Horizons Active US Floating Rate Bond (USD) ETF (HUF.U, HUF:TSX)

Transcription

1 Annual Report December 31, 2017 Horizons Active US Floating Rate Bond (USD) ETF (HUF.U, HUF:TSX) ACTIVE BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...8 Past Performance...12 Summary of Investment Portfolio...14 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...16 INDEPENDENT AUDITORS REPORT...17 FINANCIAL STATEMENTS Statements of Financial Position...18 Statements of Comprehensive Income...19 Statements of Changes in Financial Position...20 Statements of Cash Flows...21 Schedule of Investments...22 Notes to Financial Statements...27

3 Letter from the President and Co-CEO For both Horizons ETFs Management (Canada) Inc. ( Horizons ETFs ) and the Canadian ETF industry, 2017 was an extraordinary year. The industry surpassed $146 billion in assets under management ( AUM ) and now has over 650 ETF listings. Meanwhile, Horizons ETFs launched seven new ETFs and our AUM surpassed $9 billion, giving us a total of 81 different investment tools available for our clients. This was an especially remarkable year for Horizons ETFs for two key reasons. Firstly, we continued to create innovative, firstof-their-kind solutions for investors; and secondly, we became an official partner of the Toronto Raptors. In April, we brought to market the world s first marijuana-focused ETF the Horizons Marijuana Life Sciences Index ETF ( HMMJ ). HMMJ took investors to a new frontier by giving them diversified exposure to the rapidly growing cannabis industry. The launch of HMMJ was a tremendous success, as it captured worldwide media attention and is arguably the biggest new ETF launch in Canada in 2017, when you look at AUM growth and daily trading activity. We have continued our tradition of being a disruptive force in the industry, with the autumn launches of the Horizons Active A.I. Global Equity ETF ( MIND ) and the Horizons Robotics and Automation Index ETF ( ROBO ). MIND is the world s first global equity ETF driven by artificial intelligence, while ROBO is Canada s first ETF to give investors exposure to a basket of robotics, automation and artificial intelligence companies from across the globe. Like HMMJ, these ETFs also created significant media and investor interest. In addition to our new offerings, several of our established ETFs also distinguished themselves in Our lineup of Total Return Index ETFs ( TRI ETFs ), which use an innovative structure to deliver index returns in a low-cost and tax-efficient manner, experienced significant AUM growth this year. For the first time in decades, we may be looking at a period of prolonged rising interest rates. 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 among the top asset-gatherers in the preferred share space in Canada this year and was our top-selling actively managed ETF. 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 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 where we offer a range of resources designed to inform and educate ETF investors. Thank you for your continued support and here s wishing you strong returns in Sincerely, Steven J. Hawkins, President & Co-CEO Horizons ETFs Management (Canada) Inc. P.S. LET S GO RAPTORS!

4 MANAGEMENT REPORT OF FUND PERFORMANCE Horizons Active US Floating Rate Bond (USD) ETF This annual management report of fund performance for Horizons Active US Floating Rate Bond (USD) ETF ( HUF.U 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, Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Manager ), by calling toll free , or locally (416) , by writing to us at: 55 University Avenue, Suite 800, Toronto ON, M5J 2H7, 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 HUF.U is to generate income that is consistent with prevailing U.S. short-term corporate bond yields while stabilizing the market value of the ETF from the effects of U.S. interest rate fluctuations. HUF.U invests primarily in a portfolio of U.S. corporate debt securities and hedges the portfolio s U.S. interest rate risk to generally maintain a portfolio duration of less than two years. HUF.U may also invest in U.S. government debt securities and debt securities of non-u.s. companies. HUF.U may also invest in debt securities directly, or through investments in securities of other investment funds, including exchange traded funds. HUF.U uses derivatives, including interest rate swaps, to deliver a floating rate of income. As HUF.U is denominated in U.S. dollars, HUF.U generally seeks to hedge its Canadian dollar currency exposure to the U.S. dollar and does not seek to hedge its U.S. dollar currency exposure to the Canadian dollar. To achieve HUF.U s investment objectives, the ETF s sub-advisor, Fiera Capital Corporation ( Fiera or the Sub-Advisor ), uses fundamental credit research to select companies that, based on the Sub-Advisor s view on the company s industry and growth prospects, are believed to offer attractive risk adjusted returns. The Sub-Advisor seeks diversification by industry sector and geographic region and relies on its: in-depth fundamental credit research, view of market trends, analysis of the company s competitive position, and review of the return relative to the company s risk and general market conditions, to select securities for HUF.U. 1

5 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF 2 Risk HUF.U has entered into one or more interest rate swaps pursuant to which the ETF pays a counterparty a fixed return based on a portfolio of fixed-income securities in exchange for a floating rate of income. HUF.U maintains a portfolio duration that is generally not more than two years. The Sub-Advisor may, from time to time, invest in U.S., Canadian and foreign government debt, exchange traded funds, cash and cash equivalents which generally in aggregate will not exceed 40% of the ETF s net assets. No less than 95%, by value, of the debt securities held by HUF.U must be rated at or above investment grade (BBB- by S&P, BBB low by DBRS or Baa3 by Moody s). The Sub-Advisor may, from time to time, invest in non-investment grade debt securities rated at least BB by S&P, BB by DBRS or Ba2 by Moody s. Such non-investment grade debt securities will not exceed 5%, by value, of the debt securities held by HUF.U. The Sub-Advisor may sell short debt securities it believes will underperform on a relative basis or to otherwise assist the ETF in meeting its investment objectives. The Sub-Advisor of HUF.U may rely on exemptions from the securities regulatory authorities allowing it to purchase securities of a related issuer of the Sub-Advisor which are not exchange traded if certain conditions are met. In particular, the investment must be consistent with, or necessary to meet, the investment objective of HUF.U. The investment must also be approved by the ETF s Independent Review Committee ( IRC ) and is subject to certain other provisions of National Instrument ( NI ). In lieu of specific security selections, from time to time the Sub-Advisor may purchase fixed-income related exchange traded funds including those managed by the Manager and its affiliates. HUF.U may also use both long and short derivative instruments, including future contracts and credit default swaps, to manage duration, credit exposure, portfolio yield and market risk. Please refer to the ETF s most recent prospectus for a complete description of HUF.U s investment restrictions. 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: low. 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 a blend of the historical rolling 3-year and 5-year standard deviations of its return (or, generally, commencing with prospectus renewals after September 1, 2017, a rolling 10-year standard deviation), 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.

6 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Restrictions on certain unitholders Highly volatile markets Multi-class risk (up to April 28, 2017) No guaranteed return Derivatives and counterparty risk Interest rate risk Foreign currency risk Credit risk Foreign stock exchange risk Short selling risk Foreign currency denomination risk Currency price fluctuation dual currency ETF Call risk Liquidity risk Results of Operations For the year ended December 31, 2017, the U.S. dollar ( US$ units ) and Canadian dollar ( C$ units ) Class E units of the ETF returned 2.82% and -3.74%, respectively, when including distributions paid to unitholders. This compares to a return of 1.21% for the London Interbank Offered Rate ( LIBOR ), for the same period. 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. The difference in performance is attributed to the -6.47% return of the U.S. dollar versus the Canadian dollar during For the period from January 1 to their termination on April 28, 2017, Advisor Class units of the ETF returned 0.95%. For the same period, LIBOR returned 0.45%. LIBOR is a benchmark rate that some of the world s leading banks charge each other for short-term loans. It serves as the first step to calculating interest rates on various loans throughout the world. General Market Review The global economic backdrop continued to improve in This environment led to a significant shift in the tone of major central banks, as the Bank of Canada (BoC), the European Central Bank (ECB) and the Bank of England all adopted constructive stances on the economy. The U.S. Federal Reserve (the Fed ) hiked its benchmark rate three times and seems committed to continue on its path towards policy normalization. By the end of the year, the upper target for the Fed Funds rate was 1.50%, and the dot plot (a graph that presents a dot for the fed funds rate projections of each member of the Federal Open Market Committee) showed that the majority of Fed governors expected three more rate hikes in Yield curves in countries such as Canada and the U.S. flattened significantly and yields in Europe were higher in the core countries. 3

7 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF 4 Market sentiment during the second half of the year was driven mainly by renewed optimism surrounding U.S. tax reform, driving strong returns among corporate bonds while treasuries were fairly flat. Markets cheered when President Trump signed the tax reform bill into law with just days left in the year, marking the first major legislative win of his presidency. In the third quarter, markets got a better sense of how the Fed planned on winding down its $4.5 trillion balance sheet as Fed Chair Janet Yellen detailed the Fed s plan to decrease its reinvestment of proceeds and payments from treasury and agency securities by U.S.$10 billion starting in October, eventually reducing reinvestments by U.S.$50 billion per month. U.S. investors also closely watched the actions of the ECB, which had to decide if the time was ripe to begin removing monetary stimulus from the economy. In October, the ECB announced that it would begin tapering its quantitative easing program, reducing bond purchases by half as of January 2018 this was widely expected by markets. What wasn t totally priced in was the more dovish tone of ECB President Mario Draghi s press conference and his promises to keep interest rates low well past the horizon of the ECB s net asset purchases hurting the Euro upon the announcement. The top story in money markets was undoubtedly the flattening yield curve throughout the year. In the U.S., the 10-year minus the 2-year U.S. Treasury bond spread fell from 125 bps at the beginning of the year to 52 bps by year s end, while the 30-year minus the 2-year U.S. Treasury bond spread fell from 187 bps to 85 bps. At December 31, 2017, the 5-year U.S. Treasury bonds yielded 2.21%, having increased by 28 bps by the end of the year. The 10-year bond yields moved slightly lower, by 4 bps, to 2.40% and 30-year yields fell by 30 bps to end the year yielding 2.74%. The Canadian dollar traded essentially flat versus the U.S. dollar in the first 5 months of the year, but made serious gains to the order of 11.49% from the beginning of June until mid-september. The Canadian dollar would eventually finish the year at $ versus the U.S. dollar, a gain of 6.91% for the year. Portfolio Review Both the Canadian and American corporate holdings performed well throughout the year and contributed positively to the ETF s performance. Strength in the U.S. financials sector was one of the main contributors to performance this year. Outlook In the U.S., additional stimulus coming from tax reform measures should add wind to the sails of the economy. We expect the Fed to continue its march towards rate normalization over the coming year. Bond yields already reflect some of these policy shifts, however there remains room for yields to continue a moderate rise on the longer term end of the curve. We expect cyclical inflation pressures along with reduced central bank asset purchases to allow yields to move sustainably into a higher trading range as global policy intervention and deflation risks subside. Credit markets have behaved very strongly over the past year and spreads are at post-financial crisis lows. We believe this is justified by the much improved fundamentals of the Canadian and global economies. Business confidence is strong and is being led by generally positive income and employment growth. We recognize current spreads on corporate bonds offer less protection from a negative credit or liquidity event, however we believe business conditions will remain robust over the coming quarters. Fiera acknowledges some near-term risks to our base case. A failure of the North American Free Trade Agreement (NAFTA) negotiations could have an important negative impact on trade and business investment in North America. On the other hand, and perhaps more impactful, a faster acceleration in latent inflation expectations could cause a more disruptive shift in asset pricing and policy responses.

8 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2017, the ETF generated gross comprehensive income (loss) from investments and derivatives of $1,332,711. This compares to $847,728 for the year ended December 31, The ETF incurred management, operating and transaction expenses of $259,078 (2016 $202,458) of which $58,801 (2016 $59,233) 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 $693,680 to Class E unitholders and $2,395 to Advisor Class unitholders during the year (2016 Class E: $406,925, Advisor Class: $6,739). 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 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. 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. Changes to the Manager Effective September 30, 2017, AlphaPro Management Inc. ( AlphaPro ) amalgamated with its parent company, Horizons ETFs Management (Canada) Inc. (the Amalgamation ). The duties of manager and trustee for the ETF previously performed by AlphaPro have been assumed by Horizons Management in addition to its role as investment manager for the ETF (the Manager and Investment Manager ). AlphaPro originally existed as a separate corporate entity from Horizons Management to focus primarily on the management and marketing of actively managed ETFs. Since both firms shared the same management team, it was decided that an amalgamation of legal entities would create a more efficient corporate structure. There was no change to the to the ETF s investment objectives and strategies as result of the Amalgamation, nor to the day-to-day management of the ETF. Elimination of PACCs and SWPs Effective August 1, 2017, the ETF s pre-authorized cash contribution plan ( PACC ) and systematic withdrawal plan ( SWP ) were eliminated. These changes did not impact the ETF s distribution reinvestment plan ( DRIP ). 5

9 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Conversion and Termination of Advisor Class units The previously announced conversion (the Conversion ) of the ETF s advisor class units ( Advisor Class units ) into the ETF s common class units ( Class E units ) was completed at the close of business on April 28, 2017 (the Conversion Date ). The remaining unitholders of record of the Advisor Class units as at the Conversion Date received a number of whole Class E units of the ETF with an aggregate net asset value ( NAV ) equal to the aggregate NAV of the Advisor Class units converted, based on the respective NAVs of the two classes as at the Conversion Date (the Conversion Ratio ). The ETF s Conversion Ratio was , meaning, that for each Advisor Class unit of the ETF subject to the Conversion, the unitholder received Class E units of the ETF. The conversion of Advisor Class units into whole Class E units of the ETF did not give rise to a disposition by unitholders of converting Advisor Class units for tax purposes on any whole units converted. Any remaining fractional Advisor Class units were redeemed for cash and such redemption is considered a disposition for tax purposes. Immediately following the completion of the Conversion, the Advisor Class units were terminated. 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 As a result of the Amalgamation transaction described above, the manager, trustee and investment manager of the ETF is Horizons ETFs Management (Canada) Inc., 55 University Avenue, Suite 800, Toronto, Ontario, M5J 2H7, a corporation incorporated under the laws of Ontario. Horizons Management is a member of the Mirae Asset Financial Group based in Seoul, South Korea. If the ETF invests in other Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. Other Related Parties During the year, an affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) previously held an indirect minority interest in AlphaPro, and NBC holds an indirect minority interest in Fiera, the sub-advisor of the ETF. NBF or NBC may have acted as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may have created an actual or perceived conflicts of interest which investors may have considered in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF or NBC may have profited from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have had economic interests which may have differed from and were adverse to those of unitholders. 6 NBF s potential roles as a designated broker and a dealer of the ETF was 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 have extended to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates.

10 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF The ETF, in its normal course of business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that was a related party to the Manager during the year. The Manager was permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complied with the predetermined list of requirements agreed upon with the IRC. Effective June 30, 2017, Horizons Management acquired the minority interest of AlphaPro owned by an affiliate of NBC and as a result, became the sole shareholder of AlphaPro. Accordingly, NBC and NBF, along with Fiera, are no longer considered affiliates or related parties of Horizons Management and, prior to the Amalgamation, AlphaPro. For the years ended December 31, 2017 and 2016, the ETF did not make any payments to NBF and/or its affiliates in broker commissions on portfolio transactions. As discussed in the Recent Developments section above, effective September 30, 2017, AlphaPro amalgamated with its parent company, Horizons Management, and now the amalgamated companies carry on business as Horizons ETFs Management (Canada) Inc. 7

11 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 (1) Net assets, beginning of year $ Increase from operations: Total revenue Total expenses (0.05) (0.05) (0.05) (0.05) (0.05) Realized gains (losses) for the year (0.09) (0.29) Unrealized gains (losses) for the year (0.21) (0.18) (0.21) Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.17) (0.15) (0.11) (0.13) (0.18) From net realized capital gains (0.20) (0.01) From return of capital (0.05) Total annual distributions (3) (0.17) (0.15) (0.31) (0.14) (0.23) Net assets, end of year (US$ units) (4) $ Net assets, end of year (C$ units) (4) $

12 Financial Highlights (continued) Advisor Class Year (1) Net assets, beginning of year $ Increase (decrease) from operations: Total revenue Total expenses (0.03) (0.10) (0.10) (0.11) (0.11) Realized gains (losses) for the year 0.06 (0.29) Unrealized gains (losses) for the year 0.39 (0.22) (0.12) (0.22) Total increase (decrease) from operations (2) (0.05) Distributions: From net investment income (excluding dividends) (0.03) (0.09) (0.05) (0.08) (0.16) From net realized capital gains (0.20) From return of capital (0.02) Total annual distributions (3) (0.03) (0.09) (0.25) (0.08) (0.18) 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. Advisor Class information for 2017 is presented as at the termination date of those units on April 28, The ETF effectively began operations on February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. Information is presented in accordance with IFRS. 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. 9

13 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 41,858 27,341 32,776 40,880 19,856 Number of units outstanding (000 s) 4,125 2,725 3,300 4,075 1,975 Management expense ratio (2) 0.46% 0.46% 0.46% 0.46% 0.46% Management expense ratio before waivers and absorptions (3) 0.60% 0.66% 0.63% 0.69% 0.94% Trading expense ratio (4) 0.01% 0.01% 0.01% 0.02% 0.02% Portfolio turnover rate (5) 44.10% 16.28% 14.43% 10.71% 55.57% Net asset value per unit, end of year (US$ units) $ Closing market price (US$ units) $ Net asset value per unit, end of year (C$ units) $ Closing market price (C$ units) $ Advisor Class Year (1) Total net asset value (000 s) $ ,508 Number of units outstanding (000 s) Management expense ratio (2) 1.03% 1.02% 1.02% 1.03% 1.03% Management expense ratio before waivers and absorptions (3) 1.25% 1.25% 1.18% 1.26% 1.52% Trading expense ratio (4) 0.01% 0.01% 0.01% 0.02% 0.02% Portfolio turnover rate (5) 44.10% 16.28% 14.43% 10.71% 55.57% Net asset value per unit, end of year $ Closing market price $ The information for Class E units is provided as at December 31 of the years shown. Advisor Class information is presented as at the termination date of those units on April 28, 2017 and December 31 of the other years shown. Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. Information is presented in accordance with IFRS. 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. Transaction costs related to the purchase and/or sale of fixed income securities are typically imbedded in the price of those transactions and are therefore not included in the trading expense ratio. 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. 10

14 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 0.40%, plus applicable sales taxes, of the net asset value of the ETF s Class E units, calculated and accrued daily and payable monthly in arrears. Up until the termination of the ETF s Advisor Class units on April 28, 2017, as described in the section on Recent Developments, the ETF also received a monthly management fee at the annual rate of 0.90%, 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. In addition, up until the termination of the Advisor Class units, the Manager, and not the ETF, paid to registered dealers a service fee equal to 0.50% 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 and Sub-Advisor are compensated for their 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 5% 62% 33% 11

15 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 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% HUF.U - US$ 3.51% 1.50% 1.15% 0.07% 2.50% 2.82% HUF - C$ 3.44% 10.37% 19.37% -0.54% -3.74% The ETF effectively began operations on February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013, under the symbol HUF. 12

16 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, 2017 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. Period HUF.U US$ Units Return % HUF C$ Units Return % 3-Month LIBOR Return % 1 Year 2.82% -3.74% 1.21% 3 Year 1.79% 4.55% 0.73% Since Inception: HUF.U - US$ units 1.96% 0.52% HUF - C$ units 6.49% 0.58% The ETF effectively began operations on February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013, under the symbol HUF. Former Advisor Class unitholders had their units converted to Class E units of the ETF based on the Conversion Ratio disclosed in the Recent Developments section as at the close of business on April 28, Assuming the former Advisor Class unitholders held the Class E units they received as part of the Conversion until December 31, 2017, the returns those unitholders would have experienced for 2017 and for the other periods disclosed in the table above would have been substantially similar to those of the Class E unitholders, when adjusted for the differences in the expenses of the ETF paid by each class. 13

17 Summary of Investment Portfolio As at December 31, 2017 % of ETF s Asset Mix Net Asset Value Net Asset Value Long Positions U.S. Bonds U.S. dollar denominated $ 21,886, % Canadian Bonds Canadian dollar denominated 11,554, % Canadian Bonds U.S. dollar denominated 4,672, % U.S. Bonds Canadian dollar denominated 1,482, % Global Bonds U.S. dollar denominated 367, % Global Bonds Canadian dollar denominated 170, % Interest Rate Swaps* 367, % Currency Forward Hedge* (303,144) -0.72% Cash and Cash Equivalents 1,337, % Margin Deposits 138, % Other Assets less Liabilities 157, % Short Positions Futures Contracts Interest Rate Hedge* 28, % $ 41,857, % % of ETF s Sector Mix Net Asset Value Net Asset Value Long Positions Corporate Bonds $ 40,132, % Interest Rate Swaps* 367, % Currency Forward Hedge* (303,144) -0.72% Cash and Cash Equivalents 1,337, % Margin Deposits 138, % Other Assets less Liabilities 157, % Short Positions Futures Contracts Interest Rate Hedge* 28, % $ 41,857, % *Positions in interest rate swaps, forward and futures contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 14

18 Summary of Investment Portfolio (continued) As at December 31, 2017 Top 25 Holdings* % of ETF s Net Asset Value Morgan Stanley 7.23% Citigroup Inc. 6.75% Wells Fargo & Co. 6.69% Goldman Sachs Group Inc. (The) 6.09% JPMorgan Chase & Co. 6.02% Bank of Montreal 5.37% Bank of America Corp. 5.27% Bank of Nova Scotia (The) 4.77% Canadian Imperial Bank of Commerce 3.53% American Express Credit Corp. 2.40% Bank of New York Mellon Corp. (The) 2.39% Capital One Financial Corp. 2.38% Toronto-Dominion Bank (The) 2.31% Enbridge Inc. 1.75% Ford Credit Canada Co. 1.67% Laurentian Bank of Canada 1.47% Verizon Communications Inc. 1.41% Duke Energy Corp. 1.25% Kinder Morgan Energy Partners L.P. 1.24% Brookfield Finance LLC 1.24% Husky Energy Inc. 1.24% AT&T Inc. 1.20% American International Group Inc. 1.19% Royal Bank of Canada 1.13% Canadian Western Bank 1.06% * Note all of the Top 25 Holdings represent the aggregate debt instruments of that issuer in the ETF s portfolio. 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 55 University Avenue, Suite 800, Toronto, Ontario, M5J 2H7, by visiting our website at or through SEDAR at 15

19 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Active US Floating Rate Bond (USD) ETF (the ETF ) are the responsibility of the manager and trustee to the ETF, Horizons ETFs Management (Canada) 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 Horizons ETFs Management (Canada) Inc. Taeyong Lee Director Horizons ETFs Management (Canada) Inc. 16

20 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Active US Floating Rate Bond (USD) ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2017 and 2016, 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 entity 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, 2017 and 2016, 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 14, 2018 Toronto, Canada 17

21 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 1,337,556 $ 2,544,423 Investments 40,132,817 25,252,199 Margin deposits (note 12) 138,259 91,749 Amounts receivable relating to accrued income 264, ,179 Derivative assets (note 3) 408, ,929 Total assets 42,282,396 28,303,479 Liabilities Accrued management fees 15,232 10,587 Accrued operating expenses 3,152 1,567 Distribution payable 89,391 60,717 Derivative liabilities (note 3) 316, ,525 Total liabilities 424, ,396 Total net assets (note 2) $ 41,857,703 $ 28,094,083 Total net assets, Class E $ 41,857,703 $ 27,341,425 Number of redeemable units outstanding, Class E (note 9) 4,125,079 2,725,056 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 $ $ 752,658 Number of redeemable units outstanding, Advisor Class (note 9) 75,000 Total net assets per unit, Advisor Class $ $ (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 18

22 Statements of Comprehensive Income For the Years Ended December 31, Income Interest income for distribution purposes $ 917,065 $ 553,482 Securities lending income (note 8) 1,271 1,878 Net realized loss on sale of investments and derivatives (1,179,666) (639,900) Net realized gain (loss) on foreign exchange 802,974 (197,001) Net change in unrealized appreciation of investments and derivatives 760,494 1,009,285 Net change in unrealized appreciation of foreign exchange 30, ,984 1,332, ,728 Expenses Management fees (note 10) 180, ,834 Audit fees 8,992 8,977 Independent Review Committee fees Custodial fees 10,779 2,721 Legal fees 798 2,463 Securityholder reporting costs 20,113 23,043 Administration fees 30,430 29,717 Transaction costs 5,483 3,378 Withholding taxes 1,542 1,542 Other expenses , ,458 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (58,801) (59,233) 200, ,225 Increase in net assets for the year $ 1,132,434 $ 704,503 Increase in net assets, Class E $ 1,125,332 $ 690,174 Increase in net assets per unit, Class E Increase in net assets, Advisor Class $ 7,102 $ 14,329 Increase in net assets per unit, Advisor Class (See accompanying notes to financial statements) 19

23 Statements of Changes in Financial Position For the Years Ended December 31, Total net assets at the beginning of the year $ 28,094,083 $ 33,521,237 Increase in net assets 1,132, ,503 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 35,096,193 5,761,178 Aggregate amounts paid on redemption of securities of the investment fund (21,769,190) (11,479,490) Securities issued on reinvestment of distributions Distributions: From net investment income (695,513) (413,664) Return of capital (562) Total net assets at the end of the year $ 41,857,703 $ 28,094,083 Total net assets at the beginning of the year, Class E $ 27,341,425 $ 32,776,228 Increase in net assets, Class E 1,125, ,174 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 35,096,193 5,761,178 Aggregate amounts paid on redemption of securities of the investment fund (21,011,825) (11,479,490) Securities issued on reinvestment of distributions Distributions: From net investment income (693,118) (406,925) Return of capital (562) Total net assets at the end of the year, Class E $ 41,857,703 $ 27,341,425 Total net assets at the beginning of the year, Advisor Class $ 752,658 $ 745,009 Increase in net assets, Advisor Class 7,102 14,329 Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (757,365) Securities issued on reinvestment of distributions 59 Distributions: From net investment income (2,395) (6,739) Total net assets at the end of the year, Advisor Class $ $ 752,658 (See accompanying notes to financial statements) 20