Ivy Pictet Emerging Markets Local Currency Debt Fund

Market Sector Update

  • The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, returned -6.68% in U.S. dollar terms over the quarter. Returns were negative across all regions, with Latin America being the main laggard, returning -10.07% over the period, whilst Turkey was the key detractor at a country level, returning -20% as the unexpected firing of the Central Bank governor renewed concerns over the country’s ability to deliver on effective monetary policy.
  • The volatility we saw in emerging markets (EM) over the quarter originated in January following the surprise Democratic “blue wave” win, which led to a substantial repricing of the outlook for U.S. growth, indicated by a stronger and more coordinated stance on U.S. fiscal policy.
  • Since this point, we saw 10-year U.S.Treasury yields increase by over 0.8% at the highest point and a rise in inflation expectations, which has led to increased focus on monetary policy across EM and whether a normalization cycle is in sight. We have already seen evidence of this in Brazil, Russia and Turkey, where rate hikes were above market expectations.
  • The resultant macro backdrop has increased risk premiums in EM debt despite a number of positive developments we have seen over the quarter, including vaccine rollout momentum, a bounce-back in Chinese growth and higher commodity prices, providing a boost for EM exporters that suffered during the lockdown periods over the last year.

Portfolio Strategy

  • The Fund outperformed the index over the quarter. Active positioning in local rates and currencies detracted from performance over the period. The short position in U.S. Treasuries was the main contributor to performance due to the sell-off that was experienced over the quarter.
  • In local rates, underweight positions in Central and Eastern Europe names, such as Hungary and Poland, were positive for performance as inflation in the region remained elevated, making the bonds more susceptible to volatile moves in global rates. The move to an underweight position in Turkey at the start of March also added to performance as the bonds sold-off significantly following the removal of the Central Bank governor towards the end of the quarter.
  • The overweight to Indonesia detracted as domestic demand continued to drag on growth and the government was forced to increase the recovery budget again. The overweight to South Africa also detracted as growth expectations began to appear overinflated given the country’s fiscal issues and large budget deficit.
  • In currencies, the overweight to the Brazilian real detracted as volatility persisted due to the country’s fiscal uncertainty. The overweight to the Mexican peso also detracted due to initial signs of a strengthening U.S. dollar. The move underweight in Turkish lira was positive for performance as outflows put increased pressure on the currency.
  • The quarter saw portfolio duration move from an initial net overweight in January - driven by longs in Russia, Mexico, South Africa, Indonesia and China - to a net duration underweight as the reflationary environment in developed and EM favored such positioning adjustments. Consistent with the prior quarter, Hungary and Poland remained core conviction underweights, while the change in net duration came from a sizeable short position in U.S. Treasuries.

Outlook

  • Compared to the start of the year, the outlook for EM markets is now less certain due to the conflicting factors of improving global growth being supportive for risk assets and rising rates dampening returns on EM assets. Rising rates will be a key focus moving into the second quarter, with both a U.S. curve steepening and EM policy shifts coming into play.
  • Monetary policy in EM is at an inflection point; central banks maintained easy monetary policy for the majority of last year, but we now expect focus to shift to when and how much central banks will hike rates. That being said, differentiation in EM will persist depending on a country’s inflation pressures, fiscal policy, and external accounts, and there will be a number of countries that will be able to maintain their dovish stance for the remainder of the year.
  • We believe the outlook for growth in EM will be increasingly dependent on containment of the pandemic, as we have seen resurgences in certain countries over recent weeks, as well as the success of the vaccine rollout. Industry-led growth is likely to remain a key area of strength for EM, but a rise in cases could put this at risk, especially in the service sector. Again, we expect a degree of differentiation in EM with regard to growth, with cyclically sensitive EM assets being supported by the ongoing manufacturing and commodity rebound.

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 March 31, 2021, 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 JP Morgan GBI-EM Global Diversified is an unmanaged index that tracks the performance of emerging market debt. It is not possible to invest directly in an index.

All information is based on Class I shares.

Risk factors: As with any fund, the value of the Fund's shares will change, and you could lose money on your investment. 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. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction. These and other risks are more fully described in the Fund's prospectus.

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Ivy Accumulative Fund

Market Sector Update

  • The new calendar year ushered in a building sense of optimism about the U.S. economic reopening, peaking COVID- 19 cases, vaccine rollout and more government stimulus, which has allowed for equity markets to continue their upward trajectory. The big story for the quarter centered on the continued rotation out of pandemic winners and into more cyclically oriented companies. This led to significant outperformance by value and small-cap stocks.
  • After years of outperformance by growth stocks, value stocks trounced their growthier peers, and in some cases, by levels not seen since the fourth quarter of 2000. Additionally, after a strong first quarter 2021, small caps posted their second best trailing 12-month return ever at 94.8%, based on the Russell indexes. Sectors that have lagged for years, such as energy, materials, industrials and financials, posted significant gains while past leaders, information technology and health care, lagged meaningfully. The Russell 3000 Growth Index, the Fund’s benchmark, rose a modest 1.19% for the quarter.
  • U.S. economic strength is a welcomed surprise for investors. Pro-cyclical areas of the market are showing signs of an explosive earnings recovery as demand returns faster than expected at the same time corporate operating expenses are much lower due to all the pandemic-induced cost reductions. This situation is leading investors to question how much of a good thing is too much? This concern manifested itself in the first quarter of 2021 with a rapid rise in interest rates and concerns about inflation. Investors are looking for clues as to when the Federal Reserve (Fed) would start to raise interest rates to ward off any systemic inflation risks. The Fed remains very dovish and appears to have a very high threshold toward raising rates.
  • Overall, the outlook entering second quarter appears to be positive given the continuation of the trends mentioned above. Rapidly rising interest rates, the frenzy in meme stocks and a resurgence in COVID-19 present potential obstacles to further equity market gains but it appears the positives currently outweigh the negatives.

Portfolio Strategy

  • The Fund had a positive return for the quarter, slightly underperforming its benchmark. At the sector level, industrials showed the best performance for the Fund. We attribute this performance to the aforementioned comments about procyclical companies experiencing surging demand as the economy reopens and COVID-19 recedes. With regard to individual holdings in the industrials sector, leaders included Southwest Airlines, Uber Technologies and Kornit Digital. Other sector contributors include communication services and financials.
  • Conversely, information technology was the greatest detractor, mainly due to significant holdings in growth-oriented companies such as Apple and Five9. Health care was also a small detractor to overall performance. These two sectors represent more than 60% of the Fund and have generated significant returns over the past year so it is not unexpected to endure some weakness in these areas.
  • During the quarter, we identified several pro-cyclical investment opportunities. New holdings include Spirit AeroSystems, Shift4 Payments, Inc. and Ambarella, Inc. Some of the positions sold to fund these purchases were adidas AG, Alcon and NVIDIA Corp.
  • Our focus remains on balancing the portfolio with companies we believe will benefit from the economic reopening and those that have robust, long-term structural growth profiles. We think the U.S. recovery will be robust and we are hyper focused on owning companies that will not only be able to capitalize on the rebound, but also thrive in the years to come as we hopefully return to a more normalized environment.

Outlook

  • Looking ahead, it’s hard not to be excited about the pace of vaccinations. Defeating the pandemic is elemental to returning to a more normalized U.S. economy. To the extent that current trends continue, the potential for a significant earnings recovery is a very real possibility. This optimism is throttled by the risk of spiking interest rates and inflation, which could truncate the rebound.
  • Inflation has been nonexistent for well over a decade but there will undoubtedly be some transitory increases in prices as supply chains adjust to the resurgence in demand. However, we believe the structural suppressants to inflation (technology, globalization and competition) remain firmly in place, and as such, the Fed has set a very high threshold for raising interest rates.
  • As always, there will be unexpected surprises as the year progresses. We believe our investment philosophy and process provide a sound framework for dealing with these situations when they arise. We remain optimistic in our outlook and are excited for a return to pre-pandemic normalcy.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, 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.

Top 10 holdings as a % of net assets as of 03/31/2021: Apple, Inc. 7.2, Microsoft Corp. 6.9, Amazon.com, Inc. 6.5, Mastercard, Inc. 4.0, Five9, Inc. 3.5, PayPal Holdings, Inc. 3.3, Kornit Digital Ltd. 3.3, Twilio, Inc. 3.1, Darden Restaurants, Inc. 3.1 and Facebook, Inc. 3.0.

The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. It is not possible to invest directly in an index.

All information is based on Class I shares.

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. Large-capitalization companies may go in and out of favor based on market and economic conditions. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. The Fund typically holds a limited number of stocks (generally 30 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund's net asset value than it would if the Fund invested in a larger number of securities. 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.

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Ivy VIP High Income

Market Sector Update

  • The ICE BAML US High Yield Index continued its streak of positive returns in the first quarter of 2021, returning 0.90%, which is the fourth quarter in a row of positive consecutive returns. Spreads on the index ended the quarter at 352 basis points (bps), which is 35 bps tighter versus year end.
  • Leverage loans continued to gain in the quarter, returning 1.86% as the markets believe rates have bottomed and the economic recovery takes shape. Spreads ended the quarter at 420 bps versus 460 bps at year end. Split B/CCC loans (+6.66%) outperformed B loans (+1.60%) and BB loans (+0.83%).
  • The best performing sectors in the ICE BAML US High Yield Index were entertainment, airlines and publishing, which were up 21.6%, 5.1% and 4.3%, respectively. Conversely, the worst performing sectors were utilities, restaurants and cable, which returned -1.3%, -0.99% and -0.57%, respectively.
  • The $3.4 billion of default/distressed volume is the lowest quarterly default total since $2.3 billion defaulted in third quarter of 2018. Including distressed exchanges, the U.S. high-yield default rate decreased to 5.37% at the end of the quarter. Meanwhile, the loan default rate including distressed exchanges decreased to 3.66%.
  • For the quarter, the $158.6 billion of high yield new issuance easily surpassed the prior high of $145.5 billion in second quarter 2020. Leverage loan new issuance totaled $300.5 billion in the period, and leverage finance markets remain wide open.
  • High yield funds reported outflows of $10.2 billion in the quarter versus positive flows of $6 billion last quarter. Floating rate loan funds reported inflows of $11.1 billion in the period as investors respond to stronger global growth rates and a corresponding rise in interest rates.

Portfolio Strategy

  • The Portfolio meaningfully outperformed during the quarter returning low-single digits versus 0.90% for the ICE BAML US High Yield Index and 0.93% for the Morningstar peer group.
  • The high yield bond portion of the Portfolio (64% of Portfolio net assets) outperformed the index by low-single digits. Contributors to performance were credit picks in telecommunications (both wireline and wireless), rentals and aerospace/defense. The biggest detractor from performance was driven by an underweight to the energy sector.
  • Leverage loan investments (26% of Portfolio net assets) outperformed both the index and the peer group by midsingle digits. Credits in the retail, manufacturing and electronic sectors drove the outperformance. Detractors from performance were credits in the food and broadcasting sectors.
  • Equities (8% of Portfolio net assets) outperformed both the index and the Morningstar peer group, returning low double-digits. The Portfolio’s equity position in New Cotai drove the majority of the outperformance, partially offset by Laureate and McDermott.

Outlook

  • In our last outlook, we stated that credit markets were wide open to those wishing to issue debt and at absolute yields that were the lowest in history. We also observed that the vaccine rollout was just beginning but looked to have a high probability of being ramped up and successful by the end of May or June. Both characterizations remain true today and continue to drive the credit and equity markets tighter (in terms of spreads) and higher (in terms of overall prices), respectively.
  • As investors have started to see the light at the end of the COVID-19 tunnel and economic activity has started to accelerate, rates have moved up quickly with the 10-year U.S. Treasury rate increasing 76 bps so far this year. With vaccinations ramping to over three million per day on average, herd immunity should be upon us mid-to-late summer. If we remain on this track and variants of the virus remain under control, we think the Federal Reserve (Fed)’s stance on accommodative policy for the foreseeable future will become increasingly debated. This will most likely lead to a continued march higher in rates. Longer term, we believe the Fed is more worried about deflation than inflation and will want to see solid data on inflation before tapering purchases and ultimately raising the federal funds rate some time in 2022.
  • High yield credit has shrugged off the increase in rates with positive returns year to date. It is our view that rising rates aren’t necessarily a bad thing for high yield credit. Higher rates normally are accompanied by improving economic growth, better corporate profits and lower unemployment, all of which leads to levered companies being able to better service their debt obligations as the economy recovers.
  • We continue to have an outsized weighting to leverage loans which should serve us well as they have low interest rate risk and their seniority in the capital structure makes them less susceptible to price declines. Loans have also benefitted from a technical tail wind this year as the asset class has seen inflows of $11 billion.
  • We acknowledge that with spreads and yields being at or near historical lows, finding great risk reward investments is increasingly difficult. We have passed on opportunities where the compensation, i.e. coupon, has not fit the risk. We will continue to let our fundamental research drive our investment decisions with a laser focus on making sure we are being compensated for the risks we are taking.

The opinions expressed are those of the Portfolio’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 March 31, 2021, 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 ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index.

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.

Top 10 holdings as a percent of net assets as of 3/31/2021: State Street Institutional U.S. Government Money Market Fund – 4.2%; iShares iBoxx $ High Yield Corporate Bond ETF – 2.8%; New Cotai Participation Corp., Class B – 2.4%; Staples, Inc., 7.5%, 4/15/2026 – 2.3%; Olympus Merger Sub, Inc., 8.5%, 10/15/2025 – 2.2%; NFP Corp., 6.9%, 8/15/2028 – 2.1%; PAE Holding Corp., 5.3%, 10/19/2027 – 1.7%; West Corp., 5.0%, 10/10/2024 – 1.6%; Altice France Holding S.A., 10.5%, 5/15/2027 – 1.6%; Comstock Escrow Corp., 9.8%, 8/15/2026 – 1.3%

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio 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. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy VIP Global Bond

Market Sector Update

  • The global credit market ended the first quarter of 2021 tighter than calendar year-end 2020. Rallying credit markets to start and end the quarter were enough to offset weakness in late February and early March. The credit spread on the Bloomberg Barclays U.S. Universal Index, the Portfolio’s benchmark, ended the quarter at 68 basis points (bps), which is 13 bps tighter over the quarter, and even tighter than pre-pandemic levels in January 2020.
  • The International Monetary Fund (IMF) recently published its April 2021 World Economic Outlook (WEO). Its researchers again upgraded global gross domestic product (GDP) growth estimates and expectations. Looking back at last year, it estimates that the global economy contracted by -3.3% in 2020 which is 1.1 percentage points (pp) less contraction than it expected at the time of its last WEO in October 2020. At the same time, it projects global GDP growth of 6.0% in 2021 and 4.4% in 2022, which is higher by 0.5pp and 0.2pp, respectively, compared to October 2020 expectations. Unfortunately, low-income developing countries stand out with GDP growth expectations revised downward compared to last October’s WEO. Meanwhile, among major economies, the U.S. stands out with expectations to surpass pre-COVID-19 GDP levels this year, while China returned to pre-COVID-19 GDP in 2020.
  • Fixed-income investment returns were generally negative for the quarter, as tighter credit spreads could not overcome a dramatic steepening of the U.S. Treasury yield curve. The 10-year U.S. Treasury yield ended the quarter at 1.74% after entering at 0.93% as the Federal Reserve (Fed) maintained loose policy in the face of increasing fiscal stimulus.
  • Broadly, consumer consumption and activity data improved into the end of the quarter as the late-2020 COVID-19 surge receded and consumers began to spend the latest round of stimulus checks. The U.S. COVID-19 vaccination rate continues to be ahead of most of the world, further bolstering sentiment.

Portfolio Strategy

  • The Portfolio outperformed its benchmark during the quarter. The outperformance was primarily attributable to two factors. First, the Portfolio’s shorter duration benefited it as interest rates rose significantly during the quarter. Second, the Portfolio’s exposure to credit supported returns as spreads continued to tighten through the quarter.
  • The Portfolio also outperformed its Morningstar peer group. The outperformance stemmed from the Portfolio’s higher credit exposure, lower duration, and lack of foreign currencies, as the U.S. dollar outperformed most major currencies, both in developed and emerging markets.
  • We continue to seek opportunities to reduce volatility in the Portfolio. We are maintaining a low-duration strategy, although we are more open than in the recent past to marginally increasing duration to levels that would remain low compared to peer funds. With credit spreads back to levels tighter than the historical average, we continue to move towards a more defensive position by moving up in higher quality credits/companies at the expense of high-yield credits in emerging market countries.

Outlook

  • We believe short-term interest rates will stay near zero for the foreseeable future. Base effects and fiscal stimulus are likely to result in increased inflation in the near term, but this increase should be both limited and transitory due to growth constraints as we exit the pandemic. The U.S.’s sizable fiscal packages provided much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, stimulus packages passed thus far are not fiscal stimulus that will generate sustained stronger growth.
  • As expected, Democrats were able to push through another large economic stimulus bill in the first quarter of 2020. The Biden administration recently proposed a large infrastructure bill, although significant hurdles remain for that to become law.
  • Demand for corporate credit remains intact. Across the globe, fixed-income yields are staggeringly low, leaving investors few alternatives. The Fed has indicated it will continue to support markets beyond the point at which the COVID-19 virus is contained, which we believe is likely to support current spread levels.
  • China has contained COVID-19 more effectively than most countries and is now the closest of the major countries to operating at “business-as-usual.” This has been a major support to global resource demand. While China’s credit cycle has likely peaked, which could weigh on global resource demand later in 2021, vaccine rollouts in the U.S. and the U.K., and later in the year in the European Union, are likely to provide a counterweight.
  • The economies of many emerging market countries have been supported by surprisingly aggressive fiscal stimulus. With ballooning fiscal deficits, however, governments will likely have less room to respond in 2021. Furthermore, major emerging market countries including Brazil and India are now the epicenter of the COVID-19 pandemic.
  • West Texas Intermediate (WTI) crude began to rise in mid-November as COVID-19 vaccine trials showed positive results. The rise continued through most of the first quarter, driven by Saudi Arabian supply cuts, lower recent investment, and increasing demand. The WTI crude benchmark increased from $48 per barrel at the start of the year to peak at $66 before retreating slightly to end the quarter at $59 per barrel.
  • Finally, the tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 and heightened geopolitical tension between the U.S. and China will fuel the move further away from globalization, which will change complex international supply chains, and lead to higher tariffs and potentially increased barriers to immigration.

The opinions expressed are those of the Portfolio’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 March 31, 2021, 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 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.

The Bloomberg Barclays U.S. Universal Index represents the union of the U.S. Aggregate Index, the U.S. High-Yield Corporate Index, the 144A Index, the Eurodollar Index, the Emerging Markets Index, and the non- ERISA portion of the CMBS Index. Municipal debt, private placements, and non-dollar-denominated issues are excluded from the Universal Index. The only constituent of the index that includes floating-rate debt is the Emerging Markets Index. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio 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. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy VIP Science and Technology

Market Sector Update

  • The equity market saw a marginal rise in the first quarter after two strong quarters to finish 2020. Politics were a key focus early in the period as the Georgia Senate run-off resulted in a 50-50 Senate split, effectively giving Democrats control of the House of Representatives and the Senate (with Vice President Kamala Harris as the tiebreaking vote). The market reacted with modest volatility, but eventually conceded such a slim margin makes any farleft proposals unlikely. However, higher corporate taxes and individual taxes are largely expected to pass later this year. The corporate tax could potentially be retroactive to the beginning of 2021, but we expect most policies will become effective at the start of 2022.
  • Congress passed another round of stimulus in March, with a $1.9 trillion price tag, providing $1,400 checks and continuing the $300 weekly unemployment benefit. Additionally, President Joe Biden presented his $2.25 trillion infrastructure plan, a subject we expect to hear much more about in the coming quarters. Additionally, the Federal Reserve (Fed) remained consistent with its dovish commentary, though markets are clearly becoming more concerned about rising interest rates and potential inflation. Despite the rapid rise in the 10-year U.S. Treasury yield over the course of the quarter, the Fed expressed comfort with its rate policy.
  • Employment improved over the course quarter with many jobs in the leisure and hospitality beginning to return. By the middle of the quarter, roughly 60% of the 22 million jobs lost during the pandemic have returned. The unemployment rate remains well above pre-pandemic levels. Stimulus checks helped boost consumer spending during the quarter, especially as the funds arrived in March. February was weaker due to weather, but the stimulus arriving in March pushed consumer confidence to its highest level in a year.
  • The S&P North American Technology Index, the benchmark for the strategy, increased 3.4% in the period after the roughly 13.5% increase last quarter. The information technology sector saw strong performance, specifically within the semiconductor and software subsectors.

Portfolio Strategy

  • The Portfolio slightly underperformed the benchmark in the quarter. Holdings within the health care portion of the Portfolio drove the relative underperformance. Health care is absent from the Portfolio ’s benchmark. The Portfolio’s information technology allocation outperformed the benchmark on a relative basis.
  • Semiconductor stocks performed strongly, driving outperformance in the information technology part of the Portfolio. Anticipation of an economic recovery, along with a capital expenditure cycle within semiconductor equipment, drove the group higher. Shortages of semiconductors continue to extend the expected return to growth, especially within autos and industrials. Within health care, biotechnology stocks struggled in the period with the market bias to value over growth. Stock-specific developments impacted a few biotechnology holdings.
  • Several semiconductor holdings, notably ASML Holding, Micron Technology, Inc. and Infineon Technologies AG were among the top relative contributors. Despite the relative weakness of health care overall in the Portfolio, Moderna rebounded and was among the largest positive contributors. Key detractors included Sarepta Therapeutics, Inc., Vertex Pharmaceuticals Inc. and Qualcomm Inc.

Outlook

  • We expect the massive vaccination efforts and increased vaccine supply over the course of the second quarter to drive the start of a return to normal. This will likely drive strong demand across sectors. We think this strength may drive greater concern about rising rates and eventual inflation. Growth stocks often struggle in this environment, as we saw over the past quarter. At this point, we believe the divergence in performance of value in growth is closer to the end than the beginning. But we remain hyper-focused on the underlying fundamentals and macro indicators that inform the environment in which our companies operate.
  • The long-term supportive factor for the information technology and health care sectors remains the constant pace of innovation. While we are highly cognizant of macro situations, our three-to-five-year timeline for investing allows us to take a longer-term approach. That said, we believe the changing technology landscape due to COVID-19 is likely to create significant innovation and innovation-driven investment opportunities. The pandemic has only accelerated the adoption of key technologies required for companies to compete. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. Changes in how people work and where people work are driving shifts in technology utilization. We see strong cloud computing capital expenditure trends and expect strength to continue throughout 2021 and 2022.
  • Semiconductor stocks remain a key area of optimism. This subsector has contributed strongly to information technology performance recently. We believe the emergence of new secular growth opportunities, like autos, machine learning and ubiquitous connectivity are likely to continue to support ongoing above-market returns in the sector. We always expect some level of volatility in this subsector, which often creates compelling new opportunities over time. The current chip shortages will elongate the current demand environment but brings risk as supply catches up with demand.
  • We think China will remain a key risk factor in assessing information technology stocks. The U.S. is moving forward with stricter controls on China, including blacklisting certain company stocks. The biggest impact on China’s key technology stocks may come from within, as the Chinese government begins investigations into several Chinese technology platform companies. China has become concerned at the power of these technology giants and their influence on the day-to-day lives of citizens. We have seen increased focus by the incoming administration and U.S. policymakers on China's access to semiconductors. These policy risks are a key consideration as we assess ownership of stocks impacted by government reform.
  • Biotechnology remains a core area of innovation within healthcare. We expect breakthroughs in biotechnology to continue to provide great investment opportunities. Gene therapy and personalized advanced therapies are the areas of groundbreaking research and innovation that should provide significant opportunities for investment.

The opinions expressed are those of the Portfolio’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 March 31, 2021, 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.

Top 10 equity holdings as a percent of net assets as of 3/31/2021: Microsoft Corp. 9.8%, Micron Technology Inc. 6.6%, Facebook, Inc. 6.5%, Apple, Inc. 5.7%, ASML Holding N.V. 4.9%, Aspen Technology, Inc. 4.4%, Amazon.com, Inc. 3.7%, Universal Display Corp. 3.7%, Infineon Technologies AG 3.5%, WNS (Holdings) Ltd. ADR 3.5%.

The S&P North American Technology Sector Index is a modified-capitalization weighted index representing U.S. securities classified under the GICS® technology sector and internet retail sub-industry. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Because the Portfolio invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Portfolio’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. These and other risks are more fully described in the Portfolio's prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Bradley Warden

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Ivy VIP Natural Resources

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted a positive return in the quarter, with both outperforming the broader equity market. Energy outperformed the materials sector by a wide margin.
  • Crude oil prices were up strongly in the quarter, approximately 22%. Energy was the best performing sector in the market and the largest beneficiary of the announcement of COVID-19 vaccines for the second straight quarter.
  • Other commodity prices also moved higher in the quarter as economic activity continued to recover. Iron ore prices were up by about 10% and copper prices were up by about 13%. The price of gold was down almost 10% in the quarter as real interest rates continued to trend higher.

Portfolio Strategy

  • While the Portfolio posted a positive return in the quarter, it underperformed the return of its benchmark, the S&P North American Natural Resources Sector Index. Underperformance was driven by an underweight position in the energy sector and overweight positions in various sectors within the materials space.
  • The five greatest equity contributors to performance relative to its benchmark index were underweight positions in Barrick Gold Corp., Newmont Corp. and Amcor PLC and overweight positions in Diamondback Energy, Inc. and Steel Dynamics Inc.
  • The five greatest detractors to relative performance were overweight positions in Petrobras, Reliance Industries Ltd., FMC Corp., Enphase Energy, Inc. and an underweight position in Exxon Mobil Corp.
  • Our exposure to the energy sector increased from the prior quarter, ending at about 39% of equity assets. The remaining sector exposure was composed of materials, solar, industrials, utilities and chemicals. The Portfolio’s gold mining position continued decreasing in the quarter to around 7% from 10% in the previous quarter.
  • In general, we seek to own companies in the Portfolio with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their respective commodities and subsectors.

Outlook

  • The path forward continues to signal further recovery in the U.S. economy and further increase in demand for oil and other commodities. Thus far, supply restraint from energy companies/OPEC has continued into 2021 and will likely continue into the summer months. Demand recovery numbers should be significantly positive on a year-over-year basis, until comparisons get tougher later in 2021.
  • On the supply side, U.S. producers continue to signal restraint despite rising prices. This should result in rising cash flow profiles for those companies as the year progresses. Pressure from shareholders to show increased focus on returns instead of growth is expected to be an ongoing theme. In addition, social pressure to shift energy sources away from carbon-based fuels is likely to increase the cost of capital for energy companies, causing a limitation in capital investment.
  • From a macro level, we think the outlook for the natural resources space remains positive. Reflation remains the prevailing economic backdrop, which should positively impact demand for commodities. With the mass rollout of vaccines for COVID-19, consumers around the world are likely to resume normal activities, resulting in a positive tailwind for travel and oil demand. The Portfolio is focusing on equities across the natural resources landscape that we believe can deliver above-market returns on capital, with disciplined capital allocation and strong balance sheets.

The opinions expressed are those of the Portfolio'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 March 31, 2021, 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.

Top 10 equity holdings as a percent of net assets (%) as of 03/31/2021: Phillips 66 4.0, EOG Resources, Inc. 3.5, Rio Tinto plc 3.2, BHP Group Plc 3.0, Canadian Pacific Railway Ltd. 2.8, Valero Energy Corp. 2.8, ConocoPhillips 2.7, Pioneer Natural Resources Co. 2.6, Union Pacific Corp. 2.6 and Diamondback Energy, Inc. 2.6.

The S&P North American Natural Resources Sector Index represents U.S.-traded securities in the energy and materials sectors, excluding the chemicals industry, and steel sub-industry. It is not possible to invest directly in an index.

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 Portfolio's shares will change, and you could lose money on your investment. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Portfolio to other risk considerations such as potentially severe price fluctuations over short periods of time. The Portfolio may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all Portfolios may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the general public.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Michael T. Wolverton, CFA

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Where are the financial markets headed in the next 12 months? Rather than focus on unknowns, advisors and investors are better off looking at opportunities and implications. What can we learn from what we know at this point?

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Ivy VIP Balanced

Market Sector Update

  • It is rather surreal to reflect on all that has transpired since this time last year. Despite times of dissension, difficulty, and tragedy over the last twelve months, we sense a refreshing feeling of optimism. While the impacts of the pandemic linger on, the momentum behind the vaccination campaign and gradual return of mobility has breathed life into the global economy. The fiscal and monetary stimulus put in place over the last year have been helpful to blunt the acute economic impacts from COVID-19 with an encouraging trend of strengthening economic data. Of note, our economy added 1.6 million jobs in the first quarter which represents approximately 62% of the 22 million jobs lost during the first couple of months of the pandemic. Also encouraging was a 37-year high in manufacturing activity, strengthened significantly with strong orders and low inventory expected to support ongoing production in the coming months. This optimism is evident in asset markets with the S&P 500 Index advancing to a new all-time high.
  • The S&P 500 Index, the Portfolio’s equity benchmark, advanced 6.17% with the energy, financials and industrials sectors leading the advance. While every sector saw positive returns, the traditionally defensive consumer staples and utilities sectors were the most significant laggards. It is worth highlighting that the information technology sector, long a market darling, posted a modest 2.0% return for the quarter as the market’s advance broadened to include other sectors.
  • The Portfolio’s fixed-income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, declined 4.28% as interest rates rose and credit spreads narrowed slightly. The 10-year Treasury yield rose significantly to end the quarter at 1.74%, up 82 basis points (bps) from the start of the year. The Treasury curve steepened sharply with the spread relationship between the 2-year and the 10-year Treasury bond at 158 bps, up from 79 bps at the start of the year. Investment-grade credit spreads narrowed 6 bps during the quarter to 86 bps, well below the 20-year average of 144 bps and 4 bps tighter than when 2020 began.

Portfolio Strategy

  • The Portfolio posted a solid gain during the quarter and outperformed its benchmark index and peer group. Outperformance was driven by an overweight to equities and strong security selection in both the equity and fixedincome sleeves. For the quarter, the Portfolio’s equity weight averaged 69%, fixed income averaged 30%, with a very modest cash balance.
  • Within the Portfolio’s equity sleeve, strong stock selection in the consumer discretionary and industrials sectors as well as overweight allocations to the financials and energy sectors were meaningful contributors to relative performance. The quarter saw a broad-based rally, so detractors were few and far between. An underweight allocation and poor stock selection in the materials sector and poor stock selection in the health care sector hampered relative performance.
  • Positions in Goldman Sachs, Snap-on Inc, Canadian Natural Resources, Lowe’s Co. and Micron Technology, Inc. posted particularly strong results. Offsetting this strength was poor performance from Autodesk, Inc., Cerner Corp, Electronic Arts and V.F. Corp.
  • Within the fixed-income sleeve, our allocation to corporate credit was a meaningful contributor to outperformance. Our underweight of Treasuries and strong security selection in the energy and industrial sectors were notable contributors to relative performance. At the end of the quarter, the fixed-income sleeve had a duration of 7.38 years which is in line with the benchmark. During the quarter with investment-grade spreads continuing their move tighter, we reduced our corporate exposure with the proceeds invested in Treasuries. At quarter end, our allocation to corporate credit was in line with the benchmark and the fixed-income sleeve was slightly overweight Treasuries.

Outlook

  • As we look ahead, global economic growth is likely to rebound meaningfully in the near term as economies re-open and stimulus has its intended effect. As the vaccination campaign expands and mobility increases, we expect an acceleration in economic growth. We anticipate the more recent trend of a broadening of the equity market to continue as more cyclical companies see their earnings recover from the pandemic. During the quarter, after a strong run of performance, we began the process of reducing our exposure to investment grade and non-investment grade credit with the proceeds invested in Treasuries which has closed the large underweight versus the benchmark.
  • The economic impacts of COVID-19 are likely to be persistent though less punitive. We have seen growing evidence of a sharp rebound in economic activity and expect it to continue in the short term in part due to the lagged effects of fiscal and monetary stimulus put in place over the last several months. As economies recover, we are closely watching inflation rates and inflation expectations, which have been modest and must remain so in order to allow central banks to maintain their accommodative monetary policies.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding perceived high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next twelve months. This approach has served investors well over time, and our confidence in it has not waned.

The opinions expressed are those of the Portfolio’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 March 31, 2021, 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 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Top 10 equity holdings as a percent of net assets as of 03/31/2021: Microsoft Corp. 3.3%; Goldman Sachs Group, Inc. 2.0%; Micron Technology, Inc. 2.0%; Zimmer Holdings, Inc. 2.0%; Lowe's Co., Inc. 2.0%; Constellation Brands, Inc. 1.9%; Autodesk, Inc. 1.7%; Electronic Arts, Inc. 1.7%; JPMorgan Chase & Co. 1.7%; and Anthem, Inc. 1.7%.

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. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors:The value of the Portfolio’s shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. The lower-rated securities in which the Portfolio may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Portfolio may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Portfolio’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform nondividend 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 Portfolio 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. The Portfolio typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Portfolio will have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a large number of securities. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Mark Beischel
Susan K. Regan

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Ivy VIP Asset Strategy

Market Sector Update

  • Interest rates saw a significant rise during the quarter albeit from near record low levels. Optimism around vaccine rollouts and large government stimulus packages gave hope the economy could materially recover. The U.S. Federal Reserve (Fed) also made it clear that it intends to stay aggressive until inflation runs above target for some time. This stoked some fears that inflation could substantially rise.
  • Optimism on the recovery also fueled many global equity markets to record highs with many of the more cyclical parts of the market leading the way. This is a marked change from the past couple of years which has seen growth factors and U.S. equities lead the way.
  • Economic data continued to improve across the board. Employment, personal consumption, housing and manufacturing activity all strengthened during the quarter. Housing demand remained particularly strong even in the face of rising interest rates.
  • The economic recovery has generally been stronger in the U.S. which has benefited from faster vaccine rollouts and fewer restrictions. Many overseas countries have had to re-impose restrictions as COVID-19 numbers hit a third wave.

Portfolio Strategy

  • The Portfolio performed poorly during the quarter, trailing both its all-equity MSCI ACWI benchmark index and its Morningstar peer group. January was a particularly poor month for performance as we were hit by several positioning issues, especially on the equity side of the portfolio. While we recovered some of that performance as the quarter progressed, our equity return still trailed the index by about 20 basis points. While our fixed-income portfolio did outperform the Bloomberg Barclays U.S. Aggregate Bond Index (Barclays AGG) during the quarter, it still posted returns which were solidly negative.
  • The energy and financial sectors led global equity returns for the period, but we didn’t fare too well in either. In energy, Canadian Natural Resources Ltd. rose 30% while our largest position, Reliance Industries Ltd. (India), could not quite muster 1%. We continue to remain underexposed to traditional exploration & production (E&P) and oil services, which led sector returns. While we were overweight financials during the quarter, the composition of that exposure did not capitalize on the steady upward shift in the U.S. yield curve. Goldman Sachs Group, Inc.’s return of 24% was offset by slight negative returns in several positions, including AIA Group Ltd., Ping An Insurance Group Co. of China Ltd. (Hong Kong), Housing Development Finance Corp. Ltd. (India), and Intercontinental Exchange in the U.S. While the health care sector posted barely positive performance for the quarter, the Portfolio’s health care performance was decidedly negative. Underperformance was driven by Sarepta Therapeutics, Inc., declining 56% during the quarter on disappointing progress in a clinical trial. Sarepta is a volatile stock and, as such, is a smaller position for us – impactful nonetheless given the magnitude of the move. Other richly valued health care holdings, which we would characterize as longer-duration stocks, also detracted. These included Masimo Corp. and Genmab A.S., the latter of which we added to during the quarter.
  • On the positive side, our largest overweight in industrials added value, driven by Kansas City Southern (in the process of being acquired by Canadian Pacific) and Caterpillar, Inc., up 25% and 28%, respectfully. Given the move in Kansas City Southern and the decline in Canadian Pacific, we traded out of the former and into the latter during the quarter, maintaining some exposure to Kansas City Southern via options. Volkswagen AG, purchased early in the quarter, returned 40% during the period as investors realized its attractive positioning in electric vehicles even more quickly than we had anticipated. Alphabet, Inc. drove positive performance, rising 18% during the period, helping to overcome an underweight in the strong performing consumer services sector. Lastly, while our information technology overweight hurt from an allocation standpoint, stock selection more than offset that with strong moves in ASML Holding N.V., Seagate Technology, and Gartner, Inc.
  • In addition, the Portfolio benefitted from a handful of single-stock-option positions, either augmenting returns of existing positions in the case of Volkswagen or providing new exposure in the case of Pinterest, Inc.
  • The fixed-income portfolio slightly outperformed the Barclays AGG. This was mainly due to our credit heavy approach as well as our mortgage portfolio which is the only part of the portfolio that is short duration. Our overall duration positioning is quite long and was a significant detractor to performance. The long duration is mainly a result of our asset mix and risk diversification needs rather than our stance on interest rates. We mainly run a corporate credit portfolio, and credit is the longest duration asset type in the Barclays AGG. Further contributing to our long duration positioning was the use of longer duration Treasuries, mainly used for risk diversification purposes against our equity portfolio. Gold was also an issue for us during the quarter as rising real rates proved a detriment to the commodity’s performance.

Outlook

  • We are still very hesitant to allow macro calls to influence the portfolio in a material way either through interest rate exposure on the fixed-income side or factor exposure on the equity side. Predicting the pace and timing of the recovery, especially as we have had such a deep cut to economic activity followed by large stimulus, is very difficult in our view. Combine that with the uncertainty around vaccine rollouts internationally and continued lockdowns globally, we are relatively neutral in our outlook. As a result, we continue to keep our factor exposure relatively neutral and our duration exposure moderate. The focus continues to remain heavily on security selection both on the equity and fixedincome sides of the portfolio.
  • Most of the portfolio changes we have made are driven by our risk budget and overall risk framework. We are increasingly finding it difficult to find attractive areas to place risk in fixed-income markets given relatively low rates, near record low credit spreads, and fundamentals which are yet to fully rebound. As a result, when we look at risk on a security-by-security basis, we find it more attractive to take risk in individual equity securities. As a result, our equity weight has risen slightly and has also taken our risk budget back above its midpoint. To the extent the current backdrop persists, we would expect our equity weight to continue to rise and our risk budget to trend towards the higher end of its range.

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 March 31, 2021, 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.

Top 10 equity holdings as a percent of net assets as of 03/31/2021: Microsoft Corp., 2.8%; Visa, Inc., Class A, 1.9%; Alphabet, Inc. Class A 1.9%; Intuit, Inc. 1.7%; Ingersoll-Rand, Inc. 1.6%; Amazon.com, Inc. 1.6%; Samsung Electronics Co. Ltd. 1.5%; Union Pacific Corp. 1.5%; Adobe, Inc. 1.4%; and Fiserv, Inc. 1.4%.

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. 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.

All information is based on Class I shares. The MSCI ACWI Index is designed to measure the equity market performance of developed and emerging markets. The Index consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, representing most U.S. traded investment-grade bonds. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. The Fund may allocate its assets among different asset classes of varying correlation around the globe. The Fund’s Equity Sleeve typically holds a limited number of stocks (generally 50 to 70). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if it invested in a larger number of securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Fund’s Diversifying Sleeve includes fixed-income securities, that are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund may seek to hedge market risk via the use of derivative instruments. Such investments involve additional risks. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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..

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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W. Jeffery Surles, CFA

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Ivy VIP Value

Market Sector Update

  • The long-awaited “rotation” from growth stocks to value stocks made an appearance in the first quarter of 2021. The Russell 1000 Value Index (the Portfolio’s benchmark) returned 11.26% while the Russell 1000 Growth Index returned 0.94%. While the outperformance in the quarter was significant, growth has outperformed value for much of the past decade. In summary, there is a lot of catching up to do.
  • The U.S. economy continued its recovery from the COVID-19 pandemic during the first quarter of 2021, and the stock market followed with positive returns. There were many bright spots, including employment, which increased by 1.6 million in first quarter, more than recovering the fourth quarter layoffs related to the virus surge. As of March 2021, 62% of the 22 million jobs lost during the first couple months of the pandemic have been recovered.
  • A $1.9 trillion stimulus bill was passed in March 2021, which included $1,400 checks and a continuation of the $300 per week supplemental unemployment benefit. President Biden presented his infrastructure plan for total spending of $2.25 trillion to be spent over 8 years. The plan also included tax increases over a 15-year period to pay for the cost. The Federal Reserve (Fed) maintained a dovish message and continued to downplay inflation fears and taper talk. Housing demand remained strong despite gains in both home price and mortgage rates. Manufacturing activity strengthened with the ISM Index hitting a 37-year high. The combination of elevated orders and low inventories is expected to support ongoing production in the coming months.
  • As always, there are potential negatives that bear watching. Interest rates continue to rise, as inflation seems about to re-appear. Fed policy is still supportive but cannot last forever. There is also a chance for further stimulus; however, it is not certain.

Portfolio Strategy

  • The Portfolio outperformed its benchmark for the quarter. Our best performing sectors on a relative basis were health care and consumer discretionary. Sectors that dragged on performance included communication services and materials. Performance was driven primarily by stock selection as the Portfolio’s approach is to keep sector overweight and underweight positions close to the benchmark’s weightings in an effort to minimize any macro risks that come with individual sectors.
  • The sharp economic recovery was a benefit to oversold cyclical sectors. Oil rebounded to start the year, which benefited our investments in Marathon Petroleum Corp. and EOG Resources, Inc. Within financials, Capital One added to the Portfolio’s outperformance as consumers remained resilient and posted strong card data. Other positive names included NXP Semiconductors NV, Magna International, Inc. and nVent Electric plc.
  • Our investments in other areas lagged in the rebound. Walmart, Inc. was the greatest individual detractor as investors rotated away from many of the “stay-at-home” stocks. GlaxoSmithKline plc was another holding that dragged on performance. Not owning Exxon, which is a very large weight in the benchmark, was another detractor.
  • Our strategy does not attempt to make sector calls, rather focusing primarily on stock selection. We attempt to equal weight sectors to remove macro factors from the portfolio and let individual stock selection drive performance. We strive to be no more than 1% over or under weight any sector. Most sector weighting changes occur due to the movements of the stocks held within that sector.

Outlook

  • The U.S. economy grinded to an abrupt halt in March 2020, but not for an economic reason. The pandemic recession, while devastating, was relatively short lived due to government paycheck protection and targeted stimulus. The stock market rebounded to new highs earlier this year in anticipation of an economic recovery. Despite supply chain issues across the board, initial indicators are signaling that there is a tremendous amount of pent-up demand.
  • While these economic forces are currently dominating the news, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic values. This often is due to short-term negative factors, and we will become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time to seek to benefit clients over the long run.

The opinions expressed are those of the Portfolio’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, 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.

Top 10 holdings as a % of net assets as of 03/31/2021: Comcast Corp. 3.9, Citigroup, Inc. 3.7, Philip Morris International, Inc. 3.3, Morgan Stanley 3.2, Capital One Financial Corp. 3.2, Walmart, Inc. 3.2, Welltower, Inc. 3.2, Target Corp. 3.1, Eaton Corp. Plc. 3.0 and Raytheon Technologies Corp. 3.0.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large cap sector of the stock market. It is not possible to invest directly in an index.

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 Portfolio’s shares will change, and you could lose money on your investment. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. The Portfolio typically holds a limited number of stocks (generally 30 to 45) and the Portfolio’s manager also tends to invest a significant portion of the Portfolio’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s NAV than it would if the Portfolio invested in a larger number of securities or if the Portfolio’s manager invested a greater portion of the Portfolio’s total assets in a larger number of stocks. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all portfolios or portfolio classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the general public.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Matthew Norris

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Ivy VIP Growth

Market Sector Update

  • The Russell 1000 Growth Index (the Portfolio’s benchmark) posted a modest positive return of 0.94%. On a trailing 12- month basis, starting from near the depths of the 2020 market sell off, the benchmark returned nearly 63%, a remarkable period of strength considering the dire narrative during the early days of the pandemic. Value leads growth. Growth stocks underperformed value stocks during the quarter, marking the second consecutive quarter of strength across value styles. Small-capitalization companies, and particularly the small-value style, were the real source of strength as growth styles generally lagged. There was an abundance of news to generate positive market sentiment and peak investor interest in value/cyclical style investments. The main drivers included material progress made on immunization in the U.S., a steadfast accommodative Federal Reserve (Fed), and an additional round of consumer stimulus along with tangible progress toward a significant fiscal infrastructure package under a unified legislature. The quarter saw a move in the 10-year treasury rate from under 1% to start 2021 to finishing near 1.7%, approaching the pre-pandemic level. Investors began to anticipate a less accommodative policy by the Fed, although there was no change in tone from the central bank during the quarter. Concerns surfaced that the Fed would end up behind the curve and significantly overshoot its targets, with an acute focus on inflation. This shift in sentiment is notable and drove a broad compression of equity valuation multiples. Economic indicators continued to improve during the quarter. Manufacturing data has been extremely robust and services industries saw sustained gains due to improvements in mobility. Inventories remain extremely lean implying that strength should sustain given the need to replenish channel inventories. As for performance of benchmark sectors, energy (a small portion of the index), communication services, real estate (another small weight), industrials and financials were sources of strength and are illustrative of investors’ desires to find economically leverage exposure. Relative weakness came from consumer discretionary, consumer staples and information technology. At the factor level, value factors, such as earnings yield and price-to-cash flow, significantly outperformed all other factors. Risk factors, such as beta and low price, were also outperformers. Growth factors (long-term earnings growth) and momentum factors (price returns and relative strength) trailed. It was encouraging to see quality factors (return on equity and return on assets) perform during the period, but we believe that quality was not the defining characteristic but more so along for the ride as an unintentional byproduct of value buying or momentum-selling decisions

Portfolio Strategy

  • The Portfolio posted a gain during the quarter, outperforming the benchmark’s return. During the period, macro influence on stock returns diminished and stock correlations moved lower, lending to a stock pickers environment, which we found favorable. In terms of relative performance, positive contribution was generated from information technology, industrials and communication services. Performance was negatively impacted by stock selection in health care and underweight exposure to the real estate sector. Information technology was the greatest positive contributor to performance. Overweight positions in Motorola Solutions and Zebra Technologies were additive as each saw relative strength due to the potential for strong earnings revisions. Apple was a relative laggard, but our underweight position benefited relative performance. J.B. Hunt Transport Services and Stanley Black & Decker drove positive contribution from the industrials sector. J.B. Hunt saw positive sentiment around a tight freight market and strong economic environment. Stanley Black & Decker saw sustained strength out of its tools segment, dispelling concerns of a potential slowdown in consumer interest as increased mobility appears to be driving attention away from the home. Another contributor was communications services with Alphabet experiencing strong gains during the period as investors begin to anticipate the re-emergence of leisure and travel, wherein Google has decent exposure. Continued improvement in profitability from Google Cloud was also a positive. Health care was the notable detractor. An overweight position to Cerner was a detractor as guidance for the current year failed to meet investors’ expectations of an improving growth backdrop for the company. Intuitive Surgical, where we have a modest overweight, was also a detractor as investors likely grew concerned over short-term procedures volumes.

Outlook

  • We anticipated continued strength from both the hyper growth and lower quality cyclical stocks into early 2021, and it was that deep value cyclical exposure that emerged as the dominate player over the past few months. We think the strength in these V-shaped economic recovery trades – specifically industrials, financials and materials – can be attributed mainly, if not entirely, from price-to-earnings multiple expansion, not earnings growth. While the economic backdrop remains favorable, we believe that valuation expansion from low-quality, economically sensitive segments can only drive returns so far. The next leg of outperformance requires one to call the magnitude of strength from the cycle – something even the most experienced economists struggle to forecast correctly. From our perspective, the reward from calling incremental upside based on macro prospects is balanced by the risk to the downside. So, what is left to do? Focus on stock-specific drivers and growth potential independent of macro influences or macro upside surprises. We remain convinced that investors will be forced to use even more discretion and picking the next winner will prove more difficult than just buying “cheap stocks” or owning a macro-influenced basket of stocks. We think the outperforming stocks that will ultimately emerge will be connected to quality businesses. Only the best businesses should see sustained relative growth, protect if economic forecasts go awry, and retain their premium valuations. Market sentiment should likely remain balanced in the near term with positive sentiment being driven by strong earnings revisions of many cyclical companies, strong economic data fueled by needed restocking and progress toward a significant U.S. infrastructure package. This should be offset by anticipation of the Fed’s monetary response to stronger growth and realization that a significant infrastructure package, while positive for near-term sentiment, really doesn’t have much effect on near-term or intermediate-term growth. Another watch item for growth stocks, particularly those names that experienced robust revenue growth as pandemic beneficiaries, is the looming deceleration of growth during the second half of 2021. This growth deceleration can be a difficult sentiment headwind for highly valued, lower-quality growth stocks. A few of these should emerge as high-quality, strong cash flow generators and we will watch for opportunities as they present themselves. Thank you for your continued support.

The opinions expressed are those of the Portfolio’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2021, 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.

Top 10 holdings as a % of net assets as of 03/31/2021: Microsoft Corp. 10.5, Apple, Inc. 7.9, Amazon.com, Inc. 7.3, Alphabet, Inc. 5.1, Visa, Inc. 4.8, Facebook, Inc. 3.7, Motorola Solutions, Inc. 3.5, UnitedHealth Group, Inc. 3.1, Intuit, Inc. 3.0 and PayPal Holdings, Inc. 2.9.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index. All information is based on Class I shares.

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 Portfolio’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. The Portfolio typically holds a limited number of stocks (generally 40 to 60), and the Portfolio’s portfolio manager also tends to invest a significant portion of the Portfolio’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s NAV than it would if the Portfolio’s invested in a larger number of securities or if the Portfolio’s portfolio manager invested a greater portion of the Portfolio’s total assets in a larger number of stocks. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all Portfolios may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the general public.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Bradley Klapmeyer

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