2020 Annual Report - BlackRock

[Pages:628]2020 Annual Report

BlackRock Variable Series Funds, Inc. BlackRock Variable Series Funds II, Inc.

DECEMBER 31, 2020

Not FDIC Insured - May Lose Value - No Bank Guarantee

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The Markets in Review

Dear Shareholder,

The 12-month reporting period as of December 31, 2020 has been a time of sudden change in global financial markets, as the emergence and spread of the coronavirus (or "COVID-19") led to a vast disruption in the global economy and financial markets. The threat from the coronavirus became increasingly apparent throughout February and March 2020, and countries around the world took economically disruptive countermeasures. Stayat-home orders and closures of non-essential businesses became widespread, many workers were laid off, and unemployment claims spiked, causing a global recession and a sharp fall in equity prices.

After markets hit their lowest point of the reporting period in late March 2020, a steady recovery ensued, as businesses began to re-open and governments learned to adapt to life with the virus. Equity prices continued to rise throughout the summer, fed by strong fiscal and monetary support and improving economic indicators. Many equity indices neared or surpassed all-time highs late in the reporting period following a series of successful vaccine trials and passage of additional stimulus. In the United States, both large- and small-capitalization stocks posted a significant advance. International equities from developed economies grew at a more modest pace, lagging emerging market stocks, which rebounded sharply.

During the market downturn, the performance of different types of fixed-income securities initially diverged due to a reduced investor appetite for risk. U.S. Treasuries benefited from the risk-off environment, and posted solid returns, as the 10-year U.S. Treasury yield (which is inversely related to bond prices) touched an all-time low. In the corporate bond market, support from the U.S. Federal Reserve (the "Fed") assuaged credit concerns and both investment-grade and high-yield bonds recovered to post positive returns.

Following the coronavirus outbreak, the Fed instituted two emergency interest rate cuts, pushing shortterm interest rates, already low as the year began, close to zero. To stabilize credit markets, the Fed also implemented a new bond-buying program, as did several other central banks around the world, including the European Central Bank and the Bank of Japan.

Looking ahead, while coronavirus-related disruptions have clearly hindered worldwide economic growth, we believe that the global expansion is likely to accelerate as vaccination efforts get under way. The results of the U.S. elections also cleared the way for additional stimulus spending in 2021, which is likely to be a solid tailwind for economic growth. Inflation should increase as the expansion continues, but a shift in central bank policy means that moderate inflation is less likely to be followed by interest rate hikes that could threaten the equity expansion.

Overall, we favor a positive stance toward risk, with an overweight in both equities and credit. We see U.S. and Asian equities benefiting from structural growth trends in tech, while emerging markets should be particularly helped by a vaccine-led economic expansion. In credit, rising inflation should provide tailwinds for inflationprotected bonds, and Euro area peripherals and Asian bonds also provide attractive opportunities. We believe that international diversification and a focus on sustainability can help provide portfolio resilience, and the disruption created by the coronavirus appears to be accelerating the shift toward sustainable investments.

In this environment, our view is that investors need to think globally, extend their scope across a broad array of asset classes, and be nimble as market conditions change. We encourage you to talk with your financial advisor and visit for further insight about investing in today's markets.

Sincerely,

Rob Kapito President, BlackRock Advisors, LLC

Total Returns as of December 31, 2020

U.S. large cap equities (S&P 500? Index)

U.S. small cap equities (Russell 2000? Index)

International equities (MSCI Europe, Australasia, Far East Index)

Emerging market equities (MSCI Emerging Markets Index)

3-month Treasury bills (ICE BofA 3-Month U.S. Treasury Bill Index)

U.S. Treasury securities (ICE BofA 10-Year U.S. Treasury Index)

U.S. investment grade bonds (Bloomberg Barclays U.S. Aggregate Bond Index)

Tax-exempt municipal bonds (S&P Municipal Bond Index)

U.S. high yield bonds (Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index)

6-Month 12-Month 22.16% 18.40%

37.85 19.96

21.61

7.82

31.14 18.31

0.07

0.67

(1.87) 10.58

1.29

7.51

2.92

4.95

11.32

7.05

Past performance is not an indication of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Rob Kapito President, BlackRock Advisors, LLC

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2020 Annual Report

BlackRock Variable Series Funds, Inc.

? BlackRock 60/40 Target Allocation ETF V.I. Fund

DECEMBER 31, 2020

Not FDIC Insured - May Lose Value - No Bank Guarantee

Fund Summary as of December 31, 2020

BlackRock 60/40 Target Allocation ETF V.I. Fund

Investment Objective

BlackRock 60/40 Target Allocation ETF V.I. Fund's (the "Fund") investment objective is to seek to provide total return.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2020, the Fund outperformed its blended benchmark (60% MSCI All Country World Index / 40% Bloomberg Barclays U.S. Aggregate Bond Index).

What factors influenced performance?

The largest positive contributions to the Fund's relative performance came from exposures to U.S. large-cap stocks, as well as to equities within the information technology ("IT") and medical device sectors.

Equity exposures driven by size and quality factor and exposure to high yield corporate bonds were the largest detractors from performance.

Describe recent portfolio activity.

The portfolio made six notable shifts in 2020 in the form of four quarterly trades and two intra-quarter trades in response to the March 2020 market sell-off and the U.S. presidential election. Overall, the Fund maintained an overweight to stocks throughout the period, with an overweight in U.S. equities relative to emerging market and nonU.S. developed market stocks, amid support from easing trade tensions along with continued fiscal and monetary stimulus. Following the market shock in March in response to the onset of COVID-19, the Fund rebalanced back to the target asset class allocations. In June, the Fund continued its tilt to risk assets and increased its equity overweight, triggered by the relatively successful reopening of major economies globally. Strategic positions within the IT and medical devices sectors were maintained. In early October 2020, the Fund trimmed its equity position in anticipation of possible volatility driven by uncertainty over the U.S. election. In early November 2020 after the election was decided, the Fund added back to equities, increasing its equity overweight by 2%, with a preference for U.S. stocks generally and cyclical names in particular.

Describe portfolio positioning at period end.

At period end, the Fund was overweight in equity ETFs, driven by an ultra-accommodative Fed, positive vaccine news and reduced uncertainty following the presidential election. As the investment adviser believes the economic recovery will continue to gather momentum, the Fund was positioned broadly to lean into risk, with balanced exposure to both growth and value names.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

Portfolio Information

PORTFOLIO COMPOSITION

Asset Type Equity Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed Income Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-Term Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent of Affiliated Investment

Companies

55% 29 16

?

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2020 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS

Fund Summary as of December 31, 2020 (continued)

BlackRock 60/40 Target Allocation ETF V.I. Fund

$ 21,000

TOTAL RETURN BASED ON A $10,000 INVESTMENT

19,000

17,000

15,000

13,000

11,000

9,000 04/30/14(f)

Dec 14

Dec 15 CClalasssI SI Shhaarerse(sa()(ab))(b)

Dec 16

CClalasssIIIIII SShhaareress(a()a(b))(b)

Dec 17

6600%%MMSSCCI AI lAl ll CCoouunntrtyryWWoroldrld InInddeexx/ 4/ 04%0% BBlolooommbbeergrg BBaarcrclalayyssUU.S..S. AAggggrereggaateteBond InBdoenxd(c)Index(c)

Dec 18

MMSSCCI IAAlllCl Couonutnrytry WWoorrldldInIndedxe(xd)(d)

Dec 19

BBlolooommbbeergrg BBaarcrclalayyssUU.S..S. AAggggrereggaateteBond InBdoenxd(e)Index(e)

$17,767 $15,892 $15,791 $15,531 $12,889

Dec 20

(a) Assuming transaction costs, if any, and other operating expenses, including investment advisory fees. Does not include insurance-related fees and expenses. The Fund's total returns prior to May 1, 2019, are the returns of the Fund when it followed different investment strategies under the name BlackRock iShares? Dynamic Allocation V.I. Fund.

(b) The Fund invests in a portfolio of underlying exchange-traded funds that seek to track equity and fixed income indices.

(c) A customized weighted index comprised of 60% MSCI All Country World Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index.

(d) MSCI All Country World Index comprises large and mid-capitalization developed and emerging market equities. (e) A broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

(f) Commencement of operations.

Performance Summary for the Period Ended December 31, 2020

Class I (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class III (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60% MSCI All Country World Index / 40% Bloomberg Barclays U.S. Aggregate Bond Index . . . . . . . MSCI All Country World Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bloomberg Barclays U.S. Aggregate Bond Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6-Month Total Returns (a) 15.52% 15.40 14.65 24.01 1.29

Average Annual Total Returns (a)

1 Year 14.67% 14.35 13.49 16.25 7.51

5 Years 10.16% 9.87 9.37 12.26 4.44

Since Inception (b)

7.09% 6.82 7.20 9.00 3.88

(a) For the portion of the period, the Fund's investment adviser waived a portion of its fee. Without such waiver, the Fund's performance would have been lower.

(b) The Fund commenced operations on April 30, 2014.

(c) Average annual and cumulative total returns are based on changes in net asset value ("NAV") for the periods shown, and assume reinvestment of all distributions at NAV on the ex-dividend date. Insurance-related fees and expenses are not reflected in these returns. The Fund's total returns prior to May 1, 2019 are the returns of the Fund when it followed different investment

strategies under the name BlackRock iShares? Dynamic Allocation V.I. Fund. Past performance is not an indication of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund

shares. Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

FUND SUMMARY

3

Disclosure of Expenses

Shareholders of the Fund may incur the following charges: (a) transactional expenses; and (b) operating expenses, including investment advisory fees, service and distribution fees, including 12b-1 fees, acquired fund fees and expenses, and other fund expenses. The expense example shown below (which is based on a hypothetical investment of $1,000 invested on July 1, 2020 and held through December 31, 2020) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other mutual funds.

The expense example provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number corresponding to their share class under the heading entitled "Expenses Paid During the Period."

The expense example also provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in the Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in shareholder reports of other funds.

The expenses shown in the expense example are intended to highlight shareholders' ongoing costs only and do not reflect transactional expenses, such as sales charges, if any. Therefore, the hypothetical example is useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.

Class I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Actual

Beginning

Ending

Expenses

Account Value Account Value Paid During

(07/01/20)

(12/31/20) the Period (b)

$ 1,000.00 $ 1,155.20 $

1.03

1,000.00

1,154.00

2.38

Beginning Account Value

(07/01/20) $ 1,000.00

1,000.00

Hypothetical (a)

Ending Account Value

(12/31/20) $ 1,024.18

1,022.92

Expenses

Paid During

the Period (b)

$

0.97

2.24

Annualized Expense Ratio 0.19% 0.44

(a) Hypothetical 5% annual return before expenses is calculated by prorating the number of days in the most recent fiscal half year divided by 366. (b) For each class of the Fund, expenses are equal to the annualized expense ratio for the class, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the

one-half year period shown).

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2020 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS

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