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

Transcription

1 Annual Report December 31, 2015 Horizons Active US Floating Rate Bond (USD) ETF (HUF.U, HUF.V, HUF:TSX) ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...6 Past Performance...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...25

3 Letter from the Co-CEO: The story for investors in 2015 was one of a return to volatility, especially in the North American markets. Canadian equities declined noticeably and in the U.S., the S&P 500 experienced its first 10% correction in over three years, only to rally to end the year with a modest loss. Additionally, the Canadian Dollar had its worst performing year relative to the U.S. Dollar since 2008 and we saw very marginal returns from the fixed income markets. For Horizons ETFs, this year could be called The Year of the Active ETF, since many of our actively managed equity and fixed income ETFs delivered strong relative returns. Portfolio managers who can identify sectors or individual securities with better relative returns can, and do, deliver attractive results, assuming they are not burdened with the high management fees that can plague many actively managed mutual funds. Over the past year, we received many third party industry accolades and awards for our Active ETFs, which combine top-tier professional portfolio management with competitive management fees. This past year was also one where we demonstrated our unique market leadership position in indexing. The Horizons S&P/TSX 60 Index ETF ( HXT ) celebrated its five-year anniversary with an additional rebate, which lowered the ETF s effective management fee to 0.03% (from 0.05%), making it the lowest-cost fund in Canada. HXT was the first ETF that we launched with a unique total return swap structure that seeks to improve tracking error and tax efficiency by way of its synthetic structure. We now have six such ETFs in our benchmark family, including the Horizons US 7-10 Year Treasury Bond ETF ( HTB ) launched in April Most investment metrics suggest that we could be at or near the end of a five-year Goldilocks market a climate of perpetually higher returns and low volatility. As a firm, we re generally agnostic on the direction of where capital markets are headed, but we do think it s fair to say that an unprecedented era of easy returns is over. Since there isn t a single solution to investment success, we believe that our diverse suite of Canadian ETF solutions offers investors the flexibility to react efficiently to ever-changing market conditions into 2016 and beyond. Of course, you re not alone in your investment process. I urge you to visit our website at where we offer a range of resources designed to help you become a better ETF investor. Most importantly, it s our goal to help you find the best ETF solutions for your unique investment needs. Wishing you the best for 2016, Steven J. Hawkins Co-CEO Horizons ETFs Management (Canada) Inc.

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 ( Horizons 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, 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 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. Horizons 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. Horizons HUF.U may also invest in U.S. government debt securities and debt securities of non-u.s. companies. Horizons HUF.U may also invest in debt securities directly, or through investments in securities of other investment funds, including exchange traded funds. Horizons HUF.U uses derivatives, including interest rate swaps, to deliver a floating rate of income. As Horizons HUF.U is denominated in U.S. dollars, Horizons 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 Horizons 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 Horizons HUF.U. Horizons 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. Horizons HUF.U maintains a portfolio duration that is generally not more than two years. 1

5 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Risk The Sub-Advisor may, from time to time, invest in non-investment grade debt, 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. At the time of purchase, debt securities 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 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 Horizons 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 Horizons 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. Horizons 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 Horizons HUF.U s investment restrictions. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before subscribing for 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. 2 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 No guaranteed return Derivatives risk Interest rate risk Foreign currency risk Credit risk Foreign stock exchange risk Short selling risk Foreign currency denomination risk Call risk Liquidity risk

6 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Results of Operations For the year ended December 31, 2015, the U.S. dollar ( US$ units ) Class E units and Advisor Class units of the ETF returned 0.07% and -0.49%, respectively, when including distributions paid to unitholders. This compares to a return of 0.28% for the London Interbank Offered Rate ( LIBOR ), for the same period. The Class E units of the ETF in Canadian dollar terms ( C$ units ) returned 19.37% for the year. Class E C$ units are not a separate class of units of the ETF, but rather, represent the Canadian dollar value of the Class E US$ units at the current day s Canada/U.S. exchange rate. The difference in performance is attributed to the 19% appreciation of the U.S. dollar versus the Canadian dollar during 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 Canadian corporate bond spreads displayed a significant amount of volatility during 2015; ultimately finishing wider by 41 basis points (bps) over similar Government of Canada bonds from where they began the year. Therefore, the bulk of performance in corporate bonds can be attributed to the move in government yields and carry, rather than outperformance in credit. On the U.S. side, corporate bonds posted a total return of 0.60%, with BBB-rated issuances lagging the broad corporate space with a -2.18% total return. Though the general trend was downward, yields proved nearly as volatile as credit in Government of Canada 10- year bond yields began the year at 1.79%, and would get as low as 1.20% in August, before ultimately finishing the year at 1.39%. U.S. 10-year Treasury bond ( US 10-yr ) yields began the year at 2.17%, got as high as 2.37% on November 9 following a strong U.S. employment report, but began to reverse and finished the year at 2.27%. Key contributors to volatility during the year included: cuts to a number of benchmark interest rates including Canada and/or intensified quantitative easing programs (e.g. European Central Bank), contrasting U.S. and global economic data, Greek debt negotiations, ongoing conflicts in the Middle East, China and Emerging Market growth concerns, and a continued slide in oil and commodity prices. Despite trailing off towards the end of the year, corporate new issue supply remained robust in 2015, with approximately $95 billion issued in Canada. Energy names tumbled during the second half of 2015, leaving the energy sector as the worst performing sector in the corporate bond space. Portfolio Review The ETF has maintained a fairly low net duration throughout the year, ranging from 0.20 to 0.40 years. Despite a general spread widening in corporate bonds, the high relative value coming from an investment in corporate bonds relative to government bonds (carry) had a positive effect on performance. Fiera continues to focus on the quality of issuing companies rather than taking undue credit risk, constantly seeking the best opportunities in a variety of industries and along the corporate term structure, in both Canada and the U.S. Outlook Fiera anticipates that the global economy will improve over 2016 and inflation to move back towards 2% for developed economies. We expect the consumer to be the main contributor to global growth. In terms of interest rates, a better economy should lead to rate hikes in the U.S. and the U.K. and higher interest rates across yield curves around the world. A better economy, higher commodity prices should lead to better performance for positions in corporate bonds, preferred shares and high yield bonds. 3

7 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF Fiera does not see a significant change in bond yields over the near term. The U.S. Federal Reserve (the Fed ) has initiated a rate hiking cycle but it is expected they will be very cautious, following a pace closer to the market implied path rather than the more hawkish stance inferred from the Fed s own future interest rate predictions dot plot chart. The Bank of Canada will also be watching to see how the economy rebalances. Any setback may see markets anticipate another round of rate cuts. Yield enhancing strategies continue to be our favoured source of compensated risk. Liquidity is at a premium right now as markets are nervous about Fed policy. Some sectors and issuers are also at risk from weaker resource prices and heightened merger and acquisition activity. Managing these risks while benefitting from historically wide spreads will be Fiera s major objective over the coming year. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2015, the ETF generated gross comprehensive income (loss) from investments and derivatives of $193,140. This compares to $456,399 for the year ended December 31, The ETF paid management, operating and transaction expenses of $233,491 (2014 $245,995) of which $61,932 (2014 $79,868) 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 $1,046,056 to Class E unitholders and $18,739 to Advisor Class unitholders during the year (2014 Class E: $441,185, Advisor Class: $7,736). 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 4 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

8 Management Discussion of Fund Performance (continued) Horizons Active US Floating Rate Bond (USD) ETF statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. Fiera, the sub-advisor of the ETF, is an affiliate of NBF and, as stated above, an affiliate of NBF holds an indirect minority interest in the Manager. As a result, Fiera may be considered to be an associate of the Manager. 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. For the years ended December 31, 2015 and 2014, the ETF did not make any payments 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 since it effectively began operations on February 14, 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 from operations: Total revenue Total expenses (0.05) (0.05) (0.05) (0.04) Realized gains (losses) for the year (0.08) Unrealized gains (losses) for the year (0.21) (0.18) (0.21) 0.18 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.11) (0.13) (0.18) (0.19) From net realized capital gains (0.20) (0.01) From return of capital (0.05) (0.02) Total annual distributions (3) (0.31) (0.14) (0.23) (0.21) Net assets, end of year (US$ units) (4) $ Net assets, end of year (C$ units) (4) $

10 Financial Highlights (continued) Advisor Class Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.10) (0.11) (0.11) (0.09) Realized gains (losses) for the year (0.08) Unrealized gains (losses) for the year (0.22) (0.12) (0.22) 0.18 Total increase (decrease) from operations (2) (0.05) Distributions: From net investment income (excluding dividends) (0.05) (0.08) (0.16) (0.15) From net realized capital gains (0.20) From return of capital (0.02) (0.01) Total annual distributions (3) (0.25) (0.08) (0.18) (0.16) 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 and Advisor Class units of the ETF have an initial net asset value of $10.00 as at February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. 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) $ 32,776 40,880 19,856 7,602 Number of units outstanding (000 s) 3,300 4,075 1, Management expense ratio (2) 0.46% 0.46% 0.46% 0.45% Management expense ratio before waivers and absorptions (3) 0.63% 0.69% 0.94% 1.63% Trading expense ratio (4) 0.01% 0.02% 0.02% 0.28% Portfolio turnover rate (5) 14.43% 10.71% 55.57% 8.53% 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 2,534 Number of units outstanding (000 s) Management expense ratio (2) 1.02% 1.03% 1.03% 1.01% Management expense ratio before waivers and absorptions (3) 1.18% 1.26% 1.52% 2.19% Trading expense ratio (4) 0.01% 0.02% 0.02% 0.28% Portfolio turnover rate (5) 14.43% 10.71% 55.57% 8.53% Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the years shown. Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. 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 0.40%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 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. The Manager, and not the ETF, will pay 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 7% 54% 39% 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 shows the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period % 15.00% Rate of Return 10.00% 5.00% 0.00% -5.00% Class E - US$ 3.51% 1.50% 1.15% 0.07% Class E - C$ 3.44% 10.37% 19.37% Advisor Class 3.00% 0.92% 0.57% -0.49% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. 10

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, 2015 along with a market comparable. 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 Class E - US$ Units Return % Class E - C$ Units Return % Advisor Class Units Return % 3-Month LIBOR Return % 1 Year 0.07% 19.37% -0.49% 0.28% 3 Year 0.90% N/A 0.34% 0.27% Since Inception: US$ - units 1.60% 1.03% 0.30% C$ - units 14.75% 0.26% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at February 14, Class E units of the ETF began trading in Canadian dollars on October 2, 2013 under the symbol HUF. 11

15 Summary of Investment Portfolio As at December 31, 2015 % of ETF s Asset Mix Net Asset Value Net Asset Value Long Positions U.S. Bonds U.S. dollar denominated $ 14,146, % Canadian Bonds U.S. dollar denominated 7,734, % Canadian Bonds Canadian dollar denominated 4,397, % Global Bonds U.S. dollar denominated 2,443, % U.S. Bonds Canadian dollar denominated 1,186, % Global Bonds Canadian dollar denominated 346, % Currency Forward Hedge* 55, % Interest Rate Swaps* (278,723) -0.83% Cash and Cash Equivalents 3,341, % Margin Deposits 79, % Other Assets less Liabilities 83, % Short Positions Futures Contracts Interest Rate Hedge* (15,480) -0.05% $ 33,521, % % of ETF s Sector Mix Net Asset Value Net Asset Value Long Positions Corporate Bonds $ 30,255, % Currency Forward Hedge* 55, % Interest Rate Swaps* (278,723) -0.83% Cash and Cash Equivalents 3,341, % Margin Deposits 79, % Other Assets less Liabilities 83, % Short Positions Futures Contracts Interest Rate Hedge* (15,480) -0.05% $ 33,521, % *Positions in forward contracts, futures contracts and interest rate swaps are disclosed as the gain/(loss) that would be realized if the contracts/swaps were closed out on the date of this report. 12

16 Summary of Investment Portfolio (continued) As at December 31, 2015 Top 25 Holdings* % of ETF s Net Asset Value Morgan Stanley 6.45% Bank of Nova Scotia (The) 5.97% Wells Fargo & Co. 5.93% Bank of Montreal 5.46% Toronto-Dominion Bank (The) 5.17% Citigroup Inc. 4.49% Bank of America Corp. 4.34% Goldman Sachs Group Inc. (The) 4.28% JPMorgan Chase & Co. 3.87% GE Capital International Funding Co. 3.55% Verizon Communications Inc. 3.23% HSBC USA Inc. 2.97% American Express Credit Corp. 2.92% AltaGas Ltd. 2.67% Husky Energy Inc. 1.55% Statoil ASA 1.49% Canadian Imperial Bank of Commerce 1.48% Caisse Centrale Desjardins du Quebec 1.48% American International Group Inc. 1.48% AT&T Inc. 1.46% HSBC Bank PLC 1.20% HSBC Holdings PLC 1.05% Calloway REIT 1.00% Metropolitan Life Global Funding I 0.92% Sempra Energy 0.90% * 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 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 Active US Floating Rate Bond (USD) ETF (the ETF ) are the responsibility of the manager and trustee to the ETF, AlphaPro Management Inc. (the Manager ). They have been prepared in accordance with International Financial Reporting Standards using information available and include certain amounts that are based on the Manager s best estimates and judgments. The Manager has developed and maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to produce relevant, reliable and timely financial information, including the accompanying financial statements. These financial statements have been approved by the Board of Directors of the Manager 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 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, 2015 and 2014, 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 ETF 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, 2015 and 2014, 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 9, 2016 Toronto, Canada 15

19 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 3,341,485 $ 696,465 Investments 30,255,557 41,050,950 Margin deposits (note 12) 79,381 33,558 Amounts receivable relating to accrued income 137, ,451 Derivative assets (note 3) 232,730 5,225 Total assets 34,046,617 41,963,649 Liabilities Accrued expenses 14,546 18,822 Distribution payable 39,610 41,352 Derivative liabilities (note 3) 471, ,936 Total liabilities 525, ,110 Total net assets (note 2) $ 33,521,237 $ 41,632,539 Total net assets, Class E (note 2) $ 32,776,228 $ 40,880,102 Number of redeemable units outstanding, Class E (note 9) 3,300,038 4,075,038 Total net assets per unit, Class E (US$ units) (notes 1, 2) $ 9.93 $ Total net assets per unit, Class E (C$ units) (notes 1, 2) $ $ Total net assets, Advisor Class (note 2) $ 745,009 $ 752,437 Number of redeemable units outstanding, Advisor Class (note 9) 75,000 75,000 Total net assets per unit, Advisor Class (note 2) $ 9.93 $ (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 Interest income for distribution purposes $ 542,240 $ 578,940 Securities lending income 1, Net realized gain on sale of investments and derivatives 779, ,872 Net realized loss on foreign exchange (367,029) (83,448) Net change in unrealized depreciation of investments and derivatives (646,040) (633,732) Net change in unrealized depreciation of foreign exchange (116,759) (7,813) 193, ,399 Expenses Management fees (note 10) 160, ,484 Audit fees 9,616 14,276 Independent Review Committee fees Custodial fees 2,783 4,142 Legal fees Securityholder reporting costs 25,993 29,865 Administration fees 30,325 37,800 Transaction costs 3,306 6,010 Other expenses 52 1, , ,995 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (61,932) (79,868) 171, ,127 Increase in net assets for the year (note 2) $ 21,581 $ 290,272 Increase in net assets, Class E (note 2) $ 25,250 $ 281,786 Increase in net assets per unit, Class E (note 2) Increase (decrease) in net assets, Advisor Class (note 2) $ (3,669) $ 8,486 Increase (decrease) in net assets per unit, Advisor Class (note 2) (0.05) 0.09 (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 (note 2) $ 41,632,539 $ 21,364,254 Increase in net assets (note 2) 21, ,272 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 7,771,808 33,497,925 Aggregate amounts paid on redemption of securities of the investment fund (15,530,835) (13,071,076) Securities issued on reinvestment of distributions 690, Distributions: From net investment income (373,891) (406,503) From net realized capital gains (690,904) (42,418) Total net assets at the end of the year (note 2) $ 33,521,237 $ 41,632,539 Total net assets at the beginning of the year, Class E (note 2) $ 40,880,102 $ 19,856,094 Increase in net assets, Class E (note 2) 25, ,786 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 7,771,808 33,497,925 Aggregate amounts paid on redemption of securities of the investment fund (15,530,835) (12,314,603) Securities issued on reinvestment of distributions 675, Distributions: From net investment income (370,109) (398,767) From net realized capital gains (675,947) (42,418) Total net assets at the end of the year, Class E (note 2) $ 32,776,228 $ 40,880,102 Total net assets at the beginning of the year, Advisor Class (note 2) $ 752,437 $ 1,508,160 Increase (decrease) in net assets, Advisor Class (note 2) (3,669) 8,486 Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (756,473) Securities issued on reinvestment of distributions 14,980 Distributions: From net investment income (3,782) (7,736) From net realized capital gains (14,957) Total net assets at the end of the year, Advisor Class (note 2) $ 745,009 $ 752,437 (See accompanying notes to financial statements) 18

22 Statements of Cash Flows For the Years Ended December 31, Cash flows from operating activities: Increase in net assets for the year (note 2) $ 21,581 $ 290,272 Adjustments for: Net realized gain on sale of investments and derivatives (779,510) (601,872) Net realized gain on currency forward contracts 1,685, ,119 Net change in unrealized depreciation of investments and derivatives 646, ,732 Net change in unrealized depreciation of foreign exchange 5, Purchase of investments (4,718,709) (23,970,464) Proceeds from the sale of investments 13,935,208 3,354,194 Margin deposits (45,823) (33,558) Amounts receivable relating to accrued income 39,987 (49,384) Accrued expenses (4,276) 7,413 Net cash from (used in) operating activities 10,785,117 (19,503,037) Cash flows from financing activities: Amount received from the issuance of units 7,771,808 33,497,925 Amount paid on redemptions of units (15,530,835) (13,071,076) Distributions paid to unitholders (375,598) (442,891) Net cash from (used in) financing activities (8,134,625) 19,983,958 Net increase in cash and cash equivalents during the year 2,650, ,921 Effect of exchange rate fluctuations on cash and cash equivalents (5,472) (511) Cash and cash equivalents at beginning of year 696, ,055 Cash and cash equivalents at end of year $ 3,341,485 $ 696,465 Interest received $ 582,227 $ 529,556 (See accompanying notes to financial statements) 19

23 Schedule of Investments As at December 31, Horizons Active US Floating Rate Bond (USD) ETF Par Value/ Average Fair Security Contracts Cost Value U.S. DOLLAR DENOMINATED (72.56%) U.S. Bonds (42.20%) American Express Credit Corp., Floating Rate, 0.85%, 2019/08/15 1,000,000 $ 1,000,000 $ 979,149 American Honda Finance, 2.12%, 2018/10/10 250, , ,883 American International Group Inc., Callable, 2.30%, 2019/07/16 500, , ,184 AT&T Inc., Callable, 3.00%, 2022/02/15 500, , ,817 Bank of America Corp., Series 1, 3.75%, 2016/07/12 350, , ,434 Bank of America Corp., 2.00%, 2018/01/11 400, , ,686 Bank of America Corp., Floating Rate, 1.20%, 2019/04/01 200, , ,276 Bank of America Corp., Series L, 2.65%, 2019/04/01 500, , ,607 Citigroup Inc., 1.85%, 2017/11/24 1,000, , ,984 Citigroup Inc., 2.50%, 2018/09/26 500, , ,673 Ford Motor Credit Co. LLC, 2.38%, 2018/01/16 200, , ,621 Goldman Sachs Group Inc. (The), 3.62%, 2016/02/07 350, , ,895 Goldman Sachs Group Inc. (The), 6.25%, 2017/09/01 500, , ,682 Goldman Sachs Group Inc. (The), Variable Rate, 1.46%, 2018/11/15 100, , ,476 Goldman Sachs Group Inc. (The), 2.55%, 2019/10/23 250, , ,127 Goldman Sachs Group Inc. (The), Series L, Variable Rate, Perpetual, 5.70%, 2049/12/29 200, , ,000 HSBC USA Inc., 2.25%, 2019/06/23 1,000, , ,154 JPMorgan Chase & Co., 3.15%, 2016/07/05 300, , ,124 JPMorgan Chase & Co., 2.35%, 2019/01/28 500, , ,343 Morgan Stanley, 3.80%, 2016/04/29 1,450,000 1,512,060 1,462,390 Morgan Stanley, Floating Rate, 1.17%, 2019/01/24 200, , ,635 Morgan Stanley, 2.38%, 2019/07/23 500, , ,746 Sempra Energy, 2.30%, 2017/04/01 300, , ,836 Verizon Communications Inc., Floating Rate, 2.25%, 2018/09/14 500, , ,302 Verizon Communications Inc., Callable, 2.45%, 2022/11/01 600, , ,829 Wells Fargo & Co., 2.15%, 2019/01/15 800, , ,822 Wells Fargo & Co., 2.12%, 2019/04/22 500, , ,843 Wells Fargo & Co., 2.60%, 2020/07/22 500, , ,038 Wells Fargo & Co., Series U, Variable Rate, Perpetual,5.88%, 2049/12/29 175, , ,406 14,183,857 14,146,962 Canadian Bonds (23.07%) AltaGas Ltd., Variable Rate, 1.31%, 2016/03/24 900, , ,348 Bank of Montreal, Callable, 2.50%, 2017/01/11 700, , ,520 Bank of Montreal, Callable, 1.45%, 2018/04/09 227, , ,962 Bank of Montreal, Callable, 2.38%, 2019/01/25 600, , ,482 Bank of Nova Scotia (The), 2.55%, 2017/01/12 800, , ,472 Bank of Nova Scotia (The), 2.80%, 2021/07/21 1,000, ,670 1,006,781 Caisse Centrale Desjardins du Quebec, Floating Rate, 0.85%, 2017/09/12 500, , ,597 Canadian Imperial Bank of Commerce, Callable, 1.55%, 2018/01/23 500, , ,692