Market Sector Update

• Equity markets had a sharp fall in the fourth calendar quarter of 2018. Value investments were not immune, but the Fund’s benchmark, the Russell 1000 Value Index, fell about 2% less than the broad market.
• The economy and corporate earnings seem to be holding in fine, but there is fear of things worsening. Individual items such as the trade discussions with China, the lapsing of last year’s tax cut, the government shutdown and rising interest rates have soured investor enthusiasm.
• Looking ahead, many are questioning how deep the pullback will be. Are we simply slowing back down to normal after a year in which corporate profits rose 24%, or are we headed into something more severe such as a recession? We are carefully watching job creation and interest rates as clues to answer this question.

Portfolio Strategy

• The Fund outperformed its benchmark during the quarter, primarily due to individual stock selection.
• High current income is one of the objectives of the Fund, and we see the dividend growing at a low- to mid-single digit pace based on our current holdings and investment approach.
• Strength in various areas provided the outperformance. Four names each added more than 0.50% of relative performance during the quarter: Broadcom (technology semiconductors), AGNC Investment Corp. (mortgages), Omnicom (advertising) and Kohl’s (retail).
• The energy sector also added positive relative performance, although more from our lack of exposure than due to a particular stock. Avoiding energy was a correct call, as that sector was down 24.5% for the quarter.
• On the negative side, performance was hampered by ownership of the following banks: Regions Financial, Citizen’s Financial and FNB Corp. Electrical equipment manufacturer Eaton also fell more than the index. Economically facing sectors fared the worst, with the previously mentioned energy sector being joined by industrials, materials and financials as the sectors showing the most downside. Only the utilities sector had a positive return.
• The Fund does not attempt to make sector calls. It focuses exclusively on stock selection. We are overweight financials, where we find value and yield. In this area, we have been able to find good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value.
• The Fund is underweight areas of consumer staples, energy and real estate. We simply have not found many attractive investments at this time although we are constantly on the lookout should opportunities present themselves.

Outlook

• The U.S. economy has enjoyed a long successful run from the end of the 2008 recession. There was an additional boost with the tax cut in early 2018. Recent economic data supports the idea of a slowing economy but does not support the concept of a shrinking economy (recession). The current challenge will be for the Federal Reserve (Fed) to tighten money policy, yet not slow the economy into contraction. The Fed has slowed its projection to indicate a likelihood of two rate hikes in 2019. Slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, if interest rates rise too much thus helping create a recession. This is something we will watch carefully.
• While the economic forces listed above are clearly important factors, the portfolio management team’s first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Often this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, to benefit clients over the long run.

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 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.

IVY000216 04/30/2019

Top 10 holdings (%) as of 12/31/2018: American Capital Agency Corp. 6.6, Broadcom Corp. 6.0, Kohl’s Corp. 5.4, Phillips 66 5.1, Prudential Financial, Inc. 5.0, CVS Caremark Corp. 4.6, MetLife, Inc. 4.3, KLA-Tencor Corp. 4.3, AbbVie, Inc. 4.2 and Cummins, Inc. 4.1.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large cap sector of the stock 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. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Fund may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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.

NextShares^TM is a trademark of NextShares Solutions LLC. All rights reserved. Used with permission.

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.