarity on trade rules is needed for corporations. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs will erode the strong business confidence built following tax reform. Willingness to invest capital in long-term growth projects will diminish if the rules to global trade are not known. That pause in spending will have economic and market ramifications.
  • If the trade war escalates then sectors considered more defensive – consumer staples and pharmaceuticals – would be a potential hiding spot for investors. Unfortunately, growth prospects in those sectors are currently limited and it appears too early to be interested in those areas on a fundamental basis. Thank you for your continued support.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 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.

IVY000194 10/31/2018

Top 10 holdings (%) as of 06/30/2018: Microsoft Corp. 8.4, MasterCard, Inc. 6.9, Amazon.com, Inc. 6.0, Home Depot, Inc. 6.0, Alphabet, Inc. 5.9, Adobe Systems, Inc. 5.5, salesforce.com, Inc. 5.4, PayPal, Inc. 5.0, Zoetis, Inc. 4.6 and CME Group, Inc. 4.4.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. 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. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

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.

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.