Market Sector Update

• The Russell Midcap Growth Index (the Portfolio’s benchmark) was down 0.57% for the first quarter of 2021 as the market began to indicate a move toward cyclicals and small-cap stocks. Sector performance for the quarter was a mixed bag, with consumer discretionary, industrials, consumer staples, materials, real estate and energy turning in positive performance for the benchmark, while financials, health care, communications services and information technology posted negative returns.

Portfolio Strategy

• The Portfolio outperformed its benchmark for the quarter. All sectors where we had exposure were additive to performance relative to the index. Stock selection was the most significant contributor to outperformance in the quarter. This is the focus of the strategy – buying profitable companies with durable business models for the long term – so we are always pleased with strong, additive stock selection. Sector allocation weights detracted to the outperformance of the Fund, primarily due to our lack of exposure to real estate.
• Information technology is our largest sector weighting yet was also the largest underweight sector relative to the benchmark in the quarter. As the market rotated from growth to value, this sector underperformed within the benchmark for the period and our underweight exposure, coupled with strong stock selection, was additive to relative outperformance. Overweight positions to Microchip Technology Inc., Keysight Technologies, Inc. and Twilio all provided strong contributions to our sector performance while II-VI, Inc. and Guidewire Software, Inc. were the biggest detractors. Health care, our second largest sector allocation, was a positive relative contributor. While our slight overweight of the sector detracted incrementally, stock selection more than offset the performance drag from the overweight position. Laboratory Corporation of America Holdings and Envista Holdings Corp. were the top performers for the quarter, while exposure to Genmab and Seagen, Inc. were the biggest detractors to relative performance. Industrials, our largest overweight, was also the top relative contributor to performance by way of stock selection within the sector. Off benchmark holdings Middleby Corp. and A.O. Smith Corp. delivered strong returns for the quarter while overweight positions to TransUnion and CoStar Group, Inc. were drags on absolute and relative performance. Overweight exposure to financials and strong stock selection led to solid relative outperformance over the benchmark. While the benchmark is comprised of 23 small allocations in this sector, our exposure comes from two off-benchmark holdings and one significant overweight position. Off-benchmark holdings SVB Financial Group and First Republic Bank posted strong relative and absolute returns in the quarter while an overweight position in MarketAxess Holdings Inc. was a drag on overall relative performance. Our communication services exposure continues to comprise a total of three names: Twitter, Inc. and Electronic Arts Inc. (EA), both of which are not held in the benchmark, and a relative underweight position to IAC/Interactive Corp. While Twitter posted solid positive absolute and relative results on the quarter, both EA and IAC were relative detractors to overall performance. Overall, both the underweight allocation relative to the sector and our solid stock picks were additive to total relative return. Our sector overweight to materials by way of overweight positions to Scotts Miracle-Gro Company and RPM International added positive performance relative to the benchmark. Both consumer staples and consumer discretionary were additive to overall relative performance. Consumer discretionary names like Canada Goose Holdings, Inc. and BorgWarner, Inc. outperformed both on an absolute and relative basis, while the biggest detractors came from names we didn’t own, like Tractor Supply Co. and Wayfair, Inc. Our lone consumer staples holding, Hershey Company, outperformed on both an absolute and relative basis. Cash, which averaged just over 2% in the quarter, detracted 0.01% from the overall relative performance, while equity options detracted 0.12%. We continue to have no exposure to the real estate, utilities or energy sectors, which were drag on overall relative performance.

Outlook

• Outlooks are point-in-time assessments, a look at the future today, and as has been made abundantly clear over the past year, outlooks exist to be challenged, rethought and rewritten. The abiding principles of our outlook in all that we do all year, every year, are that “well-valued stocks of companies with growing streams of cash flow derived from innovation and strong management execution are key to wealth creation;” “markets go up more than they go down;” and, outside of stock picking, “the outlook that matters most is the one that figures out when the broad corporate profit cycle is determinedly inflecting into or out of a recession and what companies are best positioned over the long term, given the assessment of the profit cycle.” We witnessed a serious pandemic-wrought corporate profit recession in 2020, one that few would have predicted as it was swiftly and steeply discounted by gob-smacked investors. The recovery in 2020 (not well predicted), was almost as swiftly and steeply discounted to a market upside that has broken records, seemingly indicating economic growth and prosperity beyond previous expectations as world economies emerge and heal from the impact of the pandemic. This has also been carried along by government stimulus and interest rate maneuvering. First quarter 2021 has added a new layer to the recovery story – one that tends to lend itself to historical study of economic recoveries. That is, the broadening out of returns in the stock market from those strong, quality growers to the more cyclically charged business models that are heavily reliant on the economic cycle for earnings productivity. While the market winds have changed a bit in the quarter, we are still witnessing impressive innovation in life sciences, business and consumer technology, green energy and many other areas that have captured the imagination of professional and retail investors, driving the valuations of many companies to dizzying levels. So where does this leave us? We offer a series of predictions: 1) World economies will continue to recover and grow as vaccine distributions allow them to emerge from the pandemic lockdowns. 2) The strength of the recovery could be overestimated, as the underlying economic damage may be deeper than we appreciate. 3) While markets go up more than they go down, this may be a year in which the market takes a breather to digest the spectacular gains and sturdy valuations achieved over the last half of 2020. 4) The composition of returns may continue the trend established in the first quarter, where some groups of stocks perform quite well as many companies regain earnings power in a broad economic recovery, while the stocks of companies that over earned during the pandemic struggle to appreciate further, possibly giving up some value. 5) Many technology and health care companies may continue to experience a soft spot in demand in the remaining quarters of 2021 after a surprisingly robust 2020, and stock valuations could be at risk as a result. 6) Inflation and interest rate expectations could be too low as a result of persistent supply chain disruptions related to global lockdowns, strong generational demand for housing in an under-inventoried market, and one-off incidents like the wayward ship in the Suez Canal. 7) The Fed will continue to be supportive, but could possibly lag in its response to demand, inflation and interest rate pressures. While stock picking is always key to our process and performance, it will be paramount in this environment as we seek to manage valuation risk in the Portfolio, while investing in durable growers, both secularly and cyclically.

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 holdings as a % of net assets as of 03/31/2021: Chipotle Mexican Grill, Inc. 3.4, CoStar Group, Inc. 3.2, MarketAxess Holdings, Inc. 2.9, Monolithic Power Systems, Inc. 2.6, DexCom, Inc. 2.6, DocuSign, Inc. 2.5, Electronic Arts, Inc. 2.4, Teradyne, Inc. 2.4, Microchip Technology Inc. 2.2 and Arista Networks, Inc. 2.1.

The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. 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 mid-cap growth stocks may carry more risk than investing in stocks of larger more wellestablished companies. 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.