Ivy ProShares S&P 500 Dividend Aristocrats Index Fund

Ivy ProShares S&P 500 Dividend Aristocrats Index Fund
09.30.17

Market Sector Update

  • Large-cap domestic equities continued to show strong upward momentum, outperforming both mid-cap and smallcap stocks in the third quarter.
  • 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 S&P 500 Dividend Aristocrats Index, and its broad market target, the S&P 500 Index.
  • When comparing the benchmark to the broad market target, the sector allocation contributed to underperformance, which was partially offset by favorable stock screening.
  • At the sector level, the Fund’s underweight position to technology was a leading detractor given the sector’s overall performance for the quarter. Strong performance from stocks in the consumer discretionary, industrials and financials sectors helped to partially offset the impact from detractors in the materials and health care sector.
  • Two health care companies – Cardinal Health and Medtronic – suffered double-digit losses after releasing disappointing earnings statements.Cardinal Health lowered 2018 guidance when reporting its fiscal 2017 results in August. Medtronic’s stock price declined on tepid revenue growth despite reporting better-than-expected first quarter earnings
  • Conversely, Leggett & Platt, a furniture manufacturer, announced a 5.9% quarterly dividend increase, extending its record of consecutive annual dividend increases to 46 years.
  • Positive relative contributors were led by double-digit gains from overweight positions in T. Rowe Price, Abbvie and industrials holding Dover, which announced a 7% increase to its quarterly dividend.

Outlook

  • The Fund’s portfolio remains focused exclusively on companies within the S&P 500 Index that have grown their dividends for at least 25 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 long-term 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 S&P 500 Dividend Aristocrats Index measures the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 09/30/17: AbbVie, Inc. 2.3, Genuine Parts Co. 2.2, Brown-Forman Corp. 2.2, T. Rowe Price Group, Inc. 2.1, McCormick and Co. Inc. 2.1, Target Corp. 2.1, Dover Corp. 2.1, V.F. Corp. 2.1, AT&T, Inc. 2.1.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Large 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