Horizons Enhanced Income Equity ETF (HEX, HEX.A:TSX)

Transcription

1 Annual Report December 31, 2016 Horizons Enhanced Income Equity ETF (HEX, HEX.A:TSX) Innovation is our capital. Make it yours. ALPHA BENCHMARK BETAPRO

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...6 Past Performance...10 Summary of Investment Portfolio...12 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...14 INDEPENDENT AUDITORS REPORT...15 FINANCIAL STATEMENTS Statements of Financial Position...16 Statements of Comprehensive Income...17 Statements of Changes in Financial Position...18 Statements of Cash Flows...19 Schedule of Investments...20 Notes to Financial Statements...23

3 Letter from the President and Co-CEO: It was another noteworthy year in 2016 for both Horizons ETFs Management (Canada) Inc. ( Horizons ETFs ) and the Canadian ETF industry. The industry surpassed $100 billion in assets under management ( AUM ) with now more than 400 ETF listings. Meanwhile, our AUM surpassed $7.0 billion and we launched 10 new ETFs, giving us a total of 76 different tools available for our clients. It was gratifying that this success was spread out across all three of our ETF line-ups which include our benchmark index ETFs, actively managed ETFs and BetaPro ETFs for tactical investors. With the evolution of the investment landscape in Canada bringing greater fee 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 the Horizons Cdn High Dividend Index ETF ( HXH ), the Horizons NASDAQ-100 Index ETF ( HXQ ) and the Horizons EURO STOXX 50 Index ETF ( HXX ), which is the first ETF of its kind in Canada to provide investors with low-cost, tax-efficient exposure to the performance of 50 of the largest sector-leading companies in Europe. Along with these new offerings, we lowered the cost of the Horizons S&P 500 Index ETF ( HXS ), reducing its management fee from 0.15% to 0.10%. We also launched currency hedged versions of popular U.S.-focused index strategies, including the Horizons S&P 500 CAD Hedged Index ETF ( HSH ) and the Horizons US 7-10 Year Treasury Bond CAD Hedged ETF ( HTH ), which give investors access to U.S. asset classes with a hedge to protect returns from currency volatility between the Canadian and U.S. dollars. While most equity markets finished the year on a positive note something which has certainly helped the growth of our benchmark suite of index-replicating ETFs fixed income investors had a more difficult year in For the first time in more than a generation, we may be looking at a period of prolonged rising rather than falling interest rates. November was the worst month on record for bond losses globally, according to Bloomberg, as markets digested the unexpected results and ramifications of the U.S. presidential election. We believe that our low-cost family of actively managed fixed income ETFs have the flexibility to reduce duration and take advantage of these potentially seismic changes in the fixed income market. One of the primary beneficiaries of rising rates, for example, was in the Canadian preferred share asset class. The Horizons Active Preferred Share ETF ( HPR ) has been the top asset-gatherer in the preferred share space in Canada this year and was our top-selling actively managed ETF for the calendar year. HPR now has a solid six-year track record that demonstrates the value of active management in this asset class. Regardless of the direction of markets or interest rates, we have ETF solutions that allow investors of all types to customize their portfolio exposure. Markets do change, sometimes quickly, and our family of ETFs gives investors the tools they need to help meet their objectives. For more information on all our strategies, please visit our website at where we offer a range of resources designed to help you become a more skilled ETF investor. Thank you for your continued support and wishing you strong returns in 2017, Steven J. Hawkins, President & Co-CEO Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE This annual management report of fund performance for Horizons Enhanced Income Equity ETF ( Horizons HEX or the ETF ) contains financial highlights and is included with the audited annual 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 HEX is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization Canadian companies; and (b) monthly distributions of dividend and call option income. Horizons HEX invests primarily in a portfolio of equity and equity related securities of Canadian companies that, as at the Constituent Reset Date (see below), are amongst the largest by market capitalization and most liquid issuers on the Toronto Stock Exchange ( TSX ). 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. To achieve its investment objective, Horizons HEX primarily invests in an equal weighted portfolio of large capitalization Canadian companies. Semi-annually, the investment manager selects from the largest and most liquid Canadian issuers listed on the TSX and invests Horizons HEX in each issuer equally (the Constituent Reset Date ). Horizons HEX 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 HEX 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. Please refer to the ETF s most recent prospectus for a complete description of Horizons HEX s investment restrictions. 1

5 Management Discussion of Fund Performance (continued) Horizons Enhanced Income Equity ETF Risk The Manager performs a review of the ETF s risk rating at least annually, as well as when there is a material change in the ETF s investment objective or investment strategies. The current risk rating for the ETF is: medium to high. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on the historical rolling ten-year standard deviation of its return, the return of an underlying index, or of an applicable proxy index. In cases where the Manager believes that this methodology produces a result that is not indicative of the ETF s future volatility, the risk rating may be determined by the ETF s category. Risk ratings are not intended for use as a substitute for undertaking a proper and complete suitability or financial assessment by an investment advisor. 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 Concentration 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 stock exchange risk Suitability of investment in units Conflicts of interest Results of Operations For the year ended December 31, 2016, the Class E units and Advisor Class units of the ETF returned 22.43% and 21.46%, respectively, when including distributions paid to unitholders. This compares to the S&P/TSX 60 Index ( TSX 60 ), which returned 21.36% for the same period on a total return basis. The Class E units had an average annualized distribution yield of 5.63% when including distributions of $0.36, while the Advisor Class units provided an average yield of 4.83% with distributions of $0.31 for the year. The underlying equity portfolio return, exclusive of the covered call strategy, was 29.59% over the same period. 2 The TSX 60 represents a broad, large cap view of the Canadian marketplace. The index is rebalanced quarterly. Additions and deletions of constituent issuers of the TSX 60 are made on an as needed basis with a view to minimizing index turnover.

6 Management Discussion of Fund Performance (continued) Horizons Enhanced Income Equity ETF Market Review The broader S&P/TSX Composite Index ( Index ), after some initial weakness, rose strongly throughout most of It may have been buoyed by rebounding commodities and a more positive world economic outlook. This contrasted sharply with the elevated negative market sentiment that manifest itself in December of 2015 and the early weeks of January 2016, a period that saw severe drops in materials like iron ore, and multi-decade low levels for crude oil. Canada s commodity-centric markets had felt the weight of these deflationary forces for quite some time before a steady rebound began to take hold toward the end of At the beginning of January iron ore had already began to rebound significantly on surprising strength in Chinese steel pricing. What seemed like utter despair in sentiment in these sectors suddenly turned more upbeat as gold also found strength, posting its largest quarterly rise in 30 years. Weakness in all these areas was a source of worry for already shaken investors who had experienced high levels of market volatility as the previous fall unfolded. Stability in the key area of commodities helped to bolster confidence and equity investors returned. Copper would finish the first quarter up 4%, with natural gas and many agricultural commodities following suit. Gold miners would give back some first half gains after rallying earlier in the year. Investor concerns over the U.S. Federal Reserve rate hikes and a less dovish Federal Open Market Committee ( FOMC ) outlook as the year closed would temper gold bug enthusiasm substantially. As the first part of the year unfolded, option pricing levels softened dramatically across most sectors as North American markets moved higher and uncertainty abated. Fear gauge indicators such as the Chicago Board Options Exchange Market Volatility Index ( the VIX ) started the year high but began to pull back and drift lower until the fall, when, as has been often the case September and October once again brought some seasonal volatility. The VIX gyrated between 12 and 20 a number of times as the drama of the U.S. elections unfolded. Worries about the more perceived negative outcome for markets proved unfounded as Donald Trump s win stoked equity markets that had frankly been stuck in a range for a lengthy period of time. As has been the case for the past few years, market movement took on an all-or-nothing approach as markets either felt comfortable and complacent, or panicked. The moves up and down in volatility measures were some of the most pronounced, on a percentage basis, than we ve perhaps ever seen. Sustained strings of daily losses would suddenly become seemingly unstoppable and endless rallies. A market of this texture can be difficult to manage from a covered call perspective as timing of the call writing and rolls becomes a factor in performance. Still, overall performance versus the TSX 60 was positive. 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 year. Rebalancing The equity positions in the ETF are rebalanced semi-annually to equal weightings. The most recent rebalancing took place in September At that time, two changes were made. Cenovus Energy Inc. was added to the ETF s portfolio and Cameco Corp. was dropped to rebalance energy exposure relative to the TSX 60. The number of securities in the portfolio currently stands at 30. 3

7 Management Discussion of Fund Performance (continued) Horizons Enhanced Income Equity ETF Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $13,348,863. This compares to ($3,820,449) for the year ended December 31, The ETF incurred management, operating and transaction expenses of $899,957 (2015 $962,779) of which $29,380 (2015 $30,079) 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 $3,162,590 to Class E unitholders and $259,054 to Advisor Class unitholders during the year (2015 Class E: $4,950,521, Advisor Class: $449,708). 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. 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 Other than indicated below, there are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. 4

8 Management Discussion of Fund Performance (continued) Horizons Enhanced Income Equity ETF Termination of Advisor Class Units On December 29, 2016, the Manager announced that it plans to eliminate the Advisor Class units of the ETF. As of January 31, 2017, investment professionals will no longer be able to purchase Advisor Class units on behalf of their clients and this class of units is expected to be fully eliminated by the end of April, 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 affiliates, 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 years ended December 31, 2016 and 2015, the ETF paid $293,058 (2015 $271,132) to NBF and/or its affiliates in broker commissions on portfolio transactions. 5

9 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 for the past five fiscal years. This information is derived from the ETF s audited annual 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 Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.09) (0.08) (0.09) (0.10) (0.06) Realized gains (losses) for the year (0.39) (0.42) (0.24) Unrealized gains (losses) for the year 1.61 (0.86) (0.12) Total increase (decrease) from operations (2) 1.29 (0.43) Distributions: From dividends (0.10) (0.11) (0.11) (0.11) (0.10) From net realized capital gains (0.39) (0.28) From return of capital (0.26) (0.16) (0.35) (0.65) Total annual distributions (3) (0.36) (0.50) (0.55) (0.46) (0.75) Net assets, end of year (4) $

10 Financial Highlights (continued) Advisor Class Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.14) (0.13) (0.15) (0.16) (0.12) Realized gains (losses) for the year (0.39) (0.42) (0.24) Unrealized gains (losses) for the year 1.62 (0.84) (0.18) Total increase (decrease) from operations (2) 1.25 (0.45) Distributions: From dividends (0.06) (0.06) (0.06) (0.07) (0.06) From net realized capital gains (0.39) (0.28) From return of capital (0.25) (0.16) (0.34) (0.63) Total annual distributions (3) (0.31) (0.45) (0.50) (0.41) (0.69) Net assets, end of year (4) $ This information is derived from the ETF s audited annual financial statements as at December 31 of the years shown. Class E units of the ETF have an initial net asset value of $10.00 as at March 16, Advisor Class units of the ETF have an initial net asset value of $8.63 as at September 8, 2011 which was the net asset value of Class E units on that date. 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 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 58,065 53,517 72, , ,017 Number of units outstanding (000 s) 8,459 9,024 10,536 15,623 29,567 Management expense ratio (2) 0.82% 0.80% 0.80% 0.80% 0.80% Management expense ratio before waivers and absorptions (3) 0.87% 0.85% 0.83% 0.82% 0.90% Trading expense ratio (4) 0.52% 0.41% 0.48% 0.66% 0.79% Portfolio turnover rate (5) 66.01% 49.55% 95.94% 66.72% % Net asset value per unit, end of year $ Closing market price $ Advisor Class Year (1) Total net asset value (000 s) $ 5,231 5,284 7,849 12,790 28,005 Number of units outstanding (000 s) ,131 1,772 3,818 Management expense ratio (2) 1.62% 1.60% 1.59% 1.59% 1.59% Management expense ratio before waivers and absorptions (3) 1.66% 1.64% 1.64% 1.65% 1.73% Trading expense ratio (4) 0.52% 0.41% 0.48% 0.66% 0.79% Portfolio turnover rate (5) 66.01% 49.55% 95.94% 66.72% % Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the years shown. 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 year. 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 year. 5. 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. 8

12 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 year. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 7% 87% 6% 9

13 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 % 20.00% 15.00% Rate of Return 10.00% 5.00% 0.00% -5.00% % % Class E % 4.10% 5.07% 3.68% -7.29% 22.43% Advisor Class -5.19% 3.29% 4.25% 2.87% -8.01% 21.46% Class E units of the ETF have an initial net asset value of $10.00 as at March 16, 2011 and Advisor Class units of the ETF have an initial net asset value of $8.63 as at September 8,

14 Past Performance (continued) Annual Compound Returns The following table presents the ETF s annual compound total return since inception and for the periods shown ended December 31, 2016 along with a comparable market index. The table is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the ETF or future returns on investments in the ETF. Horizons Enhanced Equity Basket Total Return Index Return % Period Class E Return % Advisor Class Return % 1 Year 22.43% 21.46% 29.59% 21.36% 3 Year 5.58% 4.75% 10.92% 7.91% 5 Year 5.18% 4.36% 10.92% 8.98% Since Inception: Class E 2.21% 6.26% 5.60% Advisor Class 3.07% 8.63% 7.39% S&P/TSX 60 Index TM Return % Class E units of the ETF have an initial net asset value of $10.00 as at March 16, 2011 and Advisor Class units of the ETF have an initial net asset value of $8.63 as at September 8,

15 Summary of Investment Portfolio As at December 31, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Long Positions Canadian Equities $ 63,200, % Cash and Cash Equivalents 487, % Other Assets less Liabilities (136,968) -0.22% Short Positions Equity Call Options (254,369) -0.40% $ 63,296, % % of ETF s Sector Mix Net Asset Value Net Asset Value Long Positions Financials $ 22,328, % Energy 15,892, % Materials 7,999, % Consumer Discretionary 6,396, % Industrials 4,105, % Telecommunication Services 3,675, % Consumer Staples 1,784, % Health Care 1,017, % Cash and Cash Equivalents 487, % Other Assets less Liabilities (136,968) -0.22% Short Positions Equity Call Options (254,369) -0.40% $ 63,296, % 12

16 Summary of Investment Portfolio (continued) As at December 31, 2016 Top 25 Holdings % of ETF s Net Asset Value Manulife Financial Corp. 4.12% Encana Corp. 4.07% Suncor Energy Inc. 4.01% Sun Life Financial Inc. 3.82% Imperial Oil Ltd. 3.66% Cenovus Energy Inc. 3.59% Teck Resources Ltd. 3.58% National Bank of Canada 3.56% Toronto-Dominion Bank (The) 3.55% Royal Bank of Canada 3.50% Bank of Montreal 3.50% Agrium Inc. 3.48% Canadian Natural Resources Ltd. 3.44% Magna International Inc. 3.43% Canadian National Railway Co. 3.38% Thomson Reuters Corp. 3.36% Canadian Imperial Bank of Commerce 3.35% Power Corp. of Canada 3.35% Bank of Nova Scotia (The) 3.29% Restaurant Brands International Inc. 3.28% Husky Energy Inc. 3.25% Brookfield Asset Management Inc. 3.11% Canadian Pacific Railway Ltd. 3.09% Enbridge Inc. 3.01% BCE Inc. 2.96% 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 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Enhanced Income Equity 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 and have been audited by KPMG LLP, Chartered Professional Accountants, Licensed Public Accountants, on behalf of unitholders. The independent auditors report outlines the scope of their audit and their opinion on the financial statements. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. 14

18 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Enhanced Income Equity ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2016 and 2015, the statements of comprehensive income, changes in financial position and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ETF s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the ETF as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 15, 2017 Toronto, Canada 15

19 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 487,151 $ 490,103 Investments 63,200,517 58,876,751 Amounts receivable relating to accrued income 166, ,815 Amounts receivable relating to portfolio assets sold 520,140 Total assets 63,854,221 60,064,809 Liabilities Accrued expenses 57,062 58,293 Amounts payable relating to securities redeemed 444,818 Distribution payable 246, ,226 Derivative liabilities (note 3) 254, ,373 Total liabilities 557,890 1,263,710 Total net assets (note 2) $ 63,296,331 $ 58,801,099 Total net assets, Class E $ 58,065,111 $ 53,516,863 Number of redeemable units outstanding, Class E (note 9) 8,458,884 9,024,357 Total net assets per unit, Class E $ 6.86 $ 5.93 Total net assets, Advisor Class $ 5,231,220 $ 5,284,236 Number of redeemable units outstanding, Advisor Class (note 9) 759, ,580 Total net assets per unit, Advisor Class $ 6.89 $ 5.95 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 16

20 Statements of Comprehensive Income For the Years Ended December 31, Income Dividend income $ 1,587,469 $ 2,005,917 Interest income for distribution purposes 180 2,269 Net realized gain (loss) on sale of investments and derivatives (3,795,604) 3,589,915 Net realized loss on foreign exchange (1,140) (797) Net change in unrealized appreciation (depreciation) of investments and derivatives 15,558,266 (9,417,901) Net change in unrealized appreciation (depreciation) of foreign exchange (308) ,348,863 (3,820,449) Expenses Management fees (note 10) 485, ,763 Audit fees 10,354 10,634 Independent Review Committee fees 843 1,211 Custodial fees 6,043 7,396 Legal fees 4,843 1,977 Securityholder reporting costs 33,243 34,849 Administration fees 39,351 39,148 Transaction costs 319, ,801 Other expenses , ,779 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (29,380) (30,079) 870, ,700 Increase (decrease) in net assets for the year $ 12,478,286 $ (4,753,149) Increase (decrease) in net assets, Class E $ 11,426,743 $ (4,301,528) Increase (decrease) in net assets per unit, Class E 1.29 (0.43) Increase (decrease) in net assets, Advisor Class $ 1,051,543 $ (451,621) Increase (decrease) in net assets per unit, Advisor Class 1.25 (0.45) (See accompanying notes to financial statements) 17

21 Statements of Changes in Financial Position For the Years Ended December 31, Total net assets at the beginning of the year $ 58,801,099 $ 80,658,726 Increase (decrease) in net assets 12,478,286 (4,753,149) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 4,394,911 1,059,195 Aggregate amounts paid on redemption of securities of the investment fund (9,150,351) (13,054,960) Securities issued on reinvestment of distributions 194, ,516 Distributions: From net investment income (883,780) (1,133,586) From net realized capital gains (4,266,643) Return of capital (2,537,864) Total net assets at the end of the year $ 63,296,331 $ 58,801,099 Total net assets at the beginning of the year, Class E $ 53,516,863 $ 72,809,389 Increase (decrease) in net assets, Class E 11,426,743 (4,301,528) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 4,394,911 1,059,195 Aggregate amounts paid on redemption of securities of the investment fund (8,281,008) (11,350,120) Securities issued on reinvestment of distributions 170, ,448 Distributions: From net investment income (837,722) (1,071,135) From net realized capital gains (3,879,386) Return of capital (2,324,868) Total net assets at the end of the year, Class E $ 58,065,111 $ 53,516,863 Total net assets at the beginning of the year, Advisor Class $ 5,284,236 $ 7,849,337 Increase (decrease) in net assets, Advisor Class 1,051,543 (451,621) Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (869,343) (1,704,840) Securities issued on reinvestment of distributions 23,838 41,068 Distributions: From net investment income (46,058) (62,451) From net realized capital gains (387,257) Return of capital (212,996) Total net assets at the end of the year, Advisor Class $ 5,231,220 $ 5,284,236 (See accompanying notes to financial statements) 18

22 Statements of Cash Flows For the Years Ended December 31, Cash flows from operating activities: Increase (decrease) in net assets for the year $ 12,478,286 $ (4,753,149) Adjustments for: Net realized loss (gain) on sale of investments and derivatives 3,795,604 (3,589,915) Net change in unrealized depreciation (appreciation) of investments and derivatives (15,558,266) 9,417,901 Net change in unrealized depreciation (appreciation) of foreign exchange 104 (59) Purchase of investments (40,533,119) (35,322,174) Proceeds from the sale of investments 48,435,151 47,951,827 Amounts receivable relating to accrued income 11, ,987 Accrued expenses (1,231) (17,942) Net cash from operating activities 8,627,791 13,790,476 Cash flows from financing activities: Amount received from the issuance of units 4,394,911 1,059,195 Amount paid on redemptions of units (9,595,169) (12,610,142) Distributions paid to unitholders (3,430,381) (5,376,176) Net cash used in financing activities (8,630,639) (16,927,123) Net decrease in cash and cash equivalents during the year (2,848) (3,136,647) Effect of exchange rate fluctuations on cash and cash equivalents (104) 59 Cash and cash equivalents at beginning of year 490,103 3,626,691 Cash and cash equivalents at end of year $ 487,151 $ 490,103 Interest received, net of withholding taxes $ 180 $ 2,269 Dividends received, net of withholding taxes $ 1,598,731 $ 2,109,904 (See accompanying notes to financial statements) 19

23 Schedule of Investments As at December 31, Horizons Enhanced Income Equity ETF Shares/ Average Fair Security Contracts Cost Value CANADIAN EQUITIES (99.85%) Financials (35.28%) Bank of Montreal 23,111 $ 1,730,168 $ 2,231,829 Bank of Nova Scotia (The) 27,934 1,991,362 2,088,346 Brookfield Asset Management Inc., Class A 44,589 1,872,395 1,975,293 Canadian Imperial Bank of Commerce 19,413 1,770,264 2,126,888 Manulife Financial Corp. 109,299 2,355,080 2,613,339 National Bank of Canada 41,446 1,827,527 2,260,050 Power Corp. of Canada 70,794 2,085,572 2,127,360 Royal Bank of Canada 24,452 2,031,139 2,221,953 Sun Life Financial Inc. 47,180 1,799,653 2,432,129 Toronto-Dominion Bank (The) 33,998 1,839,661 2,251,348 19,302,821 22,328,535 Energy (25.11%) Canadian Natural Resources Ltd. 50,871 2,038,563 2,176,770 Cenovus Energy Inc. 112,128 1,975,795 2,276,198 Enbridge Inc. 33,807 1,766,991 1,910,096 Encana Corp. 163,969 2,331,904 2,584,152 Husky Energy Inc. 126,980 2,034,442 2,068,504 Imperial Oil Ltd. 49,771 2,487,043 2,324,803 Suncor Energy Inc. 58,134 2,218,316 2,552,083 14,853,054 15,892,606 Materials (12.64%) Agrium Inc. 16,351 1,723,777 2,206,731 Barrick Gold Corp. 84,867 1,611,309 1,823,792 Goldcorp Inc. 92,886 2,372,946 1,697,956 Teck Resources Ltd., Class B 84,526 1,435,090 2,271,213 7,143,122 7,999,692 Consumer Discretionary (10.10%) Magna International Inc., Class A 37,390 2,074,703 2,179,837 Restaurant Brands International Inc. 32,611 1,619,224 2,085,474 Thomson Reuters Corp. 36,262 1,988,516 2,130,755 5,682,443 6,396,066 Industrials (6.48%) Canadian National Railway Co. 23,688 1,472,655 2,140,448 Canadian Pacific Railway Ltd. 10,257 1,521,972 1,964,831 2,994,627 4,105,279 Telecommunication Services (5.81%) BCE Inc. 32,257 1,734,063 1,871,874 Rogers Communications Inc., Class B 34,830 1,676,531 1,803,845 3,410,594 3,675,719

24 Schedule of Investments (continued) As at December 31, 2016 Shares/ Average Fair Security Contracts Cost Value Consumer Staples (2.82%) Metro Inc., Class A 44,439 1,598,107 1,784,670 Health Care (1.61%) Valeant Pharmaceuticals International Inc. 52,283 1,990,467 1,017,950 TOTAL CANADIAN EQUITIES 56,975,235 63,200,517 DERIVATIVES (-0.40%) SHORT POSITIONS (-0.40%) Equity Call Options (-0.40%) Agrium Inc., January 2017, $ CAD (34) (6,324) (7,157) Agrium Inc., January 2017, $ CAD (43) (4,150) (1,956) Bank of Montreal, January 2017, $92.00 CAD (37) (1,868) (17,852) Bank of Montreal, January 2017, $98.00 CAD (61) (5,948) (2,776) Bank of Montreal, January 2017, $ CAD (35) (1,260) (403) Bank of Nova Scotia (The), January 2017, $78.00 CAD (176) (5,778) (3,520) Barrick Gold Corp., January 2017, $21.00 CAD (140) (5,180) (16,730) BCE Inc., January 2017, $59.00 CAD (103) (2,575) (2,318) Brookfield Asset Management Inc., Class A, January 2017, $46.00 CAD (310) (12,120) (3,410) Canadian Imperial Bank of Commerce, January 2017, $ CAD (103) (8,188) (3,811) Canadian Imperial Bank of Commerce, January 2017, $ CAD (31) (1,488) (372) Canadian National Railway Co., January 2017, $94.00 CAD (88) (5,719) (3,080) Canadian Natural Resources Ltd., January 2017, $46.00 CAD (54) (5,049) (675) Canadian Pacific Railway Ltd., January 2017, $ CAD (43) (8,686) (5,332) Canadian Pacific Railway Ltd., January 2017, $ CAD (16) (2,656) (328) Cenovus Energy Inc., January 2017, $22.00 CAD (891) (29,370) (6,237) Enbridge Inc., January 2017, $58.00 CAD (200) (10,605) (6,300) Encana Corp., January 2017, $17.00 CAD (152) (7,980) (1,900) Encana Corp., January 2017, $18.00 CAD (1,034) (26,380) (4,653) Goldcorp Inc., January 2017, $18.00 CAD (205) (6,150) (17,835) Goldcorp Inc., January 2017, $19.00 CAD (200) (6,600) (8,900) Husky Energy Inc., January 2017, $17.00 CAD (1,097) (33,329) (14,810) Imperial Oil Ltd., January 2017, $50.00 CAD (384) (13,846) (5,760) Magna International Inc., January 2017, $62.00 CAD (230) (15,743) (3,680) Manulife Financial Corp., January 2017, $25.00 CAD (610) (23,000) (6,100) Metro Inc., Class A, January 2017, $40.00 CAD (143) (9,796) (10,368) Metro Inc., Class A, January 2017, $42.00 CAD (97) (3,783) (1,018) National Bank of Canada, January 2017, $56.00 CAD (284) (10,108) (4,544) Power Corp. of Canada, January 2017, $30.00 CAD (150) (10,425) (6,975) Power Corp. of Canada, January 2017, $31.00 CAD (192) (4,416) (2,112) 21