Ivy ProShares S&P 500 Bond Index Fund

Ivy ProShares S&P 500 Bond Index Fund
12.31.18

Market Sector Update

  • The Federal Reserve (Fed) raised the federal funds rate by 25 basis points (bps) in December —the ninth rate hike since 2015— bringing the key rate to a range of 2.25–2.5%. Inflation has picked up slightly, but is still in line with the Fed’s target of a 2% annual rate.
  • The yield on the 10-year treasury ended the quarter at 2.69%, 54 bps lower than its intra-quarter high of 3.23%.
  • In December, the yield curve experienced its first inversion since 2007 as 2-year yields briefly inched above 5-year yields. The spread between 2-year yields and 10-year yields closed 2018 at 21 bps.
  • Corporate spreads widened during the quarter as the average option-adjusted spreads for investment-grade corporate bonds closed 44 bps wider; spreads on BBB-rate corporate bonds were 60 bps wider.

Portfolio Strategy

  • A passively managed index fund, the Fund had a negative return for the quarter. Shorter-dated bonds outperformed longer-dated bonds for the quarter with the 3–5 year duration range faring best.
  • Six of the 11 sectors were positive for the quarter. Higher beta sectors of energy and consumer discretionary were the worst performers, while the more rate-sensitive sectors of real estate and financials performed best.
  • Given the flight to quality during the latter weeks of the quarter, higher rated credits outperformed. Credits rated Aand higher were positive, while BBB-rated credits were negative.
  • Total issuance of investment-grade corporate bonds was down 14% in 2018. This was the first year-over-year decrease since 2010.

Outlook

  • The Fed appears to have changed its stance on continued rate hikes and has now taken a more “patient,” data dependent view on further tightening. Markets are now expecting a Fed rate hike “pause,” with futures pricing in just a 17% probability of a March rate hike and 0% for a June hike.
  • As was the case in 2018, the U.S. – China trade policy remains a significant risk. Growth in mainland China and Europe pose the greatest risks, as many market participants now see a potential for decelerated growth rate in global gross domestic product in 2019.
  • Markets will also be closely watching the ongoing negotiations regarding Brexit. The U.K. is scheduled to leave the European Union in less than 90 days and there is currently no deal in place. This could have a significant impact on corporate and sovereign bond markets – both in Europe and the U.S.

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.

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 S&P 500® /MarketAxess® Investment Grade Corporate Bond Index seeks to measure the performance of corporate debt issued in the U.S. by S&P 500 companies. It is a market value-weighted subset of the S&P 500 Investment Grade Corporate Bond index that seeks to measure the performance of corporate debt issued in the U.S. by companies (and their subsidiaries in the S&P 500), subject to additional liquidity rules. Indexes are unmanaged and one cannot invest directly in any 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. As of Nov. 30, 2017, the index was concentrated in the financial industry group; therefore, the Fund is subject to the same risks faced by companies in the financials industry to the same extent as the index is so concentrated. Such risks include extensive government regulation, fluctuation of profitability, and credit losses resulting from financial difficulties of borrowers. 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.