Ivy ProShares Russell 2000 Dividend Growers Index Fund

Ivy ProShares Russell 2000 Dividend Growers Index Fund
09.30.17

Market Sector Update

  • U.S. small-cap domestic equities continued to show strong upward momentum in the third quarter, delivering solid returns of 5.7% for the period.
  • Market volatility remained at historically low levels while business sentiment and capital spending continued to track higher, indicating that investor confidence remains strong. Employment was strong and inflation remained in check.
  • The U.S. Federal Reserve (Fed) unveiled the details of its plans to slowly unwind its $4.5 trillion balance sheet while staying the course on interest rates normalization.
  • The quarter saw numerous potential disruptions – escalating tensions with North Korea, three devastating hurricanes and a lack of meaningful policy out of Washington. Through it all, the U.S. economic backdrop was resilient.

Portfolio Strategy

  • A passively managed index fund, the Fund posted positive gains for the quarter before the effect of sales charges, but fell short of its benchmark, the Russell 2000 Dividend Growth Index, and its broad market target, the Russell 2000 Index.
  • When comparing the benchmark to the broad market target, the sector allocation and negative stock screening contributed to underperformance.
  • The largest detractors to performance came primarily from poor stock performance within the health care and materials sectors. An overweight to consumer staples, which underperformed the broader market, also detracted from relative performance.
  • Partially offsetting these results was strong performance of producer durables holding Badger Meter, which delivered strong earnings and announced a 13% hike to its quarterly dividend.
  • Positive relative contributors were led by strong performance from Badger Meter, McGrath Rent Corp. and Avista Corp., all of which saw their share prices rally in excess of 20%.
  • Conversely, individual detractors to relative performance included AmTrust Financial, which saw its shares decline due to concerns of hurricane exposure. Also, National HealthCare reported disappointing earnings despite revenue increases and announced a $25 million stock repurchase program.

Outlook

  • The Fund’s portfolio remains focused exclusively on companies within the Russell 2000 Index that have grown their dividends for at least 10 consecutive years. While not necessarily providing the highest dividend yield, a strategy based on high-quality companies with a consistent track record of dividend growth provides the potential for attractive longterm outperformance.
  • Our outlook on economic expansion and corporate earnings growth remains fairly positive barring a major unforeseen event. We are cautiously optimistic about equities, which should be buoyed by good overall growth and a lack of substantial disruptions. Broadly, we believe the strong inertia to equities will continue.
  • While predicting the political landscape on any topic has proven near impossible, we maintain our bias that improvements in corporate confidence will continue as moves to lessen regulation and simplify the corporate tax code will be positives in the years ahead.

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 September 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.

The Fund is a passively managed index fund and 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 the Index without regard to market conditions, trends or direction.

The Fund entails other risks, including imperfect benchmark correlation and market price variance that may decrease performance. 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. 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.

The Russell 2000 Dividend Growth Index measures the performance of Russell 2000 companies that have increased dividends every year for the last 10 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 09/30/17: Franklin Electric Co., Inc. 1.9, H.B. Fuller Co. 1.9, BancFirst Corp. 1.9, Brady Corp. 1.9, Hawkins, Inc. 1.8, Tompkins Financial Corp. 1.8, Westwood Holdings Group, Inc. 1.8, UMB Financial Corp. 1.8, Connecticut Water Service, Inc. 1.8, MSA Safety, Inc. 1.8.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Small capitalization companies in which the Index and, by extension, the Fund are exposed may go in and out of favor based on market and economic conditions. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates