Ivy ProShares Interest Rate Hedged High Yield Index Fund

Ivy ProShares Interest Rate Hedged High Yield Index Fund
06.30.19

Market Sector Update

  • During the second quarter, the Treasury yield curve shifted lower as both short- and longer-term interest rates fell. The front portion of the curve remained inverted for much of the period as shorter term rates were higher than longer term rates. During the quarter, yields on the 2-year Treasury bill fell 51 basis points (bps), 46 bps on the five-year Treasury note and 40 bps on the 10-year bond. After a very strong start to the year, risk assets –including high yield bonds – experienced more volatility during the second quarter. Interest rates continued to fall as economic data weakened and inflation remained stubbornly low. Credit spreads ultimately ended the period marginally lower, but experienced volatility during the quarter, especially during May’s market sell-off.

Portfolio Strategy

  • A passively managed index fund, the Fund posted positive gains for the quarter. Performance was driven primarily by gains from spread movement, and to a lesser extent, the income earned from bond yields. This was only partially offset by cost of the interest rate hedge. This Fund consists of a portfolio of diversified high-yield bonds combined with positions in short Treasury futures that are designed to offset the interest rate risk inherent in high-yield bonds. The Fund’s performance can be broken into these components: 1) high yield bond yields, 2) the cost of the Treasury hedge, 3) the impact of credit spread changes, and 4) the impact of interest rate changes.

Outlook

  • Expectations are rising for a rate cut of at least 25 bps by the U.S. Federal Reserve (Fed) in July. The influx of data ahead of the meeting could shift expectations. May’s employment report was weak with nonfarm payroll number posting a gain of just 75,000 jobs. However, there will be another employment report and the first reading on secondquarter gross domestic product before the next Fed meeting. The Fed rate hikes are behind us and the potential for cuts lies ahead, both of which should support performance. In dealing with slower growth in the eurozone, the European Central Bank said it will do “whatever it takes” to help deliver positive growth to many European economies. We continue to keep an eye on the yield curve, oil prices, improvements or lack thereof of leverage and coverage ratios across our holdings. Not all signs are indicating green lights for investors, but our base-case is that a recession is not in 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 June 30, 2019, 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.

The Fund is a passively managed index fund designed to track the performance of its stated benchmark index. It does not invest in securities based on the managers' view of the investment merit of a particular security or company, nor does it conduct conventional investment research or analysis or forecast market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities that, in combination, provide exposure to its respective benchmark Index without regard to market conditions, trends or direction.

Jeffrey Ploshnick served as a portfolio manager on the Fund until April 2019.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. While the Fund attempts to track the performance of its stated index, there is no guarantee or assurance that the methodology used to create the index will result in the Fund achieving high, or even positive, returns. The Index may underperform, and the Fund could lose value, while other indices or measures of market performance increase in value. 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 Index (and, therefore, the Fund) seeks to mitigate the potential negative impact of rising Treasury interest rates on the performance of high yield bonds by taking short positions in U.S. Treasury Securities. Such short positions are not intended to mitigate credit risk or other factors influencing the price of high yield bonds, which may have a greater impact than rising or falling interest rates, and there is no guarantee that the short positions will completely eliminate the interest rate risk of the long high yield bond positions. The Fund's use of derivatives presents several risks, including the risk that these instruments may change in value in a manner that adversely affects the Fund's net asset value and the risk that fluctuations in the value of the derivatives may not correlate with the reference instrument underlying the derivative. A number of factors may affect the Fund's ability to achieve a high degree of correlation with the Index, and there is no guarantee that the Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective. 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. 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.