Horizons Crude Oil ETF (formerly Horizons NYMEX Crude Oil ETF) (HUC:TSX) Annual Report December 31, 2016

Transcription

1 Annual Report December 31, 2016 Horizons Crude Oil ETF (formerly Horizons NYMEX Crude Oil ETF) (HUC:TSX) Innovation is our capital. Make it yours. ALPHA BENCHMARK BETAPRO

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...7 Past Performance...10 Summary of Investment Portfolio...12 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...13 INDEPENDENT AUDITORS REPORT...14 FINANCIAL STATEMENTS Statements of Financial Position...15 Statements of Comprehensive Income...16 Statements of Changes in Financial Position...17 Statements of Cash Flows...18 Schedule of Investments...19 Notes to Financial Statements...20

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

4 MANAGEMENT REPORT OF FUND PERFORMANCE This annual report management report of fund performance for Horizons Crude Oil ETF (formerly Horizons NYMEX Crude Oil ETF) ( Horizons HUC 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 investment fund 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, by calling (toll free) , or (416) , by writing to Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Manager ), at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through 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, 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 simplified 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 Strategy Horizons HUC seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the NYMEX light sweet crude oil futures contract for the next December delivery month (the Referenced Futures Contract ). Horizons HUC is denominated in Canadian dollars. Any U.S. dollar gains or losses as a result of the ETF s investment will be hedged back to the Canadian dollar to the best of the ETF s ability. If Horizons HUC is successful in meeting its investment objective, its net asset value should gain approximately as much, on a percentage basis, as any increase in the NYMEX light sweet crude oil futures contract for the next December delivery month when the NYMEX light sweet crude oil futures contract for the next December delivery month rises on a given day. Conversely, Horizons HUC s net asset value should lose approximately as much, on a percentage basis, as the NYMEX light sweet crude oil futures contract for the next December delivery month when the NYMEX light sweet crude oil futures contract for the next December delivery month declines on a given day. Horizons HUC invests in financial instruments that have similar return characteristics as the performance of the NYMEX light sweet crude oil futures contract for the next December delivery month. Initially, Horizons HUC anticipates that it will 1

5 Management Discussion of Fund Performance (continued) Risk roll the current December NYMEX light sweet crude oil futures contract to the next December NYMEX light sweet crude oil futures contract in June. In order to achieve this objective, the total underlying notional value of these instruments will typically not exceed one times the total assets of the ETF. Assets not invested in financial instruments may be invested in debt instruments or money market instruments with a term not to exceed 365 days, or repurchase agreements with a term not to exceed 30 days. Value of the Referenced Futures Contract Horizons HUC will typically use the NYMEX light sweet crude oil futures contract for the next December delivery month as determined at approximately 2:30 p.m. (EST) as the reference for its investment objective. Currently, Horizons HUC tracks the NYMEX West Texas Intermediate Cushing Crude Oil December futures contract to achieve its investment objective. The performance of Horizons HUC is currently based on a rolling futures position of the NYMEX West Texas Intermediate Cushing Crude Oil futures contract for the next December delivery month. On a periodic basis, positions in the NYMEX light sweet crude oil futures contracts specifying delivery on a nearby date must be sold and the NYMEX light sweet crude oil futures contracts that have not yet reached the delivery period must be purchased. Initially, it is anticipated that the current NYMEX light sweet crude oil futures contract will be rolled to the next December NYMEX light sweet crude oil futures contract in June. By rolling, an investor with a rolling position in a NYMEX light sweet crude oil futures contract avoids delivering the underlying commodity while maintaining exposure to light sweet crude oil. About the Referenced Futures Contract A futures contract is a standardized financial contract where the parties agree to exchange currencies, financial instruments or other physical commodities at a future date at a future price. The future market is not a ready market like a spot market, does not involve primary activity, and is speculative in nature. In the future market, deals are struck at forward prices and give the holder the obligation to buy or sell the underlying asset. The futures date is called the delivery date and a final settlement date, and the pre-set price is called the futures price. The ETF uses the NYMEX light sweet crude oil futures contract for the next December delivery month as its Referenced Futures Contract. The NYMEX light sweet crude oil futures contract is the world s most liquid forum for crude oil trading, as well as the world s largest-volume futures contract trading on a physical commodity. Because of its excellent liquidity and price transparency, the contract is used as a principal international pricing benchmark. 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: high. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on the historical rolling ten-year standard deviation of its return, the return of its Referenced Futures Contract, or of an applicable proxy. 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. 2 Investments in the units of the ETF are speculative, involve a high degree of risk and are suitable only for persons who are able to assume the risk of losing their entire investment. 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.

6 Management Discussion of Fund Performance (continued) 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 calling Horizons ETFs Management (Canada) Inc. at (toll free) , or at (416) Commodity risk Spot v. futures risk Aggressive investment technique risk Concentration risk Trading in derivatives is highly leveraged Corresponding net asset value risk Counterparty risk Correlation risk Liquidity risk Market risk Early closing risk Regulatory risk Commodity market risk No assurance of meeting investment objective Tax risk Conflicts of interest Price limit risk Liability of unitholders No assurance of continued participation Reliance on the manager Reverse repurchase transaction risk Designated broker/dealer risk Exchange risk Borrowing risk Foreign exchange risk Exchange rate risk Securities lending risk The degree of the price volatility risk will vary from period to period depending on the volatility of the Referenced Futures Contract. Please refer to the Results of Operations section for further discussion on the impact of price volatility on the performance of the ETF relative to its Referenced Futures Contract. Results of Operations For the year ended December 31, 2016, units of the ETF returned 23.28%. This compares to a return of 26.75% for the rolling Referenced Futures Contract (see Value of the Referenced Futures Contract) for the same period. The above figures are adjusted for distributions, if any. Equity market volatility that had been dormant for most of 2015 reappeared in earnest to bookend the first half of January and February were marked by a couple of rapid selloffs as world equity markets digested the U.S. Federal Reserve s December 2015 interest rate hike. The 1-month crude oil futures contracts ( Oil Futures ), which are traded on the New York Mercantile Exchange, began the year at U.S.$37.04 per barrel of West Texas Intermediate crude oil (/BBl) and sold off along with the equity markets as investors feared the onset of renewed recession fears. After hitting a low closing price for the year of U.S.$27.45/BBl on February 10, a decline of 25.89% from the end of 2015, Oil Futures recovered in dramatic fashion as those recession fears ebbed away. From the February 10 low to the closing price at the end of the first quarter on March 31 at U.S.$38.34/BBl, Oil Futures experienced a 39.67% rally to incredibly finish the first quarter of 2016 with a positive return of 3.51%. The Oil Futures price strength continued into the second quarter of Oil Futures hit a first half high closing price of U.S. $51.23/BBl on June 8, 2016, up 33.62% from March 31, 2016, and an unbelievable 86.63% off of the February 10, 2016, low. Oil Futures sold off marginally into the end of June, finishing the first half of the year on June 30 at U.S.$48.33/BBl. 3

7 Management Discussion of Fund Performance (continued) 4 The third quarter saw Oil Futures with some fairly significant swings within a trading range between a low of U.S.$39.51/ BBl and a high of U.S.$48.99/BBl. As the price of oil has risen, a number of oil companies have restarted oil production at operations that had become uneconomic at lower oil prices. This has threatened to re-ignite the oil supply glut that was prevalent over much of 2014 and 2015 and drive prices lower. In addition, now that China s strategic oil reserves are nearly full; those oil purchases will surely be reduced, removing a key driver of price support from the market. As news of large oil inventory builds began reappearing and causing prices to fall, inevitably, countering messages from the Organization of the Petroleum Exporting Countries (OPEC) hinting at oil production output freezes would appear and drive the price of Oil Futures higher. The result of all this was that the third quarter of 2016 saw a modest decline of 0.19% in the price of Oil Futures. On November 30, 2016, OPEC finally reached an agreement to remove 1.2 million barrels of crude oil per day from global oil production, with non-opec countries cutting an additional 600,000 barrels per day from production. These agreed upon cuts caused the price of Oil Futures to rise from U.S.$45.23/BBl at the close of November 29 to end the year at U.S.$53.72/BBl. This return of 18.77% in just over one month contributed to a fourth quarter return of 11.36%. The 1- and 2-month Oil Futures were in contango 100% of the time during 2016 and had an annualized standard deviation of 47.32% for the year. Horizons Management does not endeavour to predict market direction generally, or the changes that may occur in global fiscal and monetary policies, the effect of additional geopolitical concerns, or unforeseen other crises. Horizons Management and the ETF are agnostic as to their impact on global equity, fixed income, currency, and commodity markets generally, and the crude oil futures market specifically. They are only of concern to the ETF in so much as there is some minimal risk they could affect its ability to meet its investment objective. Please refer to the risk factors section in the ETF s prospectus for a more detailed discussion. The annualized volatility of each of the Referenced Futures Contract and the ETF was 35.27% and 32.02%, respectively, for the year ended December 31, The ETF may, at times, have very large purchase and redemption activity. However, the performance of the ETF is primarily affected by the performance of its forward agreement, which is rebalanced daily and is tied to the performance of the ETF s Referenced Futures Contract. The performance and liquidity of the ETF is unaffected by the asset size of the ETF, or by purchase and redemption activity, as these transactions are taken into account during the daily rebalancing of the forward agreement. Forward Agreement In order to achieve its investment objective, the ETF has entered into multiple forward agreements (the Forward Agreements ) with one or more bank counterparties (each a Forward Counterparty ). The Forward Agreements provide both positive exposure to the Referenced Futures Contract and negative exposure to the Referenced Futures Contract. The ETF seeks to achieve its investment objective through the net exposure of these Forward Agreements. The ETF generally invests its assets in interest bearing accounts and short-term Canadian federal or provincial treasury bills to earn prevailing short-term market interest rates. The one or more Forward Counterparties to any Forward Agreements entered into by the ETF must be a chartered Canadian bank or an affiliate of a chartered Canadian bank whose obligations are guaranteed by a chartered Canadian bank, and which has a designated rating. In respect of short-term securities or instruments (where the maturity date of the security or instrument is less than one year), Forward Counterparties must have a designated rating for Commercial Paper/Short-Term Debt no lower than (a)

8 Management Discussion of Fund Performance (continued) Dominion Bond Rating Service Limited ( DBRS ) - R-1(low) ; (b) Fitch Ratings ( Fitch ) - F1 ; (c) Moody s Investors Service ( Moody s ) - P-1 ; and (d) Standard & Poor s ( S&P ) - A-1(Low). In respect of long-term securities or instruments (where the maturity date of the security or instrument is equal to or greater than one year), Forward Counterparties must have a designated rating for Long-Term Debt no lower than (a) DBRS - A ; (b) Fitch - A ; (c) Moody s - A2 ; and (d) S&P - A. Forward Counterparties are subject to the applicable short-term or long-term designated rating restrictions listed above. The Forward Counterparty to the Forward Agreements meets those designated rating requirements. Each Forward Agreement has a remaining term to maturity at any point in time of less than five years which, with the consent of the ETF and the applicable Forward Counterparty, will be extended annually for a fixed number of years and, provided no default or event of default and no unresolved hedging event or disruption event has occurred and is continuing, the ETF has the ability to request the termination of its exposure under a Forward Agreement, in whole or in part, at any time. Since the Forward Agreements, like most forward agreements, may settle the obligations of each party on a net basis, the exposure of the ETF to the credit risk of the Forward Counterparty is limited to the positive mark-to-market of the Forward Agreements entered into with that Forward Counterparty, which is calculated and accrued on a daily basis. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013, is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013, is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments Other than indicated below, there are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. ETF Name Change Subsequent to the end of the reporting period, the ETF s name was changed from Horizons NYMEX Crude Oil ETF to Horizons Crude Oil ETF effective January 1, No changes were made to the investment objective and strategy of the ETF as a result of the name change. Change to the Expense Structure of the ETF A change to the expense structure of the ETF was approved at a meeting of the unitholders of the ETF on June 21, In order to bring the current fee structure of the ETF in line with generally prevailing Canadian industry practice for investment funds, unitholders approved a resolution to expand the scope of operating expenses payable by the ETF, and consequently indirectly borne by unitholders (the Amended Fee Structure ). The changes to the expense structure are detailed in the Management Fees section on page 9. 5

9 Management Discussion of Fund Performance (continued) Unit Transaction The units of the ETF were consolidated on a one for two basis effective May 30, All relevant unit and per unit historical data prior to May 30, 2016, has been adjusted to reflect the consolidation. Related Party Transactions There were no related party portfolio transactions during the current reporting period. Certain services have been provided to the ETF by related parties, and those relationships are described below. Manager, Trustee and Investment Manager The manager, trustee and investment manager of the ETF is Horizons ETFs Management (Canada) Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario. The Manager and its subsidiary, AlphaPro Management Inc., are members of the Mirae Asset Financial Group. For a complete description of services provided, please refer to the most recent prospectus of the ETF Duties and Services to be Provided by the Manager. National Bank of Canada Relationship While not a related party to the ETF, an affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in AlphaPro Management Inc., a subsidiary of 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 the ETF s unitholders. NBF s potential roles as a designated broker and a dealer of the ETF are 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, 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. 6

10 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 annual audited 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 Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.14) (0.16) (0.28) (0.26) (0.18) Realized gains (losses) for the year 0.25 (0.12) (7.72) 4.10 (3.88) Unrealized gains (losses) for the year 3.13 (3.97) (1.86) (2.88) 0.14 Total increase (decrease) from operations (2) 3.31 (4.15) (9.64) 1.00 (3.88) Total distributions (3) 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. The ETF effectively began operations on June 24, 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. Distributions, if any, were paid in cash, reinvested in additional units of the ETF, or both. 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 Year (1) Total net asset value (000 s) $ 32,208 17,461 3,014 5,441 6,224 Number of units outstanding (000 s) 2,488 1, Management expense ratio (2) 0.86% 0.85% 0.87% 0.86% 0.78% Management expense ratio before waivers and absorptions (2) 1.04% 1.11% 2.50% 1.27% 1.24% Trading expense ratio (3) 0.41% 0.41% 0.40% 0.40% 0.47% Portfolio turnover rate (4) 0.00% 0.00% 0.00% 70.65% % Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the years shown. The ETF effectively began operations on June 24, 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 portfolio advisor compensation, administration, service fees and marketing. 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. 3. The trading expense ratio represents total commissions, forward agreement fees and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the year. 4. The ETF s portfolio turnover rate indicates how actively the ETF trades its portfolio investments. 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 a year. The higher an ETF s portfolio turnover rate in a year, 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 an ETF. 8

12 Financial Highlights (continued) Management Fees In consideration for management services and investment advice provided to the ETF, the Manager is entitled to a management fee. The management fee, inclusive of sales tax, is applied on a daily basis to the net asset value of the ETF. The management fees, exclusive of sales tax, are charged at the annual rate of 0.75%. Approximately 100% of management fees were used for investment management, other general administration and profit. Fees payable to the Investment Manager, which include the fees paid to the former portfolio manager, are paid from the management fees. Since the inception of the ETF, and ending July 31, 2016, the Manager has paid, from the management fee, substantially all of the costs and expenses relating to the operation of the business and affairs of the ETF including investment management, administration, legal, accounting, custody, audit, registrar and transfer agency fees, and applicable sales taxes as well as expenses associated with advertising, marketing, sponsoring and promoting the sale of units of the ETF. For the same period, the ETF, and not the Manager, was responsible for all brokerage expenses and commissions, income taxes, sales tax, costs associated with the Independent Review Committee of the ETF, filing fees, costs associated with delivering documents to unitholders, fees payable to the CDS Clearing and Depository Services Inc. ( CDS ), annual stock exchange fees, annual index licensing fees, if applicable, withholding taxes and extraordinary expenses. As described in the Recent Developments section, as of the implementation of the Amended Fee Structure on August 1, 2016, the ETF is now responsible for all of its operating expenses, unless waived or reimbursed by the Manager, including but not limited to: audit fees; trustee and custodial expenses; valuation, accounting and record keeping costs; legal expenses; permitted prospectus preparation and filing expenses; costs associated with delivering documents to unitholders; listing and annual stock exchange fees; index licensing fees, if applicable; CDS fees; bank related fees and interest charges; extraordinary expenses; unitholder reports and servicing costs; registrar and transfer agent fees; costs of the independent review committee; income taxes; sales tax; brokerage expenses and commissions; and withholding taxes. The Manager continues to bear the costs relating to the investment management, advertising, marketing, sponsorship and promotion of the ETF. The Manager, at its discretion, has waived or absorbed, and may continue to 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. Fees related to the operation of the Forward Agreements are not included in the management fees or other operating expenses of the ETF. Forward fees and applicable hedging costs related to the Forward Agreements, as described in the Fees and Expenses section of the ETF s prospectus, are incurred by way of a reduction in the forward price payable to the ETF by the Forward Counterparty. For the purposes of financial reporting, these expenses have been broken out and disclosed in transaction costs in the statements of comprehensive income and are included in the trading expense ratio in the management report of fund performance. 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, Marketing general administrative costs and profit Waived/absorbed expenses of the ETF 4% 74% 22% 9

13 Past Performance Sales 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 returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution 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, if any, 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 the periods shown, and illustrates how the performance has changed from period to period. In percentage terms, the chart shows how much an investment made on the first day of each financial period (or, on the inception date, as the case may be) would have grown or decreased by the last day of the financial period % 20.00% 10.00% Rate of Return 0.00% % % % % HUC 8.58% 4.83% -1.16% -7.79% 4.89% % % 23.28% The ETF effectively began operations on June 24,

14 Past Performance (continued) Annual Compound Returns The following table presents the ETF s annual compound total return since inception and for the periods shown ended December 31, 2016, compared with the ETF s applicable benchmark. 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. 1 Year 3 Year 5 Year Since Inception Horizons HUC 23.28% % % -5.62% NYMEX crude oil futures contract - next December delivery month 26.75% % -8.90% -3.58% The ETF effectively began operations on June 24, The ETF is rebalanced daily to ensure an investor s risk is limited to the current value of their investment. A perfect daily correlation of 100% of the daily return of the Referenced Futures Contract would be a correlation of 1.0. The ETF has achieved a perfect daily correlation to its stated Referenced Futures Contract for the year ended December 31, 2016, of

15 Summary of Investment Portfolio As at December 31, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Investments $ 4,304, % Cash and Cash Equivalents held for Collateral 27,428, % Cash and Cash Equivalents - Other 486, % Other Assets less Liabilities (11,508) -0.03% $ 32,208, % Top Holdings % of ETF s Net Asset Value Cash and Cash Equivalents held for Collateral 85.16% Forward Agreements (net notional value US$23,973,599) 13.36% The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent interim and annual reports are available at no cost by calling toll free , or (416) , by writing to us at Horizons ETFs Management (Canada) Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, or by visiting our website at 12

16 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Crude Oil ETF (the ETF ) are the responsibility of the manager and the 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 judgements. 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. 13

17 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Crude Oil ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2016 and 2015, the statements of comprehensive income, changes in financial position and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ETF s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the ETF as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 15, 2017 Toronto, Canada 14

18 Statements of Financial Position As at December 31, Assets Cash and cash equivalents held for collateral $ 27,428,770 $ 21,278,060 Cash and cash equivalents - other 486, ,604 Amounts receivable relating to accrued income 11,968 6,025 Derivative assets (note 3) 4,460, ,455 Total assets 32,387,803 22,366,144 Liabilities Accrued expenses 23,476 11,674 Derivative liabilities (note 3) 155,832 4,893,494 Total liabilities 179,308 4,905,168 Total net assets (note 2) $ 32,208,495 $ 17,460,976 Number of redeemable units outstanding, (note 10) 2,487,500 1,662,500 Total net assets per unit $ $ (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Director Taeyong Lee Director Director 15

19 Statements of Comprehensive Income For the Years Ended December 31, Income Interest income for distribution purposes $ 191,638 $ 92,310 Securities lending income (note 9) 9,709 4,110 Net realized gain (loss) on sale of investments and derivatives 682,755 (120,795) Net change in unrealized appreciation (depreciation) of investments and derivatives 8,659,955 (4,074,827) 9,544,057 (4,099,202) Expenses Management fees (note 11) 256, ,312 Annual stock exchange listing fees 3,450 3,001 Index licensing fees 15,614 6,797 Audit fees 1,121 Filing fees 23,649 22,351 Independent Review Committee fees Custodial fees 297 Legal fees 5,031 Securityholder reporting costs 6,489 5,862 Administration fees 12,125 Transaction costs 126,659 55, , ,363 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (56,059) (36,180) 395, ,183 Increase (decrease) in net assets for the period $ 9,148,771 $ (4,270,385) Increase (decrease) in net assets per unit $ 3.31 $ (4.15) (See accompanying notes to financial statements) 16

20 Statements of Changes in Financial Position For the Years Ended December 31, Total net assets at the beginning of the year $ 17,460,976 $ 3,013,846 Increase (decrease) in net assets 9,148,771 (4,270,385) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 21,911,545 22,662,268 Aggregate amounts paid on redemption of securities of the investment fund (16,312,797) (3,944,753) Total net assets at the end of the year $ 32,208,495 $ 17,460,976 (See accompanying notes to financial statements) 17

21 Statements of Cash Flows For the Years Ended December 31, Cash flows from operating activities: Increase (decrease) in net assets for the period $ 9,148,771 $ (4,270,385) Adjustments for: Net realized loss (gain) on sale of investments and derivatives (682,755) 120,795 Net change in unrealized depreciation (appreciation) of investments and derivatives (8,659,955) 4,074,827 Purchase of investments 126,659 55,894 Proceeds from the sale of investments 682,755 (120,795) Amounts receivable relating to accrued income (5,943) (4,246) Accrued expenses 11,802 10,112 Net cash from (used in) operating activities 621,334 (133,798) Cash flows from financing activities: Amount received from the issuance of units 21,911,545 22,662,268 Amount paid on redemptions of units (16,312,797) (3,944,753) Net cash from financing activities 5,598,748 18,717,515 Net increase in cash and cash equivalents for the year 6,220,082 18,583,717 Cash and cash equivalents at beginning of year 21,695,664 3,111,947 Cash and cash equivalents at end of year $ 27,915,746 $ 21,695,664 Interest received $ 186,016 $ 89,404 Total Cash and Cash Equivalents are composed of: Cash and cash equivalents held for collateral $ 27,428,770 $ 21,278,060 Cash and cash equivalents - other 486, ,604 Cash and cash equivalents at end of year $ 27,915,746 $ 21,695,664 (See accompanying notes to financial statements) 18

22 Schedule of Investments As at December 31, 2016 Security Fair Value FORWARD AGREEMENTS (13.36%) Positive Exposure Forward Agreement (13.85%) NYMEX Crude Oil Forward Agreement Payment Date October 1, 2021 (notional value US$27,792,622) $ 4,460,089 Negative Exposure Forward Agreement (-0.49%) NYMEX Crude Oil Forward Agreement Payment Date October 15, 2021 (notional value US$3,819,023) (155,832) TOTAL FORWARD AGREEMENTS 4,304,257 CASH AND CASH EQUIVALENTS HELD FOR COLLATERAL (85.16%) 27,428,770 TOTAL INVESTMENT PORTFOLIO (98.52%) (note 8) $ 31,733,027 Cash and cash equivalents - other (1.51%) 486,976 Other assets less liabilities (-0.03%) (11,508) TOTAL NET ASSETS (100.00%) $ 32,208,495 (See accompanying notes to financial statements) 19

23 Notes to Financial Statements For the Years Ended December 31, 2016 and REPORTING ENTITY Horizons Crude Oil ETF (see note 15) ( Horizons HUC or the ETF ) is an investment trust established under the laws of the Province of Ontario by Declaration of Trust and effectively began operations on June 24, The address of the ETF s registered office is: c/o Horizons ETFs Management (Canada) Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2. The ETF is offered for sale on a continuous basis by its prospectus in class A units which trade on the Toronto Stock Exchange ( TSX ) under the symbol HUC. 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 are able to trade units of the ETF in the same way as other securities traded on the TSX, including by using market orders and limit orders and may incur customary brokerage commissions when buying or selling units. Horizons HUC seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the NYMEX light sweet crude oil futures contract for the next December delivery month (the Referenced Futures Contract ). Horizons HUC is denominated in Canadian dollars. Any U.S. dollar gains or losses as a result of the ETF s investment will be hedged back to the Canadian dollar to the best of the ETF s ability. If Horizons HUC is successful in meeting its investment objective, its net asset value should gain approximately as much, on a percentage basis, as any increase in the NYMEX light sweet crude oil futures contract for the next December delivery month when the NYMEX light sweet crude oil futures contract for the next December delivery month rises on a given day. Conversely, Horizons HUC s net asset value should lose approximately as much, on a percentage basis, as the NYMEX light sweet crude oil futures contract for the next December delivery month when the NYMEX light sweet crude oil futures contract for the next December delivery month declines on a given day. Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Manager, the Investment Manager, or the Trustee ) is the manager, investment manager and trustee of the ETF. The Investment Manager is responsible for implementing the ETF s investment strategies. Unit Transaction The units of the ETF were consolidated on a one for two basis effective May 30, All relevant unit and per unit historical data prior to May 30, 2016, has been adjusted to reflect the consolidation. 2. BASIS OF PREPARATION (i) Statement of compliance These 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 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. These financial statements were authorized for issue on March 15, 2017 by the Board of Directors of the Manager. (ii) Basis of measurement 20 The financial statements have been prepared on the historical cost basis except for financial instruments at fair value though profit or loss, which are measured at fair value.

24 Notes to Financial Statements (continued) For the Years Ended December 31, 2016 and 2015 (iii) Functional and presentation currency These financial statements are presented in Canadian dollars, which is the ETF s functional currency. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Financial instruments (i) Recognition, initial measurement and classification Financial assets and financial liabilities at fair value through profit or loss ( FVTPL ) are initially recognized on the trade date, at fair value (see below), with transaction costs recognized in the statements of comprehensive income. Other financial assets and financial liabilities are recognized on the date on which they are originated at fair value. The ETF classifies financial assets and financial liabilities into the following categories: Financial assets at fair value through profit or loss: - Held for trading: derivative financial instruments - Designated as at fair value through profit or loss: debt securities and equity investments, if any Financial assets at amortized cost: All other financial assets are classified as loans and receivables Financial liabilities at fair value through profit or loss: - Held for trading: derivative financial instruments Financial liabilities at amortized cost: all other financial liabilities are classified as other financial liabilities (ii) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the ETF has access at that date. The fair value of a liability reflects its non-performance risk. Investments are valued at fair value as of the close of business on each day upon which a session of the TSX is held ( Valuation Date ) and based on external pricing sources to the extent possible. Investments held that are traded in an active market through recognized public stock exchanges, over-the-counter markets, or through recognized investment dealers, are valued at their closing sale price. However, such prices may be adjusted if a more accurate value can be obtained from recent trading activity or by incorporating other relevant information that may not have been reflected in pricing obtained from external sources. Short-term investments, including notes and money market instruments, are valued at amortized cost which approximates fair value. Investments held that are not traded in an active market, including some derivative financial instruments, are valued using observable market inputs where possible, on such basis and in such manner as established by the Manager. Derivative financial instruments are recorded in the statements of financial position according to the gain or loss that would be realized if the contracts were closed out on the Valuation Date. Margin deposits, if any, are included in the schedule of investments as margin deposits. See also the summary of fair value measurements in note 7. Fair value policies used for financial reporting purposes are the same as those used to measure the net asset value ( NAV ) for transactions with unitholders. 21