Horizons Enhanced Income US Equity (USD) ETF (HEA.U, HEA.V, HEA, HEA.A:TSX)

Transcription

1 Interim Report June 30, 2016 Horizons Enhanced Income US Equity (USD) ETF (HEA.U, HEA.V, HEA, HEA.A:TSX) ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...6 Past Performance...11 Summary of Investment Portfolio...12 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...14 FINANCIAL STATEMENTS Statements of Financial Position...15 Statements of Comprehensive Income...16 Statements of Changes in Financial Position...17 Statements of Cash Flows...18 Schedule of Investments...19 Notes to Financial Statements...23

3 Letter from the Co-CEO: So far, 2016 has been a road to recovery for North American investors, as equity markets continue to bounce back from the lows of late January. In fact, the Canadian equity market, up more than 8% year-to-date has been one of the best-performing developed equity markets in the world. Additionally, we have seen the price of crude oil stabilize which we believe has been a leading contributor to the recovery and strengthening of the Canadian dollar relative to the U.S. dollar, up approximately 7% since the beginning of Overall, the first half of the year has been very successful for the North American ETF industry, with U.S. assets at US$2.2 trillion and Canadian ETF assets surpassing the CAD$100 billion mark in May. Equities and fixed income ETFs continue to make up the largest inflows for both Canada and the U.S. For Horizons ETFs, in particular, this has been a year of new milestones. In April, we surpassed more than $6 billion in assets under management and have continued to watch our active and benchmark lineup of ETFs grow. In fact, the Horizons Cdn High Dividend Index ETF ( HXH ) has been one of the largest launches on the Canadian side of the border, acquiring more than $100 million in assets within its first week of launch. With the regulatory landscape in North America, particularly Canada, shifting towards fee-based transparency, and fewer tax efficient products available to the retail investor, we ve focused on expanding our line-up of Total Return Index (TRI) ETFs. This includes the launch of HXH and the Horizons Nasdaq-100 Index ETF ( HXQ ), and lowering the cost of our flagship TRI ETFs like the Horizons S&P 500 Index ETF ( HXS ), reducing its management fee to 0.10% from 0.15%. We also launched the Horizons China High Dividend Yield Index ETF ( HCN ), the first benchmark ETF to provide Canadian investors with exposure to the Hang Seng High Dividend Yield Index. Looking to the remainder of 2016, it will be an interesting time for global markets. Many investors are watching every Federal Open Market Committee (FOMC) meeting closely, wondering whether or not the U.S. is in fact in a strong enough position economically to take on another rate hike. As well, the outcome of the June 23 referendum in the United Kingdom to leave the European Union could have far reaching implications in the markets, both locally and abroad, for the months and years to come. At Horizons ETFs we try and remain agnostic on the direction of the markets, however, we do think it s fair to say that investors can no longer rely on easy returns. Investors require more creative solutions that take advantage of volatility, such as covered call and alternative asset strategies. Knowing investors shouldn t rely on a single strategy for success, we believe that our diverse suite of ETF solutions provides investors with the tools they need for handling any of the market conditions that 2016 holds on the horizon. We remain proud to be a partner in your investment process. For more information on our strategies, please visit our website at where we offer a range of resources designed to help you become a skilled ETF investor. Wishing you the best for the remainder of 2016, Steven J. Hawkins, President & Co-CEO Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE Horizons Enhanced Income US Equity (USD) ETF This interim management report of fund performance for Horizons Enhanced Income US Equity (USD) ETF ( Horizons HEA.U or the ETF ) contains financial highlights and is included with the unaudited interim financial statements for the investment fund. You may request a copy of the ETF s unaudited interim or audited annual financial statements, interim or annual management report of fund performance, current proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures, at no cost, from the ETF s manager, AlphaPro Management Inc. ( AlphaPro or the Manager ), by calling toll free , or locally (416) , by writing to us at: 26 Wellington Street East, Suite 700, Toronto ON, M5E 1S2, or by visiting our website at or SEDAR at This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance, or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, and the effects of competition in the geographic and business areas in which the ETF may invest and the risks detailed from time to time in the ETF s prospectus. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. We caution that the foregoing list of factors is not exhaustive, and that when relying on forward-looking statements to make decisions with respect to investing in the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Manager does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Management Discussion of Fund Performance Investment Objective and Strategies The investment objective of Horizons HEA.U is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization U.S. companies; and (b) monthly U.S. dollar distributions of dividend and call option income. Horizons HEA.U invests primarily in a portfolio of equity and equity related securities of U.S. companies that, as at the Constituent Reset Date (see below), are amongst the largest by market capitalization and most liquid issuers on the New York Stock Exchange (the NYSE ) or the NASDAQ Stock Market ( NASDAQ ). To mitigate downside risk and generate income, the ETF s investment manager actively manages a covered call strategy that generally writes out of the money covered call options on up to 100% of the portfolio securities. The level of covered call option writing may vary based on market volatility and other factors. Horizons HEA.U does not to seek to hedge its exposure to the U.S. dollar back to the Canadian dollar. To achieve its investment objective Horizons HEA.U primarily invests in an equal weighted portfolio of large capitalization U.S. companies. Semi-annually, the investment manager selects from the largest and most liquid U.S. companies listed on the NYSE or the NASDAQ and invests Horizons HEA.U in each issuer equally (the Constituent Reset Date ). Horizons HEA.U rebalances, on an equal weight basis, the portfolio of constituent securities on each Constituent Reset Date. The number of issuers included in the equal weighted portfolio may change on a Constituent Reset Date. Between Constituent Reset Dates, the allocation between each of these constituent securities will change due to market movement and the investment manager will not re-allocate, include or exclude issuers from Horizons HEA.U s portfolio until its next rebalance date or Constituent Reset Date, other than when, in the opinion of the investment manager, circumstances necessitate a change. 1

5 Management Discussion of Fund Performance (continued) Horizons Enhanced Income US Equity (USD) ETF Risk Please refer to the ETF s most recent prospectus for a complete description of Horizons HEA.U s investment restrictions. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. Use of options risk Stock market risk Specific issuer risk Regulatory risk Corresponding net asset value risk Designated broker/dealer risk Cease trading or securities risk Exchange risk Early closing risk No assurance of meeting investment objectives No guaranteed return Tax risk Securities lending, repurchase and reverse repurchase transaction risk Liability of unitholders Reliance on key personnel Derivatives risk Foreign currency risk Foreign stock exchange risk Suitability of investment in units Conflicts of interest Results of Operations For the six-month period ended June 30, 2016, the Class E units and Advisor Class U.S. dollar units of the ETF ( US$ units ) returned 3.36% and 2.96%, respectively, when including distributions paid to unitholders. This compares to the S&P 100 (the Index ), which returned 2.68% for the same period on a total return basis. The Class E units had an average annualized distribution yield of 6.21% when including distributions of $0.32, while the Advisor Class units provided an average yield of 5.41% with distributions of $0.27 for the period. The underlying equity portfolio return, exclusive of the covered call strategy, was 4.82% over the same period. The return of the Canadian dollar traded Class E units and Advisor Class units of the ETF ( C$ units ) for the period was -3.49% and -3.87%, respectively. C$ units are not a separate class of units of the ETF, but rather, represent the Canadian dollar value of the US$ units at the current day s Canada/U.S. exchange rate. Neither the US$ units nor the C$ units seek to hedge U.S. dollar currency exposure to the Canadian dollar. The Index, a sub-set of the S&P 500, measures the performance of large capitalization companies in the United States. The Index comprises 100 major, blue chip companies across multiple industry groups. Market Review 2 In contrast with the volatile first quarter of 2016 the S&P 500, of which the Index makes up the largest 100 securities by market capitalization, traded in a narrow range during the second quarter. Continually improving U.S. job and housing

6 Management Discussion of Fund Performance (continued) Horizons Enhanced Income US Equity (USD) ETF markets helped keep the equity markets steady during the second quarter, however worries after the U.K. referendum to leave the European Union added volatility at the end of June. While volatility was range-bound for the months of April and May, it steadily increased as we approached the referendum date. We expect volatility to continue to trend higher amidst global uncertainty, specifically the weakness of the European financial sector. Covered call strategies perform well in range bound markets and this allowed us to outperform the Index during the latest quarter. Option Writing Strategy During each month, options are generally written on up to 100% of the equities in the portfolio of the ETF. The premiums are received from selling call options approximately one(1) standard deviation out-of-the-money. The ETF s monthly distributions are not fixed, but vary as the premiums generated from covered call writing are earned and passed through, and will change with changes in implied volatility and time to option expiration. Distributions also vary based on the dividends received from the securities in the ETF s portfolio during the period. Rebalancing The equity positions in the ETF are rebalanced to equal weightings semi-annually with the objective of maintaining sector balance within the U.S. market. The most recent rebalancing took place in March There were no changes to any of the portfolio constituents. The number of securities in the portfolio is unchanged at 50. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $1,060,659. This compares to $530,460 for the six-month period ended June 30, The ETF paid management, operating and transaction expenses of $294,727 (2015 $344,829) of which $26,818 (2015 $28,790) was either paid or absorbed by the Manager on behalf of the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. The ETF distributed $954,257 to Class E unitholders and $63,637 to Advisor Class unitholders during the year (2015 Class E: $1,079,883, Advisor Class: $89,794). Unitholder Activity An ETF is a stock exchange listed, open-ended, continuously offered fund. All orders to purchase units directly from the ETF must be placed by designated brokers and/or underwriters. On any trading day, a designated broker or an underwriter may place a subscription order for a prescribed number of units ( PNU ) or integral multiple PNU. The ETF reserves the absolute right to reject any subscription order placed by a designated broker and/or an underwriter. No fees will be payable by the ETF to a designated broker or an underwriter in connection with the issuance of units. On the issuance of units, the Manager may, at its discretion, charge an administrative fee to an underwriter or designated broker to offset any expenses incurred in issuing the units. All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. 3

7 Management Discussion of Fund Performance (continued) Horizons Enhanced Income US Equity (USD) ETF 4 Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its af-

8 Management Discussion of Fund Performance (continued) Horizons Enhanced Income US Equity (USD) ETF filiates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. The ETF, in its course of normal business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that is a related party to the Manager. The Manager is permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complies with the predetermined list of requirements agreed upon with the IRC. For the periods ended June 30, 2016 and 2015, the ETF paid $nil (2015 $413) to NBF and/or its affiliates in broker commissions on portfolio transactions. 5

9 Horizons Enhanced Income US Equity (USD) ETF Financial Highlights The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance since it effectively began operations on September 13, This information is derived from the ETF s audited annual financial statements and the current unaudited interim financial statements. Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. The ETF s Net Assets per Unit Class E Period Net assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.08) (0.16) (0.16) (0.20) (0.08) (0.03) Realized gains (losses) for the period (0.14) Unrealized gains (losses) for the period 0.34 (0.60) (1.53) 1.62 (0.11) 0.31 Total increase (decrease) from operations (2) 0.24 (0.10) Distributions: From net investment income (excluding dividends) (0.32) (0.12) (0.11) (0.10) (0.10) From net realized capital gains (0.50) (1.86) (0.82) (0.69) From return of capital (0.03) (0.42) (0.08) (0.01) Total distributions (3) (0.32) (0.65) (1.97) (0.52) (1.00) (0.70) Net assets, end of period (US$ units) (4) $ Net assets, end of period (C$ units) (4) $

10 Horizons Enhanced Income US Equity (USD) ETF Financial Highlights (continued) Advisor Class Period Net assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.12) (0.25) (0.26) (0.28) (0.16) (0.05) Realized gains (losses) for the period (0.14) Unrealized gains (losses) for the period 0.44 (0.59) (1.58) Total increase (decrease) from operations (2) 0.30 (0.18) Distributions: From net investment income (excluding dividends) (0.27) (0.05) (0.05) (0.01) (0.07) From net realized capital gains (0.50) (1.82) (0.76) (0.67) From return of capital (0.02) (0.42) (0.08) (0.01) Total distributions (3) (0.27) (0.57) (1.87) (0.43) (0.91) (0.68) Net assets, end of period (US$ units) (4) $ Net assets, end of period (C$ units) (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2016 and the audited annual financial statements as at December 31 of the other years shown. Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at September 13, Class E units and Advisor Class units of the ETF began trading in Canadian dollars on January 15, 2014 under the symbols HEA and HEA.A, respectively. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Net assets per unit and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is based on the weighted average number of units outstanding over the financial period. 3. Income, dividend and/or return of capital distributions, if any, are paid in cash, reinvested in additional units of the ETF, or both. Capital gains distributions, if any, may or may not be paid in cash. Noncash capital gains distributions are reinvested in additional units of the ETF and subsequently consolidated. They are reported as taxable distributions and increase each unitholder s adjusted cost base for their units. Neither the number of units held by the unitholder, nor the net asset per unit of the ETF change as a result of any non-cash capital gains distributions. Distributions classified as return of capital, if any, decrease each unitholder s adjusted cost base for their units. The characteristics of distributions, if any, are determined subsequent to the end of the ETF s tax year. Until such time, distributions are classified as from net investment income (excluding dividends) for reporting purposes. 4. The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. 7

11 Horizons Enhanced Income US Equity (USD) ETF Financial Highlights (continued) Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 29,494 36,243 36,609 30,392 41,029 11,166 Number of units outstanding (000 s) 2,798 3,446 3,242 2,665 4,060 1,100 Management expense ratio (2) (5) 0.82% 0.81% 0.83% 0.81% 0.80% 0.83% Management expense ratio excluding proportion of expenses from underlying investment funds 0.82% 0.80% 0.80% 0.80% 0.80% 0.83% Management expense ratio before waivers and absorptions (3) 0.98% 0.89% 0.97% 0.94% 1.31% 2.10% Trading expense ratio (4) (5) 0.38% 0.34% 0.35% 0.73% 0.74% 0.96% Trading expense ratio excluding proportion of costs from underlying investment funds 0.38% 0.34% 0.35% 0.73% 0.74% 0.96% Portfolio turnover rate (6) 33.99% 64.08% % 59.77% % 49.71% Net asset value per unit, end of period (US$ units) $ Closing market price (US$ units) $ Net asset value per unit, end of period (C$ units) $ Closing market price (C$ units) $

12 Horizons Enhanced Income US Equity (USD) ETF Financial Highlights (continued) Advisor Class Period (1) Total net asset value (000 s) $ 2,437 2,440 3,748 4,282 5,309 4,314 Number of units outstanding (000 s) Management expense ratio (2) (5) 1.61% 1.61% 1.62% 1.61% 1.59% 1.64% Management expense ratio excluding proportion of expenses from underlying investment funds 1.61% 1.60% 1.59% 1.59% 1.59% 1.64% Management expense ratio before waivers and absorptions (3) 1.78% 1.71% 1.79% 1.77% 2.17% 2.91% Trading expense ratio (4) (5) 0.38% 0.34% 0.35% 0.73% 0.74% 0.96% Trading expense ratio excluding proportion of costs from underlying investment funds 0.38% 0.34% 0.35% 0.73% 0.74% 0.96% Portfolio turnover rate (6) 33.99% 64.08% % 59.77% % 49.71% Net asset value per unit, end of period (US$ units) $ Closing market price (US$ units) $ Net asset value per unit, end of period (C$ units) $ Closing market price (C$ units) $ This information is provided as at June 30, 2016 and December 31 of the other years shown. Class E units and Advisor Class units of the ETF began trading in Canadian dollars on January 15, 2014 under the symbols HEA and HEA.A, respectively. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Management expense ratio is based on total expenses, including sales tax, (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Out of its management fees, the Manager pays for such services to the ETF as investment manager compensation, service fees and marketing. 3. The Manager, at its discretion, may waive and/or absorb a portion of the fees and/or expenses otherwise payable by the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. 4. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. 5. The ETF s management expense ratio (MER) and trading expense ratio (TER) include an estimated proportion of the MER and TER for any underlying investment funds held in the ETF s portfolio during the period. 6. The ETF s portfolio turnover rate indicates how actively its portfolio investments are traded. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. Generally, the higher the ETF s portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the ETF. 9

13 Horizons Enhanced Income US Equity (USD) ETF Financial Highlights (continued) Management Fees The Manager appoints the Investment Manager and provides, or oversees the provision of, administrative services required by the ETF including, but not limited to: negotiating contracts with certain third-party service providers, such as portfolio managers, custodians, registrars, transfer agents, auditors and printers; authorizing the payment of operating expenses incurred on behalf of the ETF; arranging for the maintenance of accounting records for the ETF; preparing reports to unitholders and to the applicable securities regulatory authorities; calculating the amount and determining the frequency of distributions by the ETF; preparing financial statements, income tax returns and financial and accounting information as required by the ETF; ensuring that unitholders are provided with financial statements and other reports as are required from time to time by applicable law; ensuring that the ETF complies with all other regulatory requirements, including the continuous disclosure obligations of the ETF under applicable securities laws; administering purchases, redemptions and other transactions in units of the ETF; and dealing and communicating with unitholders of the ETF. The Manager provides office facilities and personnel to carry out these services, if not otherwise furnished by any other service provider to the ETF. The Manager also monitors the investment strategies of the ETF to ensure that the ETF complies with its investment objectives, investment strategies and investment restrictions and practices. In consideration for the provision of these services, the Manager receives a monthly management fee at the annual rate of 0.65%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 1.40%, plus applicable sales taxes, of the net asset value of the ETF s Advisor Class units, calculated and accrued daily and payable monthly in arrears. The Manager, and not the ETF, will pay to registered dealers a service fee equal to 0.75% per year of the net asset value of Advisor Class units held by clients of the registered dealer. No service fees are paid to registered dealers in respect of Class E units. The Investment Manager is compensated for its services out of the management fees without any further cost to the ETF. Any expenses of the ETF which are waived or absorbed by the Manager are paid out of the management fees received by the Manager. The table below details, in percentage terms, the services received by the ETF from the Manager in consideration of the management fees paid during the period. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 9% 70% 21% 10

14 Horizons Enhanced Income US Equity (USD) ETF Past Performance Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF. Please read the prospectus before investing. The indicated rates of return are the historical total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any investor that would have reduced returns. An investment in the ETF is not guaranteed. Its value changes frequently and past performance may not be repeated. The ETF s performance numbers assume that all distributions are reinvested in additional units of the ETF. If you hold this ETF outside of a registered plan, income and capital gains distributions that are paid to you increase your income for tax purposes whether paid to you in cash or reinvested in additional units. The amount of the reinvested taxable distributions is added to the adjusted cost base of the units that you own. This would decrease your capital gain or increase your capital loss when you later redeem from the ETF, thereby ensuring that you are not taxed on this amount again. Please consult your tax advisor regarding your personal tax situation. Year-by-Year Returns The following chart presents the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period % 15.00% Rate of Return 10.00% 5.00% 0.00% -5.00% Class E - US$ 8.71% 9.58% 18.37% 6.75% -1.07% 3.36% Class E - C$ 13.46% 18.00% -3.49% Advisor Class - US$ 8.45% 8.71% 17.44% 5.90% -1.86% 2.96% Advisor Class - C$ 12.60% 17.07% -3.87% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at September 13, 2011 Class E units and Advisor Class units of the ETF began trading in Canadian dollars on January 15, 2014 under the symbols HEA and HEA.A, respectively. 11

15 Horizons Enhanced Income US Equity (USD) ETF Summary of Investment Portfolio As at June 30, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Long Positions U.S. Equities $ 31,771, % Cash and Cash Equivalents 530, % Other Assets less Liabilities (151,079) -0.47% Short Positions Equity Call Options (218,882) -0.69% $ 31,931, % % of ETF s Sector Mix Net Asset Value Net Asset Value Long Positions Information Technology $ 5,469, % Financials 4,916, % Health Care 4,620, % Consumer Discretionary 3,820, % Energy 3,424, % Consumer Staples 3,149, % Industrials 3,117, % Telecommunication Services 1,300, % Materials 1,296, % Utilities 655, % Cash and Cash Equivalents 530, % Other Assets less Liabilities (151,079) -0.47% Short Positions Equity Call Options (218,882) -0.69% $ 31,931, % 12

16 Horizons Enhanced Income US Equity (USD) ETF Summary of Investment Portfolio (continued) As at June 30, 2016 Top 25 Holdings % of ETF s Net Asset Value Amazon.com Inc. 2.51% Pfizer Inc. 2.26% Anadarko Petroleum Corp. 2.21% Bristol-Myers Squibb Co. 2.18% Exxon Mobil Corp. 2.14% Union Pacific Corp. 2.12% Johnson & Johnson 2.12% Occidental Petroleum Corp. 2.11% ConocoPhillips 2.11% UnitedHealth Group Inc. 2.10% Freeport-McMoRan Inc. 2.09% Chevron Corp. 2.08% Comcast Corp. 2.06% Merck & Co. Inc. 2.05% QUALCOMM Inc. 2.03% Wal-Mart Stores Inc. 2.03% AT&T Inc. 2.03% Duke Energy Corp. 2.01% JPMorgan Chase & Co. 2.00% Procter & Gamble Co. (The) 1.98% PepsiCo Inc. 1.98% Cisco Systems Inc. 1.97% Philip Morris International Inc. 1.97% Verizon Communications Inc. 1.96% United Technologies Corp. 1.96% The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent financial statements are available at no cost by calling , by writing to us at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through SEDAR at 13

17 Horizons Enhanced Income US Equity (USD) ETF MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying unaudited interim financial statements of Horizons Enhanced Income US Equity (USD) ETF (the ETF ) are the responsibility of the manager and trustee to the ETF, AlphaPro Management Inc. (the Manager ). They have been prepared in accordance with International Financial Reporting Standards using information available and include certain amounts that are based on the Manager s best estimates and judgments. The Manager has developed and maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to produce relevant, reliable and timely financial information, including the accompanying financial statements. These financial statements have been approved by the Board of Directors of the Manager. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. NOTICE TO UNITHOLDERS The Auditors of the ETF have not reviewed these Financial Statements. AlphaPro Management Inc., the Manager of the ETF, appoints an independent auditor to audit the ETF s annual financial statements. The ETF s independent auditors have not performed a review of these interim financial statements in accordance with Canadian generally accepted auditing standards. 14

18 Horizons Enhanced Income US Equity (USD) ETF Statements of Financial Position (unaudited) As at June 30, 2016 and December 31, Assets Cash and cash equivalents $ 530,118 $ 318,183 Investments 31,771,136 38,735,317 Amounts receivable relating to accrued income 28,657 47,653 Amounts receivable relating to portfolio assets sold 8,635 Total assets 32,338,546 39,101,153 Liabilities Accrued expenses 35,071 41,694 Distribution payable 153, ,013 Derivative liabilities (note 3) 218, ,392 Total liabilities 407, ,099 Total net assets (note 2) $ 31,931,293 $ 38,683,054 Total net assets, Class E $ 29,494,013 $ 36,242,929 Number of redeemable units outstanding, Class E (note 9) 2,798,349 3,445,809 Total net assets per unit, Class E (US$ units) (note 1) $ $ Total net assets per unit, Class E (C$ units) (note 1) $ $ Total net assets, Advisor Class $ 2,437,280 $ 2,440,125 Number of redeemable units outstanding, Advisor Class (note 9) 231, ,891 Total net assets per unit, Advisor Class (US$ units) (note 1) $ $ Total net assets per unit, Advisor Class (C$ units) (note 1) $ $ (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 15

19 Horizons Enhanced Income US Equity (USD) ETF Statements of Comprehensive Income (unaudited) For the Periods Ended June 30, Income Dividend income $ 407,990 $ 457,666 Interest income for distribution purposes 37 Securities lending income (note 8) 11 1,126 Net realized gain (loss) on sale of investments and derivatives (460,468) 639,774 Net realized gain on foreign exchange 11,155 Net change in unrealized appreciation (depreciation) of investments and derivatives 1,113,059 (579,461) Net change in unrealized appreciation of foreign exchange ,060, ,460 Expenses Management fees (note 10) 127, ,625 Audit fees 5,197 5,581 Independent Review Committee fees Custodial fees 1,606 1,456 Securityholder reporting costs 22,599 24,859 Administration fees 14,751 15,608 Transaction costs 64,111 68,001 Withholding taxes 58,237 69, , ,829 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (26,818) (28,790) 267, ,039 Increase in net assets for the period $ 792,750 $ 214,421 Increase in net assets, Class E $ 724,004 $ 200,193 Increase in net assets per unit, Class E Increase in net assets, Advisor Class $ 68,746 $ 14,228 Increase in net assets per unit, Advisor Class (See accompanying notes to financial statements) 16

20 Horizons Enhanced Income US Equity (USD) ETF Statements of Changes in Financial Position (unaudited) For the Periods Ended June 30, Total net assets at the beginning of the period $ 38,683,054 $ 40,356,892 Increase in net assets 792, ,421 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 8,157 2,807,985 Aggregate amounts paid on redemption of securities of the investment fund (6,552,752) (3,382,305) Securities issued on reinvestment of distributions 17,978 22,646 Distributions: From net investment income (1,017,894) (1,169,677) Total net assets at the end of the period $ 31,931,293 $ 38,849,962 Total net assets at the beginning of the period, Class E $ 36,242,929 $ 36,608,646 Increase in net assets, Class E 724, ,193 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 8,157 2,807,985 Aggregate amounts paid on redemption of securities of the investment fund (6,544,595) (2,815,995) Securities issued on reinvestment of distributions 17,775 21,577 Distributions: From net investment income (954,257) (1,079,883) Total net assets at the end of the period, Class E $ 29,494,013 $ 35,742,523 Total net assets at the beginning of the period, Advisor Class $ 2,440,125 $ 3,748,246 Increase in net assets, Advisor Class 68,746 14,228 Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (8,157) (566,310) Securities issued on reinvestment of distributions 203 1,069 Distributions: From net investment income (63,637) (89,794) Total net assets at the end of the period, Advisor Class $ 2,437,280 $ 3,107,439 (See accompanying notes to financial statements) 17

21 Horizons Enhanced Income US Equity (USD) ETF Statements of Cash Flows (unaudited) For the Periods Ended June 30, Cash flows from operating activities: Increase in net assets for the period $ 792,750 $ 214,421 Adjustments for: Net realized loss (gain) on sale of investments and derivatives 460,468 (639,774) Net change in unrealized depreciation (appreciation) of investments and derivatives (1,113,059) 579,461 Net change in unrealized appreciation of foreign exchange (30) (200) Purchase of investments (11,413,802) (13,582,153) Proceeds from the sale of investments 19,070,429 15,717,133 Amounts receivable relating to accrued income 18,996 33,377 Accrued expenses (6,623) (2,211) Net cash from operating activities 7,809,129 2,320,054 Cash flows from financing activities: Amount received from the issuance of units 8,157 2,807,985 Amount paid on redemptions of units (6,552,752) (3,382,305) Distributions paid to unitholders (1,052,629) (1,228,734) Net cash used in financing activities (7,597,224) (1,803,054) Net increase in cash and cash equivalents during the period 211, ,000 Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at beginning of period 318, ,015 Cash and cash equivalents at end of period $ 530,118 $ 668,215 Interest received $ 37 $ Dividends received, net of withholding taxes $ 368,749 $ 421,661 (See accompanying notes to financial statements) 18

22 Schedule of Investments (unaudited) As at June 30, 2016 Horizons Enhanced Income US Equity (USD) ETF Shares/ Average Fair Security Contracts Cost Value U.S. EQUITIES (99.50%) Information Technology (17.13%) Alphabet Inc., Class A 875 $ 606,896 $ 615,589 Apple Inc. 5, , ,406 Cisco Systems Inc. 21, , ,975 Facebook Inc., Class A 5, , ,598 Intel Corp. 18, , ,117 International Business Machines Corp. 4, , ,780 Microsoft Corp. 11, , ,801 Oracle Corp. 14, , ,886 QUALCOMM Inc. 12, , ,643 5,430,520 5,469,795 Financials (15.40%) American International Group Inc. 11, , ,014 Bank of America Corp. 45, , ,549 Berkshire Hathaway Inc., Class B 4, , ,361 Citigroup Inc. 14, , ,058 Goldman Sachs Group Inc. (The) 3, , ,028 JPMorgan Chase & Co. 10, , ,860 U.S. Bancorp 15, , ,976 Wells Fargo & Co. 12, , ,599 5,119,108 4,916,445 Health Care (14.47%) Amgen Inc. 4, , ,533 Bristol-Myers Squibb Co. 9, , ,034 Gilead Sciences Inc. 6, , ,495 Johnson & Johnson 5, , ,375 Merck & Co. Inc. 11, , ,017 Pfizer Inc. 20, , ,192 UnitedHealth Group Inc. 4, , ,677 4,393,715 4,620,323 Consumer Discretionary (11.97%) Amazon.com Inc. 1, , ,219 Comcast Corp., Class A 10, , ,220 General Motors Co. 19, , ,567 McDonald s Corp. 4, , ,749 Starbucks Corp. 10, , ,649 Walt Disney Co. (The) 6, , ,516 3,329,661 3,820,920 Energy (10.73%) Anadarko Petroleum Corp. 13, , ,332 Chevron Corp. 6, , ,476 ConocoPhillips 15, , ,803 19

23 Horizons Enhanced Income US Equity (USD) ETF Schedule of Investments (unaudited) (continued) As at June 30, 2016 Shares/ Average Fair Security Contracts Cost Value Exxon Mobil Corp. 7, , ,114 Occidental Petroleum Corp. 8, , ,773 3,918,876 3,424,498 Consumer Staples (9.86%) Coca-Cola Co. (The) 13, , ,956 PepsiCo Inc. 6, , ,123 Philip Morris International Inc. 6, , ,833 Procter & Gamble Co. (The) 7, , ,771 Wal-Mart Stores Inc. 8, , ,968 3,136,297 3,149,651 Industrials (9.76%) Boeing Co. (The) 4, , ,389 Caterpillar Inc. 7, , ,567 General Electric Co. 19, , ,649 Union Pacific Corp. 7, , ,637 United Technologies Corp. 6, , ,145 3,285,952 3,117,387 Telecommunication Services (4.07%) AT&T Inc. 15, , ,582 Verizon Communications Inc. 11, , ,215 1,074,238 1,300,797 Materials (4.06%) E.I. du Pont de Nemours & Co. 9, , ,348 Freeport-McMoRan Inc., Class B 60,320 1,015, ,965 1,623,641 1,296,313 Utilities (2.05%) Duke Energy Corp. 7, , ,007 TOTAL U.S. EQUITIES 31,911,993 31,771, DERIVATIVES (-0.69%) SHORT POSITIONS (-0.69%) Equity Call Options (-0.69%) Alphabet Inc., Class A, July 2016, $ USD (5) (2,355) (688) Alphabet Inc., Class A, July 2016, $ USD (3) (894) (98) Amazon.com Inc., July 2016, $ USD (3) (2,304) (2,535) Amazon.com Inc., July 2016, $ USD (8) (5,335) (2,900) American International Group Inc., July 2016, $54.00 USD (38) (1,292) (1,748) American International Group Inc., July 2016, $57.50 USD (11) (1,144) (39) American International Group Inc., August 2016, $57.50 USD (38) (2,109) (1,235) Amgen Inc., July 2016, $ USD (20) (2,430) (2,470) Amgen Inc., July 2016, $ USD (13) (1,115) (754) Anadarko Petroleum Corp., July 2016, $57.00 USD (33) (1,633) (1,188) Anadarko Petroleum Corp., July 2016, $58.00 USD (67) (5,192) (1,508)

24 Horizons Enhanced Income US Equity (USD) ETF Schedule of Investments (unaudited) (continued) As at June 30, 2016 Shares/ Average Fair Security Contracts Cost Value Anadarko Petroleum Corp., July 2016, $60.00 USD (33) (1,287) (578) Apple Inc., July 2016, $98.00 USD (28) (1,155) (1,050) Apple Inc., July 2016, $99.50 USD (14) (875) (203) Apple Inc., July 2016, $ USD (14) (693) (154) AT&T Inc., July 2016, $40.00 USD (23) (759) (7,244) AT&T Inc., July 2016, $41.00 USD (70) (2,164) (15,574) Bank of America Corp., July 2016, $13.00 USD (300) (7,200) (14,549) Bank of America Corp., July 2016, $14.00 USD (132) (3,485) (1,122) Berkshire Hathaway Inc., Class B, July 2016, $ USD (14) (1,512) (3,115) Berkshire Hathaway Inc., Class B, July 2016, $ USD (11) (929) (1,810) Boeing Co. (The), July 2016, $ USD (40) (3,670) (1,320) Bristol-Myers Squibb Co., July 2016, $73.50 USD (32) (1,808) (3,536) Bristol-Myers Squibb Co., July 2016, $74.00 USD (24) (792) (2,028) Bristol-Myers Squibb Co., July 2016, $75.00 USD (32) (1,504) (1,408) Caterpillar Inc., July 2016, $80.00 USD (62) (3,255) (1,178) Chevron Corp., July 2016, $ USD (21) (2,730) (4,158) Chevron Corp., July 2016, $ USD (27) (2,883) (3,713) Chevron Corp., July 2016, $ USD (16) (1,000) (1,432) Cisco Systems Inc., July 2016, $29.50 USD (110) (2,090) (495) Citigroup Inc., July 2016, $41.50 USD (35) (2,327) (5,845) Citigroup Inc., July 2016, $46.00 USD (37) (2,645) (444) Citigroup Inc., July 2016, $47.50 USD (75) (3,637) (263) Coca-Cola Co. (The), July 2016, $46.00 USD (79) (1,492) (1,343) Comcast Corp., Class A, July 2016, $64.00 USD (51) (1,938) (7,241) Comcast Corp., Class A, July 2016, $64.50 USD (34) (1,122) (3,655) ConocoPhillips, July 2016, $47.00 USD (117) (5,352) (1,638) Duke Energy Corp., July 2016, $82.50 USD (43) (4,523) (14,619) E.I. du Pont de Nemours & Co., July 2016, $69.00 USD (24) (2,124) (108) E.I. du Pont de Nemours & Co., July 2016, $70.00 USD (24) (1,236) (48) Exxon Mobil Corp., July 2016, $92.50 USD (7) (661) (1,320) Exxon Mobil Corp., July 2016, $94.00 USD (24) (1,129) (2,244) Exxon Mobil Corp., July 2016, $95.00 USD (18) (720) (900) Facebook Inc., Class A, July 2016, $ USD (22) (1,903) (3,135) Facebook Inc., Class A, July 2016, $ USD (17) (1,555) (697) Facebook Inc., Class A, July 2016, $ USD (13) (624) (215) Freeport-McMoRan Inc., Class B, July 2016, $13.00 USD (603) (19,596) (4,523) General Electric Co., July 2016, $31.50 USD (97) (2,231) (3,638) General Motors Co., July 2016, $30.50 USD (114) (3,371) (399) Gilead Sciences Inc., August 2016, $87.50 USD (17) (3,128) (2,610) Gilead Sciences Inc., August 2016, $90.00 USD (22) (2,013) (2,024) Goldman Sachs Group Inc. (The), July 2016, $ USD (10) (1,860) (755) Goldman Sachs Group Inc. (The), July 2016, $ USD (10) (1,720) (395) Goldman Sachs Group Inc. (The), July 2016, $ USD (14) (2,282) (280) Intel Corp., July 2016, $33.00 USD (138) (3,720) (5,864) International Business Machines Corp., July 2016, $ USD (23) (4,653) (1,656) 21

25 Horizons Enhanced Income US Equity (USD) ETF Schedule of Investments (unaudited) (continued) As at June 30, 2016 Shares/ Average Fair Security Contracts Cost Value Johnson & Johnson, July 2016, $ USD (39) (2,240) (7,488) Johnson & Johnson, July 2016, $ USD (14) (735) (1,008) JPMorgan Chase & Co., July 2016, $59.50 USD (34) (3,332) (9,247) JPMorgan Chase & Co., July 2016, $63.00 USD (35) (2,152) (2,380) JPMorgan Chase & Co., July 2016, $65.00 USD (35) (1,837) (665) McDonald s Corp., July 2016, $ USD (25) (951) (313) Merck & Co. Inc., July 2016, $57.50 USD (67) (3,895) (4,958) Microsoft Corp., July 2016, $52.00 USD (56) (2,072) (1,960) Occidental Petroleum Corp., July 2016, $77.50 USD (52) (6,648) (2,444) Oracle Corp., July 2016, $41.00 USD (74) (2,775) (3,293) Oracle Corp., July 2016, $41.50 USD (38) (836) (931) PepsiCo Inc., July 2016, $ USD (6) (555) (1,188) PepsiCo Inc., July 2016, $ USD (30) (2,872) (3,945) Pfizer Inc., July 2016, $36.00 USD (51) (1,326) (383) Philip Morris International Inc., July 2016, $ USD (30) (1,065) (915) Procter & Gamble Co. (The), July 2016, $85.00 USD (40) (1,120) (2,360) QUALCOMM Inc., July 2016, $55.00 USD (73) (5,110) (2,263) Starbucks Corp., July 2016, $57.50 USD (59) (1,929) (3,304) U.S. Bancorp, July 2016, $43.00 USD (114) (3,232) (570) Union Pacific Corp., July 2016, $87.50 USD (20) (940) (2,710) Union Pacific Corp., July 2016, $92.50 USD (40) (1,560) (460) United Technologies Corp., July 2016, $ USD (27) (1,310) (648) UnitedHealth Group Inc., July 2016, $ USD (24) (589) (732) Verizon Communications Inc., July 2016, $55.00 USD (60) (960) (5,759) Wal-Mart Stores Inc., July 2016, $72.50 USD (53) (3,800) (5,856) Wal-Mart Stores Inc., July 2016, $74.00 USD (23) (851) (817) Walt Disney Co. (The), July 2016, $ USD (9) (643) (212) Walt Disney Co. (The), July 2016, $ USD (16) (811) (40) Wells Fargo & Co., July 2016, $47.00 USD (40) (2,100) (4,520) Wells Fargo & Co., July 2016, $49.00 USD (64) (2,816) (1,824) (204,218) (218,882) TOTAL DERIVATIVES (204,218) (218,882) Transaction costs (45,566) TOTAL INVESTMENT PORTFOLIO (98.81%) $ 31,662,209 $ 31,552,254 Cash and cash equivalents (1.66%) 530,118 Other assets less liabilities (-0.47%) (151,079) TOTAL NET ASSETS (100.00%) $ 31,931,293 (See accompanying notes to financial statements) 22