Ivy ProShares S&P 500 Bond Index Fund

Ivy ProShares S&P 500 Bond Index Fund
06.30.18

Market Sector Update

  • The U.S. Federal Reserve (Fed) continued on its path of gradually raising rates, increasing its target rate by 25 basis points in June, moving its target range to 1.75 – 2.0%. 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 U.S. Treasury was as high as 3.12% during the quarter, the highest in five years, but closed the quarter at 2.85%, which as due in part to growing trade disputes between the U.S. and key trading partners.
  • The flattening yield curve is another notable change that has the potential to impacting the markets, as yield spreads between the two-year and 10-year U.S. Treasuries closed the quarter at 32 basis points (bps), the tightest since 2008.
  • Corporate spreads grew slightly during the quarter as the average option-adjusted spreads for investment grade corporate bonds widened by 10 bps.

Portfolio Strategy

  • A passively managed index fund, the Fund underperformed against its benchmark, the S&P 500 Bond Index.
  • All sectors were negative for the quarter. Telecommunication services, materials and consumer discretionary were the worst performers, while the more defensive sectors of health care and industrials were less impacted.
  • Along the credit spectrum, "BBB" rated credits underperformed higher quality bonds.
  • After a slow start of the year, corporate bond issuance rebounded during the period. Total investment-grade bond issuance was up 12% versus the same time period as last year.
  • Given spread changes along the curve, longer maturity corporate bonds underperformed shorter-dated bonds for the quarter.

Outlook

  • Markets continue to assess the impact of potential retaliation to U.S. tariffs along with other geopolitical risks that persist.
  • Signs of a near-term recession remain abated. However, as the yield curve continues to flatten, all eyes will look towards the possibility (and result) of curve inversion.
  • Increasing corporate yields will present market participants with tactical opportunities; however rising rates, widening credit spreads and inflationary pressures will continue to pose headwinds.

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, 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 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.

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 June 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.