Annual Report December 31, 2011

Transcription

1 Canada s largest family of ETFs Annual Report December 31, 2011 Horizons Winter-Term NYMEX Natural Gas ETF (HUN:TSX)

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance Financial Highlights Past Performance Summary of Investment Portfolio MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING INDEPENDENT AUDITORS REPORT FINANCIAL STATEMENTS Statement of Net Assets Statement of Operations Statement of Changes in Net Assets Statement of Investment Portfolio Notes to Financial Statements

3 MANAGEMENT REPORT OF FUND PERFORMANCE This annual management report of fund performance for Horizons Winter-Term NYMEX Natural Gas ETF ( Horizons HUN 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, formerly BetaPro Management Inc.), 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. 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 HUN seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the NYMEX natural gas futures contract for the next January delivery month (the Referenced Futures Contract ). Horizons HUN 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 HUN 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 natural gas futures contract for the next January delivery month when the NYMEX natural gas futures contract for the next January delivery month rises on a given day. Conversely, Horizons HUN s net asset value should lose approximately as much, on a percentage basis, as the NYMEX natural gas futures contract for the next January delivery month when the NYMEX natural gas futures contract for the next January delivery month declines on a given day. Horizons HUN invests in financial instruments that have similar return characteristics as the performance of the NYMEX natural gas futures contract for the next January delivery month. Horizons HUN anticipates that it will roll the current January NYMEX natural gas futures contract to the next January NYMEX natural gas futures contract in November. 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. 1

4 Management Discussion of Fund Performance (continued) Horizons Winter-Term NYMEX Natural Gas ETF Risk Value of the Referenced Futures Contract Horizons HUN will typically use the NYMEX natural gas futures contract for the next January delivery month as determined at approximately 2:30 p.m. (EST) as the reference for its investment objective. Currently, Horizons HUN tracks the NYMEX Henry Hub Natural Gas November futures contract to achieve its investment objective. The performance of Horizons HUN is currently based on a rolling futures position of the NYMEX Henry Hub Natural Gas November futures contract for the next January delivery month. On a periodic basis, positions in the NYMEX natural gas futures contracts specifying delivery on a nearby date must be sold and the NYMEX natural gas futures contracts that have not yet reached the delivery period must be purchased. It is anticipated that the current NYMEX natural gas futures contract will be rolled to the next January NYMEX natural gas futures contract in November. By rolling, an investor with a rolling position in a NYMEX natural gas futures contract avoids delivering the underlying commodity while maintaining exposure to natural gas. 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 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 calling Horizons ETFs Management (Canada) Inc. at (toll free) , or at (416) Commodity risk Spot v. futures risk Concentration risk Corresponding net asset value risk Correlation risk Market risk Regulatory risk No assurance of meeting investment objective Tax risk Price limit risk No assurance of continued participation Reverse repurchase transaction risk Exchange risk Borrowing risk Foreign exchange risk Aggressive investment technique risk Trading in derivatives is highly leveraged Counterparty risk Liquidity risk Early closing risk Commodity market risk Conflicts of interest Liability of unitholders Reliance on the Manager and the Investment Manager Designated broker/dealer risk Exchange rate risk Securities lending risk The degree of the price volatility risk will vary from year to year 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. 2

5 Management Discussion of Fund Performance (continued) Horizons Winter-Term NYMEX Natural Gas ETF Results of Operations The net asset value per security of the ETF declined by 40.36% from January 1, 2011 to December 31, This compares to a decrease of the compounded value of 39.43% for the Referenced Futures Contract over the same period. The above figures are adjusted for distributions. For the year ended December 31, 2011, natural gas prices have experienced moderate volatility with a standard deviation of 10.28%. Natural gas prices have been on a steady decline, losing 32.15% over the year largely due to the large amount of supply in the industry. Natural gas fell to a low of $2.99 per thousand cubic feet (mcf) on December 30, 2011 and after having reached a high of $4.85 per mcf on June 8, Average contango for the year was $0.47 per mcf. The annualized volatility of each of the Referenced Futures Contract and the ETF was 23.08% and 23.70%, 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, purchases or redemptions as these transactions are taken into account during the daily rebalancing of the forward agreement. Forward Agreement As a means to achieving its investment objective, the ETF has entered into a forward share purchase agreement (the Forward Agreement ). Under the Forward Agreement, the counterparty (the Counterparty ), which must be a Canadian chartered bank or an affiliate of a Canadian chartered bank whose obligations are guaranteed by a Canadian chartered bank, agrees to pay to the ETF, in exchange for a basket of equity securities, an amount that is determined in reference to the performance of the ETF s Referenced Futures Contract, at a predetermined future date. The Counterparty must have a credit rating no lower than (a) Dominion Bond Rating Service Limited ( DBRS ) R-1(low) rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt; (b) Fitch Ratings F1 rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt; (c) Moody s Investors Service P-1 rating for Commercial Paper/Short- Term Debt and A2 for Long-Term Debt; or (d) Standard & Poor s A-1(low) rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt. The credit rating of the Counterparty, National Bank of Canada, as at the end of the reporting period was DBRS R-1(middle) and AA(low) for the short-term and long-term debt ratings, respectively. Since the Forward Agreement, 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 Counterparty is limited to the positive mark-to-market of the Forward Agreement, which is calculated and accrued on a daily basis. Recent Developments There have been no recent market developments of particular note, aside from the normal fluctuations of the markets, that are expected to have an undue influence on the portfolio of the ETF when compared to its benchmark. Change of Control of Manager On November 14, 2011, the Manager announced that Mirae Asset Global Investments Co., Ltd. ( Mirae Asset ) had completed its acquisition and become the majority shareholder of Horizons ETFs Management (Canada) Inc., including its subsidiaries AlphaPro Management Inc. and Horizons Investment Management Inc. ( Horizons Investment or the Investment Manager, formerly JovInvestment Management Inc.). Mirae Asset acquired a majority stake in Horizons Management, including the entire stake owned by Jovian Capital Corporation ( Jovian ), as announced on July 15, The management teams of the Manager and Investment Manager have remained substantially unchanged. 3

6 Management Discussion of Fund Performance (continued) Horizons Winter-Term NYMEX Natural Gas ETF 4 Harmonized Sales Tax Effective July 1, 2010, the provinces of Ontario and British Columbia have implemented their previously announced plan to harmonize their existing provincial sales tax with the federal goods and services tax ( GST ). Investment funds, such as the ETF, are subject to the new harmonized tax and are required to pay the harmonized sales tax on expenses such as management fees and other operating expenses, rather than the previously imposed 5% GST. This resulted in an increase in costs borne by the ETF. Future Accounting Standards Transition to International Financial Reporting Standards ( IFRS ) In February 2008, the Canadian Accounting Standards Board (the AcSB ) originally confirmed January 1, 2011 as the date IFRS would replace current Canadian standards and interpretations as Canadian generally accepted accounting principles ( GAAP ) for publicly accountable enterprises such as investment funds and other reporting issuers. The AcSB then announced in December 2011 that the implementation of IFRS for investment funds be postponed and instead be adopted for all fiscal years beginning on or after January 1, The Canadian Securities Administrators (the CSA ) has issued CSA Staff Notice , which requires the Manager to provide progress updates on the changeover plan to the new reporting standards at each interim and annual reporting period up until the changeover date. For the ETF, IFRS will be effective for the interim and annual periods starting January 1, 2014, including the preparation and reporting of one year of comparative figures. In order to prepare for the transition to IFRS, the Manager has developed an implementation plan and has commenced assessing the impact of significant accounting differences between IFRS and Canadian GAAP. The Manager has presently determined that there will be no material impact to the net asset value per unit from the changeover to IFRS as it is currently drafted. The impact of IFRS on accounting policies and implementation decisions will mainly be in the areas of presentation and additional note disclosures in the financial statements of the ETF. Further updates on implementation progress and potential reporting impact from the adoption of IFRS will be provided during the implementation period. The Manager s current assessment is subject to change resulting from the issuance of new standards or new interpretations of existing standards. 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. See also, Recent Developments, Change of Control of Manager. Manager, Trustee and Investment Manager The manager and trustee 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. 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. The Manager has appointed Horizons Investment Management Inc., 26 Wellington Street East, Suite 608, Toronto, Ontario, M5E 1S2, as the investment manager. Horizons Investment is a wholly-owned subsidiary of the Manager.

7 Management Discussion of Fund Performance (continued) Horizons Winter-Term NYMEX Natural Gas ETF As described in Recent Developments, the Change of Control of Manager resulted in a change in (direct or indirect) control of the Manager and Investment Manager from Jovian to Mirae Asset. Related Dealers MGI Securities Inc., a Jovian controlled dealer through whom securities of the ETF may be purchased, is no longer related to the Manager as a result of the Transaction, as described in Recent Developments, Change of Control of Manager. Prior to this change, MGI Securities Inc. may have at times had interests that differed from the interests of the unitholders of the ETF. MGI Securities Inc. may have acted as a dealer of the ETF from time to time. National Bank of Canada Relationship While not a related party to the ETF, an affiliate of the Counterparty to the Forward Agreement and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in AlphaPro Management Inc., a subsidiary of the Manager. Another affiliate of the Counterparty, 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 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, 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. 5

8 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 inception on June 24, 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) $ 5.21 $ 8.32 $ Decrease from operations Total revenue Total expenses (0.03) (0.07) (0.06) Realized loss for the year (3.27) (4.40) (0.66) Unrealized gain (loss) for the year (0.65) Total decrease in net assets from operations (3) (1.98) (3.52) (1.37) Total distributions (4) Net assets, end of year (2) (5) $ 3.10 $ 5.21 $ 8.32 (1) This information is derived from the ETF s audited annual financial statements as at December 31 of the years shown. The inception date of the ETF was June 24, (2) Differences may result in the fair valuation of securities held by the ETF for financial reporting purposes under Canadian GAAP versus the market value used to determine the net asset value of the ETF for the purchase and redemption of the ETF s units. As a result, the net assets per unit presented in the financial statements may differ from the net asset value per unit presented in these Financial Highlights. (3) 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. (4) Distributions, if any, were paid in cash, reinvested in additional units of the ETF, or both. (5) The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. 6

9 Financial Highlights (continued) Ratios and Supplemental Data Year (1) Total net asset value (2) (000 s) $ 933 $ 1,826 $ 12,540 Number of units outstanding (000 s) ,500 Management expense ratio (3) 0.58% 0.98% 1.28% Management expense ratio before waivers and absorptions (3) 2.26% 1.61% 1.28% Portfolio turnover rate (4) % 61.46% % Trading expense ratio (5) 0.64% 0.40% 0.42% Net asset value per unit Closing market price (1) This information is provided as at December 31 of the years shown. The inception date of the ETF was June 24, (2) Differences may result in the fair valuation of securities held by the ETF for financial reporting purposes under Canadian GAAP versus the market value used to determine the net asset value of the ETF for the purchase and redemption of the ETF s units. As a result, the net assets per unit presented in the financial statements may differ from the net asset value per unit presented in these Financial Highlights. (3) Management expense ratio is based on total expenses (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. (4) The ETF s portfolio turnover rate indicates how actively the ETF s portfolio manager 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. (5) 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. 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 0.75%. Approximately 100% of management fees were used for investment management, other general administration and profit. From the management fee, the Manager has paid 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. The ETF, and not the Manager, is responsible for all brokerage expenses and commissions, income taxes, sales tax, costs associated with the Independent Review Committee of the ETF, filing fees, fees payable to the CDS Clearing and Depository Series Inc., annual stock exchange fees, annual index licensing fees, if applicable, withholding taxes and extraordinary expenses. 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. 7

10 Financial Highlights (continued) 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 10% -114% 204% 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 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 the years shown, and illustrates how the performance has changed from year to year (where more than one year may be presented). 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. 0.00% Rate of Return % % % % % % Date of inception was June 24,

11 Past Performance (continued) Annual Compound Returns The following table shows the ETF s annual compound total return for the periods indicated ended December 31, 2011 compared with the ETF s applicable benchmark. The table shown 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 Since Inception Horizons HUN % % NYMEX natural gas futures contract next January delivery month % % Date of inception was June 24, The ETF is rebalanced daily to ensure an investor s risk is limited to the current value of their investment. The daily correlation of the ETF to its stated Referenced Futures Contract since inception was A perfect daily correlation of 100% of the daily return of the Referenced Futures Contract would be a correlation of

12 Summary of Investment Portfolio As at December 31, 2011 % of ETF s Asset Mix Net Asset Value Net Asset Value Investments $ 919, % Cash and cash equivalents 14, % Other assets less liabilities (482) -0.05% $ 933, % Top Holdings % of ETF s Net Asset Value Common share portfolio % Index forward (notional value US$916,874) % 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 10

13 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Winter-Term NYMEX Natural Gas 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 Canadian generally accepted accounting principles 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 Accountants, Licensed Public Accountants, on behalf of securityholders. The independent auditors report outlines the scope of their audit and their opinion on the financial statements. Adam Felesky Director Horizons ETFs Management (Canada) Inc. Howard Atkinson Director Horizons ETFs Management (Canada) Inc. 11

14 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Winter-Term NYMEX Natural Gas ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of net assets as at December 31, 2011 and 2010, the statements of operations and changes in net assets for the years ended December 31, 2011 and 2010, the statement of investment portfolio as at December 31, 2011, 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 Canadian generally accepted accounting principles, 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 an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the net assets of the ETF as at December 31, 2011 and 2010, the results of its operations and changes in net assets for the years ended December 31, 2011 and 2010 and its investments held at December 31, 2011 in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants March 15, 2012 Toronto, Canada 12

15 Statement of Net Assets As at December 31, Assets Cash and cash equivalents $ 14,586 $ 29,688 Investments 1,026,251 2,942,241 Amounts receivable relating to accrued income 186 1,041,023 2,971,929 Liabilities Accounts payable and accrued liabilities 668 1,268 Amounts payable in respect of derivative transactions, including premiums or discounts paid (note 5) 110,680 1,148, ,348 1,149,580 Total net assets and securityholders equity $ 929,675 $ 1,822,349 Number of securities outstanding (note 3) 300, ,000 Net assets per security $ 3.10 $ 5.21 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Adam Felesky Director Howard Atkinson Director 13

16 Statement of Operations For the Years Ended December 31, Investment Income Securities lending revenue $ 186 $ 186 Expenses Management fees (note 6) 14,092 33,682 Annual stock exchange listing fees 4,838 4,997 Index licensing fees 862 1,762 Filing fees 18,845 19,020 Independent Review Committee fees ,673 59,487 Amounts that were payable by the ETF that were paid or absorbed by the Manager (28,767) (23,392) 9,906 36,095 Net investment loss for the year (9,720) (36,095) Realized and unrealized gains (losses) on investments and transaction costs Net realized loss (1,213,216) (2,362,112) Change in unrealized loss on investments (545,184) (1,609,528) Change in unrealized gain on derivative transactions 1,044,480 2,129,704 Transaction costs (11,034) (14,683) Net loss on investments (724,954) (1,856,619) Decrease in net assets from operations $ (734,674) $ (1,892,714) Decrease in net assets from operations per security $ (1.98) $ (3.52) (See accompanying notes to financial statements) 14

17 Statement of Changes in Net Assets For the Years Ended December 31, Net assets, beginning of the year $ 1,822,349 $ 12,476,738 Decrease in net assets from operations (734,674) (1,892,714) Capital Transactions Proceeds from the issuance of securities of the investment fund 5,280,275 1,474,155 Securities redeemed (5,438,275) (10,235,830) Net assets, end of the year $ 929,675 $ 1,822,349 (See accompanying notes to financial statements) 15

18 Statement of Investment Portfolio As at December 31, 2011 Horizons Winter-Term NYMEX Natural Gas ETF Average Fair Security Shares Cost Value COMMON SHARE PORTFOLIO (110.39%) Advantage Oil & Gas Ltd. 9,908 $ 54,098 $ 41,812 Angle Energy Inc. 7,257 50,001 46,082 CGI Group Inc. Cl. A Sub. Voting 3,990 79,999 76,488 FirstService Corporation Sub. Voting 2,249 61,240 60,566 Flint Energy Services Ltd. 5,274 61,231 66,716 Gabriel Resources Ltd. 2,361 18,424 14,803 Great Canadian Gaming Corporation 7,178 61,228 59,865 Harry Winston Diamond Corporation 2,569 29,287 27,745 Horizons S&P/TSX 60 TM Index ETF 5,177 54,100 51,252 Kirkland Lake Gold Inc. 3,370 55,841 51,730 Legacy Oil + Gas Inc. 3,453 29,281 36,118 Martinrea International Inc. 4,562 29,288 33,896 Neo Material Technologies, Inc. 3,990 29,287 29,207 Open Text Corporation ,124 50,010 Osisko Mining Corp. 4,421 50,001 43,237 Precision Drilling Corporation 4,343 47,512 45,428 Research In Motion Limited 4,044 70,002 59,689 Savanna Energy Services Corp. 6,594 55,851 49,125 Tahoe Resources Inc. 3,612 62,013 63,246 Tourmaline Oil Corp. 1,620 54,108 43,060 TransGlobe Energy Corporation 3,218 29,284 25,905 Valeant Pharmaceuticals International, Inc. 1,059 47,528 50,271 1,083,728 1,026,251 INDEX FORWARD (-11.91%) NYMEX Natural Gas Forward Payment date June 25, 2014 (notional value US$916,874) (110,680) TOTAL INVESTMENT PORTFOLIO (98.48%) (note 5) $ 915,571 Cash and cash equivalents (1.57%) 14,586 Other assets less other liabilities (-0.05%) (482) NET ASSETS (100%) $ 929,675 (See accompanying notes to financial statements) 16

19 Notes to Financial Statements December 31, 2011 and ESTABLISHMENT OF THE ETF AND AUTHORIZED SECURITIES The Horizons Winter-Term NYMEX Natural Gas ETF ( Horizons HUN or the ETF ) was established on June 24, 2009 in accordance with the ETF s Master Declaration of Trust. Units of the ETF are traded on the Toronto Stock Exchange ( TSX ) under the symbol HUN. Legal structure Horizons ETFs Management (Canada) Inc. (the Manager or the Trustee, formerly BetaPro Management Inc.) is the manager and trustee of the ETF. The ETF is an unincorporated open-ended mutual fund trust. The ETF is established under the laws of the Province of Ontario by a Master Declaration of Trust. The Manager has appointed Horizons Investment Management Inc. ( Horizons Investment or the Investment Manager, formerly JovInvestment Management Inc.), an affiliate of the Manager, to act as the investment manager to the ETF, and ProShare Advisors LLC (the Portfolio Manager ), to act as the portfolio manager. Change of Control of Manager On November 14, 2011, the Manager announced that Mirae Asset Global Investments Co., Ltd. ( Mirae Asset ) had completed its acquisition and become the majority shareholder of Horizons ETFs Management (Canada) Inc., including its subsidiaries AlphaPro Management Inc. and Horizons Investment. Mirae Asset acquired a majority stake in the Manager, including the entire stake owned by Jovian Capital Corporation ( Jovian ), as announced on July 15, The management teams of the Manager and Investment Manager have remained substantially unchanged. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Generally Accepted Accounting Principles These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). The following is a summary of significant accounting policies followed by the ETF in the preparation of these financial statements. (a) Investments Investments are valued at fair value as of the close of business on the relevant business day and valued based on external pricing sources to the extent possible. When available, fair values, which are determined by closing bid prices for securities owned and closing ask prices for securities sold short, will be obtained from broker-dealers and exchanges; 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 are valued at amortized cost, which approximates fair value. See also Summary of Fair Value Measurements section of note 2. (b) Transaction costs Portfolio transaction costs are expensed and are included in Transaction costs in the statement of operations. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, fees incurred in conjunction with the ETF s forward agreement, levies by regulatory agencies and securities exchanges. 17

20 Notes to Financial Statements (continued) December 31, 2011 and 2010 (c) Derivative financial instruments Derivative financial instruments such as forward contracts are valued on each valuation date ( Valuation Date ) according to the gain or loss that would be realized if the contracts were closed out. Margin, if any consisting of assets other than cash, is noted in the statement of investment portfolio. Derivative financial instruments are recorded at the statement of net assets date at their respective fair values. (d) Fair values of financial instruments Investments are valued at fair value (note 2 (a)). The fair values of other financial assets and liabilities approximate their carrying values due to the short-term nature of these instruments. (e) Investment transactions and income Investment transactions are accounted for as of the trade date. Realized gains and losses from investment transactions are calculated on an average cost basis. The difference between market value and average cost, as recorded in the financial statements, is included in the statement of operations as part of change in unrealized gain (loss) on investments. Interest income is accrued daily and dividend income is recognized on the ex-dividend date. Income from securities lending, if any, is included in securities lending revenue on the statement of operations and is recognized when earned. Any securities on loan continue to be displayed in the statement of investment portfolio and the market value of the securities loaned and collateral held is determined daily (note 8). (f) Cost basis The cost of portfolio investments is determined on an average cost basis. (g) Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and short-term, interest bearing investments with a term to maturity of less than 90 days from the date of acquisition. (h) Net assets per security Net assets per security is computed by dividing the net assets of the ETF at the Valuation Date by the total number of securities outstanding in the ETF. (i) Increase (decrease) in net assets from operations per security The increase (decrease) in net assets from operations per security in the statement of operations represents the change in net assets from operations divided by the average number of securities outstanding during the year. Interest income, management fees, and realized and unrealized capital gains (losses) are distributed in proportion to the securities invested in the ETF. (j) Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets during the year. Actual results could differ from those estimates. SUMMARY OF FAIR VALUE MEASUREMENTS 18 Below is a classification of fair value measurements of the ETF s investments based on a three level fair value hierarchy and a reconciliation of transactions and transfers within that hierarchy. The hierarchy of fair valuation inputs is summarized as follows:

21 Notes to Financial Statements (continued) December 31, 2011 and 2010 Level 1: securities that are valued based on quoted prices in active markets. Level 2: securities that are valued based on inputs other than quoted prices that are observable, either directly as prices or indirectly as derived from prices. Level 3: securities that are valued with no observable market data. Changes in valuation methods may result in transfers into or out of an investment s assigned level. The following is a summary of the inputs used as at December 31, 2011 and 2010 in valuing the ETF s investments and derivatives carried at fair values: December 31, 2011 December 31, 2010 Level 1 ($) Level 2 ($) Level 3 ($) Level 1 ($) Level 2 ($) Level 3 ($) Common shares 1,026,251 2,942,241 Total Investments in Securities 1,026,251 2,942,241 Derivative assets / (liabilities) (110,680) (1,148,312) Total Investment Portfolio 1,026,251 (110,680) 2,942,241 (1,148,312) There were no significant transfers made between Levels 1 and 2 as a result of changes in the availability of quoted market prices or observable market inputs during the year. In addition, there were no investments or transactions classified in Level 3 for the years ended December 31, 2011 and NET ASSET VALUE VS NET ASSETS RECONCILIATION National Instrument ( NI ) permits investment funds to have two different net asset values: (i) one for financial statements, which is prepared in accordance with Canadian GAAP (and referred to as net assets ); and (ii) another for all other purposes, including unit pricing for investor transactions (referred to as net asset value ). For financial statement reporting purposes, the ETF is required to disclose the differences between net assets per unit and net asset value per unit, including any differences in valuation principles or practices for the purposes of calculating net asset value versus those required under Canadian GAAP. For investments that are traded in an active market where quoted prices are readily and regularly available, Canadian GAAP requires bid prices (for investments held) and ask prices (for investments sold short) to be used in the fair valuation of investments, rather than the use of closing sale prices currently used for the purpose of determining net asset value. For investments that are not traded in an active market, Canadian GAAP requires the use of specific valuation techniques, rather than the use of valuation techniques by virtue of general practice in the investment funds industry. These changes account for the difference between net assets and net asset value. The difference between net assets and net asset value is as follows: As at Net Asset Value per Security Adjustment Net Assets per Security December 31, 2011 $3.11 ($0.01) $3.10 December 31, 2010 $5.22 ($0.01) $

22 Notes to Financial Statements (continued) December 31, 2011 and SECURITYHOLDERS EQUITY On any trading day ( Trading Day ), which is defined as the day that a net asset value of the ETF is being struck, securityholders of the ETF may (i) redeem securities of the ETF for cash at a redemption price per security equal to 95% of the closing price for securities of the ETF on the TSX on the effective day of the redemption or (ii) redeem, less any applicable redemption fee determined by the Manager, in its sole discretion from time to time, a PNU (prescribed number of units) or a multiple PNU of the ETF for cash equal to the net asset value of that number of securities. Securities of the ETF are issued or redeemed on a daily basis at the net asset value per security that is determined as at 4:00 p.m. (Eastern Time) each business day. Purchase and redemption orders are subject to a 9:30 a.m. (Eastern Time) cut-off time. In order for any cash redemption to be effective on a Trading Day, a cash redemption request in the form prescribed by the Manager from time to time must be delivered to the Manager with respect to the applicable ETF at its head office by 9:30 a.m. (Eastern Time) on that day. If a cash redemption request is not received by 9:30 a.m. (Eastern Time) on a Trading Day, the cash redemption request will be effective only on the next Trading Day. Where possible, payment of the redemption price will be made by no later than the first Trading Day after the effective day of the redemption. Investors that redeem their securities of the ETF prior to the distribution record date for any distribution will not be entitled to receive that distribution. In connection with the redemption of securities of the ETF, it will generally dispose of securities or other financial instruments. Summary of purchases/reinvestments and redemptions of securities for the years ended December 31, 2011 and Year Beginning of year Purchases/ Reinvestments during year Redemptions during year End of year Weighted average number of securities ,000 1,100,000 (1,150,000) 300, , ,500, ,000 (1,400,000) 350, , INCOME TAX STATUS The ETF qualifies as a mutual fund trust under the Income Tax Act (Canada) for the fiscal year, and accordingly, is not taxed on the portion of taxable income that is paid or allocated to securityholders. As well, tax refunds (based on redemptions and realized and unrealized gains during the period) may be available that would make it possible to retain some net capital gains in the ETF without incurring any income taxes. As at December 31, 2011, the ETF had capital and/or non-capital losses, with the year of expiry of the non-capital losses, as follows: Capital Losses Non-Capital Losses Year of Expiry $4,754,117 $95, $48, $14,

23 Notes to Financial Statements (continued) December 31, 2011 and FORWARD AGREEMENT AND SECURITIES PLEDGED AS COLLATERAL The ETF may enter into forward agreements (a Forward Agreement ) for the purpose of pursuing its investment objective or as a substitute for investing directly in securities. The common share portfolio ( Common Share Portfolio ) in the statement of investment portfolio of the ETF has been pledged as collateral for the performance of the obligations of the ETF under a Forward Agreement to which the ETF is party. The strike price payable by National Bank of Canada, as the counterparty (the Counterparty ) to the Forward Agreement, to the ETF with respect to the Common Share Portfolio is calculated by reference to a notional investment amount (the Investment Amount ). Pursuant to the Forward Agreement, at the option of the ETF, either the Counterparty will pay the ETF an amount equal to the Investment Amount in exchange for the ETF delivering to the Counterparty the Common Share Portfolio or the Counterparty will pay to the ETF the amount (if any) by which the Investment Amount exceeds the fair market value of the Common Share Portfolio on the maturity date of the Forward Agreement (the Common Share Portfolio Maturity Value ) or the ETF will pay to the Counterparty the amount (if any) by which the Common Share Portfolio Market Value exceeds the Investment Amount on that maturity date. Since the Forward Agreement, 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 Counterparty is limited to the positive mark-to-market of the Forward Agreement, which is calculated and accrued on a daily basis. Until such time as the Forward Agreement is settled, the amount by which the Investment Amount exceeds the value of the Common Share Portfolio, or vice versa, will be reflected in the statement of net assets as amounts receivable (or payable) in respect of derivative transactions, including premiums or discounts received (paid). In addition, the change in the amount receivable or payable from year to year is reflected in the change in unrealized gain (loss) on derivative transactions in the statement of operations. The current Counterparty to the Forward Agreement, and any other entity that may act as the Counterparty to any Forward Agreement 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 not related to the Manager and Trustee, the Investment Manager or the Portfolio Manager. The Counterparty must have a credit rating no lower than (a) Dominion Bond Rating Service Limited ( DBRS ) R-1(low) rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt; (b) Fitch Ratings F1 rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt; (c) Moody s Investors Service P-1 rating for Commercial Paper/Short-Term Debt and A2 for Long-Term Debt; or (d) Standard & Poor s A-1(low) rating for Commercial Paper/Short-Term Debt and A for Long-Term Debt. National Bank of Canada s credit rating as at the end of the reporting period was DBRS R-1(middle) and AA(low) for the short-term and long-term debt ratings, respectively. In the event of a default by the Counterparty, the ETF will seek return of the collateral and may incur certain costs exercising their rights with respect to the collateral. 6. RELATED PARTY TRANSACTIONS 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 0.75%. From the management fee, the Manager has paid 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 securities of the ETF. 21