Market Sector Update

• The second quarter of 2017 brought once again a rally in the municipal market. With Donald Trump now seated as the President of the United States, the market began to realize Washington is a very difficult place to do business. Prospects of lower tax rates and faster economic growth in the near term began to fade as investors began to realize the municipal market was oversold. The second quarter of 2017 saw lower yields as investors realized that President Trump would not be able to fulfill all his promises, as he continues to struggle with Congress.
• Even with the rally in rates during the first half of 2017 we have become constructive on the high yield municipal space, as new issues come to market with more attractive yields and better collateral for investors.
• Going forward, we believe the municipal market is attractive vs. other fixed income asset classes based on higher tax adjusted returns. While the Federal Reserve is likely to continue to slowly raise rates in 2017, we believe the rise in rates has been dramatic and overdone in our view.

Portfolio Strategy

• The fund underperformed in the second quarter of 2017 as we were underweight tobacco bonds, which were the strongest sector in the municipal market, returning just over 18% for the first half of the year.
• We continue to favor revenue bonds over tax-backed debt as revenue bonds, in our view, provide higher yields and better diversification from general tax and pension issues currently affecting many municipalities.
• Going forward, we will look for opportunities in bonds with less defensive structures, as interest rates have risen so dramatically. We feel at this time it makes sense to begin to lengthen duration, as these bonds represent greater value than in the past as a result of the aggressive upward move in rates during the fourth quarter of 2016.

Outlook

• In the near term, we believe volatility will continue, as choppy economic data continues to globally create large amounts of uncertainty for markets. It is important that investors realize prudent managers diversify across states and sectors and always limit the amount of exposure to those variables as well as any individual bond.
• We believe investors will continue to search for tax-exempt yield due to higher tax rates, which should benefit the municipal market.

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 June 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.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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 INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.