Ivy ProShares Interest Rate Hedged High Yield Index Fund

Ivy ProShares Interest Rate Hedged High Yield Index Fund
12.31.18

Market Sector Update

  • During the fourth quarter, the Treasury yield curve shifted lower as short- and long-term interest rates fell in response to the risk-off sentiment in capital markets. The curve remained fairly flat during the period as yields fell on the twoyear Treasury by 33 basis points (bps), by 44 bps on the five-year Treasury, and by 38 bps on the 10-year bond.As widely expected, the U.S. Federal Reserve (Fed) raised interest rates in December by another 25 bps, moving its target range to 2.25 – 2.50%. This was the fourth Fed rate hike in 2018. Even though high yield bonds were resilient through market volatility for much of the year, the fourth quarter proved to be a different story, as the FTSE High Yield (Treasury Rate-Hedged) Index, the Fund’s broad market target declined for the period.Credit spreads widened by over 200 bps during the quarter, and finished the period above their most recent five-year averages. Lower-quality bonds in the high yield market–specifically B and CCC rated bonds–were the worst performers during the period.

Portfolio Strategy

  • A passively managed index fund, the Fund posted negative gains for the quarter. Performance was driven primarily by losses from spread movement, and to a lesser extent, the cost of the interest-rate hedge. This was only partially offset by income earned from bond yields.
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Outlook

  • The 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. It appears market volatility will remain a factor for the foreseeable future, especially with the possible escalation of trade disputes with key U.S. partners. We believe the Fed will stay true to its monetary policy, continuing to raise the federal funds rate at a measured pace. Current spread levels are viewed as being in the tight to midpoint range for high yield bonds. Default in this area has been relatively low and is expected to continue this trend.

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.

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.

The FTSE High Yield (Treasury Rate-Hedged) Index is an index measuring the performance of high yield debt issued by companies domiciled in the U.S. or Canada. 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. 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.