Ivy ProShares S&P 500 Bond Index Fund

12.31.20

Market Sector Update

  • The U.S. yield curve continued to steepen during the final quarter of 2020, lifted by vaccination hopes and the expectation that a full recovery was in sight. The 10-year yield increased 23 basis points (bps) ending the year at its highest level since the depths of the market disruption in March.
  • Demand for corporate credit remained strong: average yields on investment-grade corporate bonds ended the year at all-time lows.
  • A somewhat disappointing employment report was offset by expectations for further fiscal stimulus. President-elect Biden unveiled plans for a $1.9 trillion relief package; a majority of which will go towards vaccination efforts and helping small businesses.

Portfolio Strategy

  • A passively managed index fund, the Fund performed in line with its benchmark for the quarter.
  • All maturity ranges were positive for the quarter with long duration bonds continuing to outperform.
  • For the third consecutive quarter, all eleven sectors were positive; energy, industrials and consumer discretionary produced the strongest returns with financials and information technology lagging despite solid performance.
  • Investment-grade corporate spreads tightened further during the quarter with lower quality BBB-rated credits outperforming higher quality corporate bonds.
  • Unsurprisingly, corporate bond issuance slowed significantly during the last three months of 2020. However, the annual totals still managed to shatter prior records: the $1.7 trillion of investment-grade bonds issued during the year was 35% higher than 2017’s prior record.

Outlook

  • With the latest release of President-elect Biden’s “American Rescue Plan”, focus has shifted to the impact of the $1.9 trillion relief package. Consensus now points to increased government spending, higher corporate tax rates, a weaker U.S. dollar and inflationary pressures that could have the U.S. Federal Reserve acting sooner than previously anticipated.
  • Credit rating downgrades and default risk have increased within lower quality corporates. Despite low interest costs, excessive leverage will continue to pose challenges if another economic slowdown occurs.
  • Despite an uptick in inflation expectations, interest rates will most likely remain low for some time. Yield starved investors will continue to chase higher returns by moving into riskier securities which could present opportunities for high quality corporate bonds.

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, 2020, 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 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.

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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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 November 30, 2018, 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.