Horizons Active Emerging Markets Dividend ETF (HAJ, HAJ.A:TSX)

Transcription

1 Interim Report June 30, 2016 (HAJ, HAJ.A:TSX) ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...7 Past Performance...11 Summary of Investment Portfolio...12 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...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...21

3 Letter from the Co-CEO: So far, 2016 has been a road to recovery for North American investors, as equity markets continue to bounce back from the lows of late January. In fact, the Canadian equity market, up more than 8% year-to-date has been one of the best-performing developed equity markets in the world. Additionally, we have seen the price of crude oil stabilize which we believe has been a leading contributor to the recovery and strengthening of the Canadian dollar relative to the U.S. dollar, up approximately 7% since the beginning of Overall, the first half of the year has been very successful for the North American ETF industry, with U.S. assets at US$2.2 trillion and Canadian ETF assets surpassing the CAD$100 billion mark in May. Equities and fixed income ETFs continue to make up the largest inflows for both Canada and the U.S. For Horizons ETFs, in particular, this has been a year of new milestones. In April, we surpassed more than $6 billion in assets under management and have continued to watch our active and benchmark lineup of ETFs grow. In fact, the Horizons Cdn High Dividend Index ETF ( HXH ) has been one of the largest launches on the Canadian side of the border, acquiring more than $100 million in assets within its first week of launch. With the regulatory landscape in North America, particularly Canada, shifting towards fee-based 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 HXH and the Horizons Nasdaq-100 Index ETF ( HXQ ), and lowering the cost of our flagship TRI ETFs like the Horizons S&P 500 Index ETF ( HXS ), reducing its management fee to 0.10% from 0.15%. We also launched the Horizons China High Dividend Yield Index ETF ( HCN ), the first benchmark ETF to provide Canadian investors with exposure to the Hang Seng High Dividend Yield Index. Looking to the remainder of 2016, it will be an interesting time for global markets. Many investors are watching every Federal Open Market Committee (FOMC) meeting closely, wondering whether or not the U.S. is in fact in a strong enough position economically to take on another rate hike. As well, the outcome of the June 23 referendum in the United Kingdom to leave the European Union could have far reaching implications in the markets, both locally and abroad, for the months and years to come. At Horizons ETFs we try and remain agnostic on the direction of the markets, however, we do think it s fair to say that investors can no longer rely on easy returns. Investors require more creative solutions that take advantage of volatility, such as covered call and alternative asset strategies. Knowing investors shouldn t rely on a single strategy for success, we believe that our diverse suite of ETF solutions provides investors with the tools they need for handling any of the market conditions that 2016 holds on the horizon. We remain proud to be a partner in your investment process. For more information on our strategies, please visit our website at where we offer a range of resources designed to help you become a skilled ETF investor. Wishing you the best for the remainder of 2016, Steven J. Hawkins, President & Co-CEO Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance for ( Horizons HAJ or the ETF ) contains financial highlights and is included with the unaudited interim financial statements for the investment fund. You may request a copy of the ETF s unaudited interim or audited annual financial statements, interim or annual management report of fund performance, current proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures, at no cost, from the ETF s manager, AlphaPro Management Inc. ( AlphaPro or the Manager ), by calling toll free , or locally (416) , by writing to us at: 26 Wellington Street East, Suite 700, Toronto ON, M5E 1S2, or by visiting our website at or SEDAR at This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance, or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, and the effects of competition in the geographic and business areas in which the ETF may invest and the risks detailed from time to time in the ETF s prospectus. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. We caution that the foregoing list of factors is not exhaustive, and that when relying on forward-looking statements to make decisions with respect to investing in the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Manager does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Management Discussion of Fund Performance Investment Objective and Strategies The investment objective of Horizons HAJ is to seek long-term returns consisting of regular dividend income and modest long-term capital growth. Horizons HAJ invests primarily in equity and equity related securities of companies with operations in emerging market economies. To achieve Horizons HAJ s investment objectives, the ETF s sub-advisor, Guardian Capital LP ( Guardian Capital or the Sub-Advisor ), selects high quality dividend paying companies from different sectors located, or with a significant presence, in emerging economies, which in its view, demonstrate the potential for growth and consistent dividends. The portfolio investments are diversified among countries with emerging economies which offer the prospect of higher returns and faster economic growth measured through gross domestic product ( GDP ). Horizons HAJ may hedge some or all of its non-canadian dollar currency exposure at the discretion of the Sub-Advisor. To achieve its investment objective, the Sub-Advisor primarily invests in equity securities listed on North American exchanges including American Deposit Receipts ( ADRs ) and may also from time to time invest in preferred and fixed-income securities such as government bonds, corporate bonds or treasury bills. The Sub-Advisor may sell short equity securities it believes will underperform on a relative basis or to otherwise assist the ETF in meeting its investment objectives. Please refer to the ETF s most recent prospectus for a complete description of Horizons HAJ s investment restrictions. 1

5 Management Discussion of Fund Performance (continued) Risk The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Restrictions on certain unitholders Highly volatile markets Multi-class risk No guaranteed return Derivatives and counterparty risk Foreign currency risk Emerging markets risk Leveraged ETFs risk Foreign stock exchange risk Short selling risk Results of Operations For the six-month period ended June 30, 2016, the Class E units and Advisor Class units of the ETF returned 4.77% and 4.33%, respectively, when including distributions paid to unitholders. By comparison, the MSCI Emerging Markets Index (the Index ) and the BNY Mellon Emerging Markets 50 ADR Index returned -0.12% and 2.69%, respectively, for the same period in Canadian dollar terms (6.41% and 9.41%, respectively, in U.S. dollars), both on a total return basis. The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. With 838 constituents, the Index covers approximately 85% of the free float-adjusted market capitalization in each country. The BNY Mellon Emerging Markets ADR Index is capitalization-weighted and designed to track the performance of approximately 50 emerging market-based American Depository Receipts (ADRs). 2

6 Management Discussion of Fund Performance (continued) General Market Review Markets were off to a rocky start in 2016, as a cooling China and political headwinds in Europe prompted currency volatility and talks of interest rates retreating into negative territory. This trend persisted throughout the half, as the lead-up to, and aftermath of, the U.K. referendum to leave the European Union ( Brexit ) reigned over global markets. The referendum, which resulted in a surprising Leave vote, will likely force central banks around the world to continue the trend of monetary easing. Even the U.S. Federal Reserve (the Fed ), which diverged from its peers and embarked on a path of normalization, will have to hold rates steady for the time being, lest they stoke any further market turmoil to add to both domestic and global pressures. In the U.S., economic data in the first half remained mixed, as continued robustness in the labour market and small upticks in inflation were offset by weak housing numbers and dismal factory activity. With global growth concerns already at the fore from a softening Chinese economy, the Fed moved swiftly to soothe any further market turmoil, leaving its key benchmark rate unchanged. In addition, the March Federal Open Market Committee (FOMC) meeting minutes adopted a dovish tone, as the pace of anticipated interest rate hikes for this year fell to two from four. The trend looks to persist, as domestic demand continues to suffer from restricted business investment while a strong dollar further weighs on exports. In terms of equities, currency strength should be seen as the immediate threat squeezing profit margins and dampening inflation expectations. On the other hand, the Brexit vote is looking to be a non-issue for U.S. markets. In the week following the referendum, the S&P 500 rallied 3.2%, finishing the first half of the year up 3.84%. In China, the People s Bank of China (PBOC) will continue to ease monetary policy in order to support the government s intention to deliver a soft landing as the economy transitions from a manufacturing driven model to one driven more by services and consumer spending. In 2015, services surpassed manufacturing as the key driver of growth and now represents more than 50% of nominal GDP. Rather than devaluing the yuan further, the PBOC will likely continue to use monetary stimulus, including cutting interest rates and reserve ratios, to manage both its equity market and currency. China s economy continued to soften in the second quarter, as new orders and private sector investing retreated. Fortunately, this has been counterbalanced by a steady Purchasing Managers Index (PMI) reading of 50 and a 3% trade-weighted depreciation in the yuan - bringing about a relative calmness to the markets after a tumultuous first quarter. Tighter restrictions on capital outflows, too, soothed earlier fears of a hard landing for the world s second largest economy. Other emerging markets have been on a tear recently and, seeing as most developing economies are sufficiently detached from the goings on in Europe, the increased volatility from Brexit did little to alter the trend. In fact, the exposure of many emerging market economies to safe haven commodities actually buoyed asset prices throughout much of the turmoil. Commodity-backed currencies appreciated significantly against the U.S. dollar, led by the Brazilian real, which gained an impressive 12.4%. South Africa also performed well, as precious metals prices surged against the backdrop of uncertainty. The strong positive correlation between emerging market currencies and their equity markets boded well for the Index, which finished the month of June up 4% in U.S. dollar terms. Portfolio Review The ETF s outperformance of the Index was due to positive stock selection from 7 of 10 sectors, the main contributors being telecommunications services, up 9.6% versus the Index return of -0.2% for the sector, industrials (13.3% versus -1.6% for the Index) and utilities (12.1% versus 0.9% for the Index). Within the telecommunications services sector, diversified telecommunications providers Telefonica Brasil SA and PT Telekomunikasi Indonesia TBK posted strong performance over the first half of the year, returning 45.6% and 32.8%, respectively. In the industrials sector, transportation infrastructure companies Grupo Aeroporturario del Pacific SA de CV and Grupo Aeroporturario del Centro Norte SAB de CV, which operate in development and maintenance of airports, returned 3

7 Management Discussion of Fund Performance (continued) 10.7% and 19.5%, respectively. In the utilities sector, positioning in water and electric utilities resulted in strong performance, with investments in Companhia de Saneamento Basico do Estado de Sao Paolo, CPFL Energia SA and Companhia Paranaense de Energia-Copel posting returns of 84.3%, 68.1% and 49.2%, respectively. Underperformance came primarily from the materials and information technology sectors. The portfolio was not positioned in strong performing materials sector, as the portfolio tried to avoid volatility triggered by China slowdown sentiment. Historically, the portfolio has been underweight information technology, as it is not a traditional yield-bearing sector. The ETF lagged the rally in emerging markets information technology. The portfolio maintains overweight in the yield bearing sectors which include telecommunications services (+18.7%), consumer staples (+13.3%), and industrials (+6.5%). Underweight sectors include financials (-14.0%), information technology (-13.4%), and consumer discretionary (-9.4%). Geographically, the portfolio is underweight China (-16.4%) and South Korea (-8.1%) and overweight Mexico (+21.0%) and Chile (9.8%) relative to the Index. In terms of portfolio characteristics, the portfolio exhibits a year over year revenue growth rate of -13.2% compared to -17.6% for the Index. The price-to-cash flow of the portfolio is 9.99 compared to for the Index. The yield on the portfolio as of June 30, 2016 is 3.26%. Outlook Now that the U.K. has opted to leave the Eurozone and domestic pressures within the U.S. prevent it from picking up much of the slack, additional monetary stimulus from global central banks will be needed to keep the global economic recovery on track. Given the fragile nature of the recovery, shareholder yield and income oriented strategies should focus on downside protection as well as stable and sustainable yield. A stock selection framework built upon the cornerstones of growth, payout, and sustainability will be able to withstand any renewed market volatility. Rather than focusing on high-yield stocks, the portfolio follows a strategy that is well diversified across all sectors, with the goal of achieving a consistent level of dividend income, along with better downside protection and reduced volatility. The portfolio is naturally geared towards dividend growth instead of dividend yield where the certainty and visibility of cash flows is paramount. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $1,109,482. This compares to $539,715 for the six-month period ended June 30, The ETF paid management, operating and transaction expenses of $139,976 (2015 $88,141) of which $46,973 (2015 $38,469) was either paid or absorbed by the Manager on behalf of the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. The ETF distributed $106,154 to Class E unitholders and $4,665 to Advisor Class unitholders during the period (2015 Class E: $62,663, Advisor Class: $4,322). 4

8 Management Discussion of Fund Performance (continued) Unitholder Activity An ETF is a stock exchange listed, open-ended, continuously offered fund. All orders to purchase units directly from the ETF must be placed by designated brokers and/or underwriters. On any trading day, a designated broker or an underwriter may place a subscription order for a prescribed number of units ( PNU ) or integral multiple PNU. The ETF reserves the absolute right to reject any subscription order placed by a designated broker and/or an underwriter. No fees will be payable by the ETF to a designated broker or an underwriter in connection with the issuance of units. On the issuance of units, the Manager may, at its discretion, charge an administrative fee to an underwriter or designated broker to offset any expenses incurred in issuing the units. All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. 5

9 Management Discussion of Fund Performance (continued) Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its affiliates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. The ETF, in its course of normal business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that is a related party to the Manager. The Manager is permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complies with the predetermined list of requirements agreed upon with the IRC. For the periods ended June 30, 2016 and 2015, the ETF paid $9,025 (2015 $9) to NBF and/or its affiliates in broker commissions on portfolio transactions. 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 since it effectively began operations on October 10, This information is derived from the ETF s audited annual financial statements and the current unaudited interim financial statements. Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. The ETF s Net Assets per Unit Class E Period Net assets, beginning of period (1) $ Increase from operations: Total revenue Total expenses (0.11) (0.17) (0.16) (0.16) (0.02) Realized gains (losses) for the period (0.08) (0.30) Unrealized gains (losses) for the period (0.70) Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.12) (0.25) (0.21) (0.31) From net realized capital gains (0.06) From return of capital (0.03) (0.05) Total distributions (3) (0.12) (0.28) (0.27) (0.31) (0.05) Net assets, end of period (4) $

11 Financial Highlights (continued) Advisor Class Period Net assets, beginning of period (1) $ Increase from operations: Total revenue Total expenses (0.15) (0.28) (0.26) (0.25) (0.04) Realized gains (losses) for the period (0.08) (0.30) Unrealized gains (losses) for the period (0.11) Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.07) (0.17) (0.16) (0.21) From net realized capital gains (0.01) From return of capital (0.04) Total distributions (3) (0.07) (0.17) (0.17) (0.21) (0.04) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2016 and the audited annual financial statements as at December 31 of the other years shown. Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 10, Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Net assets per unit and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is based on the weighted average number of units outstanding over the financial period. 3. Income, dividend and/or return of capital distributions, if any, are paid in cash, reinvested in additional units of the ETF, or both. Capital gains distributions, if any, may or may not be paid in cash. Noncash capital gains distributions are reinvested in additional units of the ETF and subsequently consolidated. They are reported as taxable distributions and increase each unitholder s adjusted cost base for their units. Neither the number of units held by the unitholder, nor the net asset per unit of the ETF change as a result of any non-cash capital gains distributions. Distributions classified as return of capital, if any, decrease each unitholder s adjusted cost base for their units. The characteristics of distributions, if any, are determined subsequent to the end of the ETF s tax year. Until such time, distributions are classified as from net investment income (excluding dividends) for reporting purposes. 4. The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. 8

12 Financial Highlights (continued) Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 19,197 4,781 5,249 5,001 4,896 Number of units outstanding (000 s) 1, Management expense ratio (2) 0.91% 0.90% 0.91% 0.90% 0.89% Management expense ratio before waivers and absorptions (3) 1.85% 2.14% 2.16% 2.41% 5.31% Trading expense ratio (4) 0.21% 0.01% 0.14% 0.06% 0.18% Portfolio turnover rate (5) 11.20% 11.01% 87.53% 35.46% 25.21% Net asset value per unit, end of period $ Closing market price $ Advisor Class Period (1) Total net asset value (000 s) $ 1, Number of units outstanding (000 s) Management expense ratio (2) 1.75% 1.75% 1.75% 1.75% 1.73% Management expense ratio before waivers and absorptions (3) 2.66% 2.93% 2.94% 3.19% 6.14% Trading expense ratio (4) 0.21% 0.01% 0.14% 0.06% 0.18% Portfolio turnover rate (5) 11.20% 11.01% 87.53% 35.46% 25.21% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2016 and December 31 of the other years shown. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Management expense ratio is based on total expenses, including sales tax, (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Out of its management fees, the Manager pays for such services to the ETF as investment manager compensation, service fees and marketing. 3. The Manager, at its discretion, may waive and/or absorb a portion of the fees and/or expenses otherwise payable by the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. 4. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. 5. The ETF s portfolio turnover rate indicates how actively its portfolio investments are traded. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. Generally, the higher the ETF s portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the ETF. 9

13 Financial Highlights (continued) Management Fees The Manager appoints the Investment Manager and provides, or oversees the provision of, administrative services required by the ETF including, but not limited to: negotiating contracts with certain third-party service providers, such as portfolio managers, custodians, registrars, transfer agents, auditors and printers; authorizing the payment of operating expenses incurred on behalf of the ETF; arranging for the maintenance of accounting records for the ETF; preparing reports to unitholders and to the applicable securities regulatory authorities; calculating the amount and determining the frequency of distributions by the ETF; preparing financial statements, income tax returns and financial and accounting information as required by the ETF; ensuring that unitholders are provided with financial statements and other reports as are required from time to time by applicable law; ensuring that the ETF complies with all other regulatory requirements, including the continuous disclosure obligations of the ETF under applicable securities laws; administering purchases, redemptions and other transactions in units of the ETF; and dealing and communicating with unitholders of the ETF. The Manager provides office facilities and personnel to carry out these services, if not otherwise furnished by any other service provider to the ETF. The Manager also monitors the investment strategies of the ETF to ensure that the ETF complies with its investment objectives, investment strategies and investment restrictions and practices. In consideration for the provision of these services, the Manager receives a monthly management fee at the annual rate of 0.80%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 1.55%, plus applicable sales taxes, of the net asset value of the ETF s Advisor Class units, calculated and accrued daily and payable monthly in arrears. The Manager, and not the ETF, will pay to registered dealers a service fee equal to 0.75% per year of the net asset value of Advisor Class units held by clients of the registered dealer. No service fees are paid to registered dealers in respect of Class E units. The Investment Manager and Sub-Advisor are compensated for their services out of the management fees without any further cost to the ETF. Any expenses of the ETF which are waived or absorbed by the Manager are paid out of the management fees received by the Manager. The Manager paid substantially more than 100% of the management fees it received from the ETF during the period towards marketing and promotional costs, and towards the fees associated with the managerial, portfolio management and portfolio advisory services provided to the ETF. 10

14 Past Performance Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF. Please read the prospectus before investing. The indicated rates of return are the historical total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any investor that would have reduced returns. An investment in the ETF is not guaranteed. Its value changes frequently and past performance may not be repeated. The ETF s performance numbers assume that all distributions are reinvested in additional units of the ETF. If you hold this ETF outside of a registered plan, income and capital gains distributions that are paid to you increase your income for tax purposes whether paid to you in cash or reinvested in additional units. The amount of the reinvested taxable distributions is added to the adjusted cost base of the units that you own. This would decrease your capital gain or increase your capital loss when you later redeem from the ETF, thereby ensuring that you are not taxed on this amount again. Please consult your tax advisor regarding your personal tax situation. Year-by-Year Returns The following chart presents the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period % 8.00% Rate of Return 6.00% 4.00% 2.00% 0.00% Class E 5.84% 8.54% 7.38% 4.71% 4.77% Advisor Class 5.65% 7.62% 6.47% 3.83% 4.33% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 10,

15 Summary of Investment Portfolio As at June 30, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Mexico Equities $ 5,101, % Brazil Equities 3,068, % Taiwan Equities 2,297, % Chile Equities 2,241, % India Equities 2,192, % South Korea Equities 1,323, % Hong Kong Equities 1,268, % Indonesia Equities 636, % China Equities 626, % Bermuda Equities 539, % Philippines Equities 491, % South Africa Equities 335, % Currency Forward Hedge* (11,126) -0.05% Cash and Cash Equivalents 229, % Other Assets less Liabilities 92, % $ 20,435, % % of ETF s Sector Mix Net Asset Value Net Asset Value Telecommunication Services $ 4,989, % Consumer Staples 4,425, % Industrials 3,020, % Financials 2,453, % Information Technology 1,861, % Energy 1,569, % Utilities 930, % Materials 444, % Health Care 428, % Currency Forward Hedge* (11,126) -0.05% Cash and Cash Equivalents 229, % Other Assets less Liabilities 92, % $ 20,435, % *Positions in forward contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 12

16 Summary of Investment Portfolio (continued) As at June 30, 2016 Top 25 Holdings % of ETF s Net Asset Value Grupo Aeroportuario del Centro Norte SAB de CV, ADR 4.58% Grupo Aeroportuario del Pacifico SA de CV, ADR 4.37% Chunghwa Telecom Co. Ltd., ADR 3.92% Ambev SA, ADR 3.89% Taiwan Semiconductor Manufacturing Co. Ltd., ADR 3.82% Fomento Economico Mexicano SAB de CV, ADR 3.78% Grupo Aeroportuario del Sureste SA de CV, ADR 3.66% Coca-Cola FEMSA SAB de CV, ADR 3.65% Siliconware Precision Industries Co. Ltd., ADR 3.50% Telefonica Brasil SA 3.47% China Mobile Ltd., ADR 3.41% Compania Cervecerias Unidas SA, ADR 3.36% Industrias Bachoco SAB de CV, ADR 3.32% SK Telecom Co. Ltd., ADR 3.25% KT Corp., ADR 3.22% PT Telekomunikasi Indonesia Persero TBK, ADR 3.12% HDFC Bank Ltd., ADR 3.04% Ultrapar Participações SA, ADR 2.88% Embotelladora Andina SA, ADR 2.77% ICICI Bank Ltd., ADR 2.67% Endurance Specialty Holdings Ltd. 2.64% Philippine Long Distance Telephone Co., ADR 2.41% Dr. Reddy s Laboratories Ltd., ADR 2.10% CNOOC Ltd., ADR 2.04% Banco de Chile, ADR 1.82% The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent financial statements are available at no cost by calling , by writing to us at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through SEDAR at 13

17 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying unaudited interim financial statements of (the ETF ) are the responsibility of the manager and trustee to the ETF, AlphaPro Management Inc. (the Manager ). They have been prepared in accordance with International Financial Reporting Standards using information available and include certain amounts that are based on the Manager s best estimates and judgments. The Manager has developed and maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to produce relevant, reliable and timely financial information, including the accompanying financial statements. These financial statements have been approved by the Board of Directors of the Manager. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. NOTICE TO UNITHOLDERS The Auditors of the ETF have not reviewed these Financial Statements. AlphaPro Management Inc., the Manager of the ETF, appoints an independent auditor to audit the ETF s annual financial statements. The ETF s independent auditors have not performed a review of these interim financial statements in accordance with Canadian generally accepted auditing standards. 14

18 Statements of Financial Position (unaudited) As at June 30, 2016 and December 31, Assets Cash and cash equivalents $ 229,382 $ 43,737 Investments 20,124,693 5,339,160 Amounts receivable relating to accrued income 141,021 9,798 Total assets 20,495,096 5,392,695 Liabilities Accrued expenses 16,648 5,596 Distribution payable 32,032 9,246 Derivative liabilities (note 3) 11,126 Total liabilities 59,806 14,842 Total net assets (note 2) $ 20,435,290 $ 5,377,853 Total net assets, Class E $ 19,197,057 $ 4,780,887 Number of redeemable units outstanding, Class E (note 9) 1,550, ,483 Total net assets per unit, Class E $ $ Total net assets, Advisor Class $ 1,238,233 $ 596,966 Number of redeemable units outstanding, Advisor Class (note 9) 100,000 50,000 Total net assets per unit, Advisor Class $ $ (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 15

19 Statements of Comprehensive Income (unaudited) For the Periods Ended June 30, Income Dividend income $ 317,569 $ 122,942 Securities lending income (note 8) 3,833 4,743 Net realized gain (loss) on sale of investments and derivatives (104,487) 4,292 Net realized gain on foreign exchange 39,412 4,588 Net change in unrealized appreciation of investments and derivatives 854, ,256 Net change in unrealized appreciation (depreciation) of foreign exchange (1,341) 8,894 1,109, ,715 Expenses Management fees (note 10) 46,847 30,575 Audit fees 7,505 7,607 Independent Review Committee fees Custodial fees 1, Legal fees 3, Securityholder reporting costs 12,473 12,832 Administration fees 24,300 18,061 Transaction costs 10, Withholding taxes 34,024 18, ,976 88,141 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (46,973) (38,469) 93,003 49,672 Increase in net assets for the period $ 1,016,479 $ 490,043 Increase in net assets, Class E $ 973,510 $ 443,453 Increase in net assets per unit, Class E Increase in net assets, Advisor Class $ 42,969 $ 46,590 Increase in net assets per unit, Advisor Class (See accompanying notes to financial statements) 16

20 Statements of Changes in Financial Position (unaudited) For the Periods Ended June 30, Total net assets at the beginning of the period $ 5,377,853 $ 5,832,153 Increase in net assets 1,016, ,043 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 14,150,286 Securities issued on reinvestment of distributions 1,491 1,054 Distributions: From net investment income (110,819) (66,985) Total net assets at the end of the period $ 20,435,290 $ 6,256,265 Total net assets at the beginning of the period, Class E $ 4,780,887 $ 5,249,268 Increase in net assets, Class E 973, ,453 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 13,547,323 Securities issued on reinvestment of distributions 1,491 1,054 Distributions: From net investment income (106,154) (62,663) Total net assets at the end of the period, Class E $ 19,197,057 $ 5,631,112 Total net assets at the beginning of the period, Advisor Class $ 596,966 $ 582,885 Increase in net assets, Advisor Class 42,969 46,590 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 602,963 Distributions: From net investment income (4,665) (4,322) Total net assets at the end of the period, Advisor Class $ 1,238,233 $ 625,153 (See accompanying notes to financial statements) 17

21 Statements of Cash Flows (unaudited) For the Periods Ended June 30, Cash flows from operating activities: Increase in net assets for the period $ 1,016,479 $ 490,043 Adjustments for: Net realized loss (gain) on sale of investments and derivatives 104,487 (4,292) Net realized gain on currency forward contracts 4,203 Net change in unrealized appreciation of investments and derivatives (854,496) (394,256) Net change in unrealized depreciation (appreciation) of foreign exchange 1,034 (8,348) Purchase of investments (15,179,584) (61,642) Proceeds from the sale of investments 1,150,983 16,462 Amounts receivable relating to accrued income (131,223) (37,734) Accrued expenses 11,052 (1,826) Net cash used in operating activities (13,877,065) (1,593) Cash flows from financing activities: Amount received from the issuance of units 14,150,286 Distributions paid to unitholders (86,542) (66,486) Net cash from (used in) financing activities 14,063,744 (66,486) Net increase (decrease) in cash and cash equivalents during the period 186,679 (68,079) Effect of exchange rate fluctuations on cash and cash equivalents (1,034) 8,348 Cash and cash equivalents at beginning of period 43, ,921 Cash and cash equivalents at end of period $ 229,382 $ 212,190 Dividends received, net of withholding taxes $ 152,322 $ 66,615 (See accompanying notes to financial statements) 18

22 Schedule of Investments (unaudited) As at June 30, 2016 Shares/ Average Fair Security Contracts Cost Value EQUITIES (98.48%) Mexico (24.95%) America Movil SAB de CV, ADR, Series L 20,724 $ 373,939 $ 328,254 Coca-Cola FEMSA SAB de CV, ADR, Series L 6, , ,974 Fomento Economico Mexicano SAB de CV, ADR 6, , ,475 Grupo Aeroportuario del Centro Norte SAB de CV, ADR 15, , ,513 Grupo Aeroportuario del Pacifico SA de CV, ADR 6, , ,747 Grupo Aeroportuario del Sureste SA de CV, ADR, Series B 3, , ,017 Industrias Bachoco SAB de CV, ADR 10, , ,474 4,609,433 5,101,454 Brazil (15.01%) Ambev SA, ADR 103, , ,000 Banco Bradesco SA, ADR 17, , ,637 Braskem SA, ADR 5,954 97,632 91,153 Companhia de Saneamento Basico do Estado de Sao Paulo, ADR 23, , ,859 Companhia Paranaense de Energia-Copel, ADR 22, , ,649 CPFL Energia SA, ADR 10, , ,831 Telefonica Brasil SA 40, , ,937 Ultrapar Participações SA, ADR 20, , ,304 2,751,643 3,068,370 Taiwan (11.25%) Chunghwa Telecom Co. Ltd., ADR 17, , ,577 Siliconware Precision Industries Co. Ltd., ADR 72, , ,188 Taiwan Semiconductor Manufacturing Co. Ltd., ADR 23, , ,217 2,013,884 2,297,982 Chile (10.97%) Banco de Chile, ADR 4, , ,404 Compania Cervecerias Unidas SA, ADR 22, , ,393 Embotelladora Andina SA, ADR, Series A 22, , ,348 Empresa Nacional de Electricidad SA, ADR 5, , ,375 Endesa Americas SA, ADR 12, , ,047 Vina Concha y Toro SA, ADR 4, , ,388 2,187,293 2,241,955 India (10.73%) Dr. Reddy s Laboratories Ltd., ADR 6, , ,426 HDFC Bank Ltd., ADR 7, , ,391 ICICI Bank Ltd., ADR 58, , ,431 Infosys Technologies Ltd., ADR 15, , ,360 Tata Motors Ltd., ADR 5, , ,112 2,081,877 2,192,720 South Korea (6.48%) KT Corp., ADR 35, , ,538 19

23 Schedule of Investments (unaudited) (continued) As at June 30, 2016 Shares/ Average Fair Security Contracts Cost Value SK Telecom Co. Ltd., ADR 24, , ,095 1,246,674 1,323,633 Hong Kong (6.21%) China Mobile Ltd., ADR 9, , ,621 China Unicom (Hong Kong) Ltd., ADR 11, , ,267 CNOOC Ltd., ADR 2, , ,292 1,262,357 1,268,180 Indonesia (3.12%) PT Telekomunikasi Indonesia Persero TBK, ADR 8, , ,973 China (3.07%) China Life Insurance Co. Ltd., ADR 14, , ,720 Huaneng Power International Inc., ADR, Series N 6, , ,431 PetroChina Co. Ltd., ADR 2, , , , ,509 Bermuda (2.64%) Endurance Specialty Holdings Ltd. 6, , ,086 Philippines (2.41%) Philippine Long Distance Telephone Co., ADR 8, , ,925 South Africa (1.64%) Sasol Ltd., ADR 9, , ,906 TOTAL EQUITIES 18,828,062 20,124,693 DERIVATIVES (-0.05%) Currency Forwards (-0.05%) Currency forward contract to buy C$796,312 for US$625,000 maturing July 14, 2016 (11,126) TOTAL DERIVATIVES (11,126) Transaction costs (9,796) 20 TOTAL INVESTMENT PORTFOLIO (98.43%) $ 18,818,266 $ 20,113,567 Cash and cash equivalents (1.12%) 229,382 Other assets less liabilities (0.45%) 92,341 TOTAL NET ASSETS (100.00%) $ 20,435,290 (See accompanying notes to financial statements)

24 Notes to Financial Statements (unaudited) June 30, REPORTING ENTITY ( Horizons HAJ 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 October 10, The address of the ETF s registered office is: c/o AlphaPro Management 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 both class E units ( Class E ) and advisor class units ( Advisor Class ) which trade on the Toronto Stock Exchange ( TSX ) under the symbols HAJ and HAJ.A, respectively. Advisors are directly compensated with a service fee on a trailing quarterly basis (the Service Fee ). The only difference between the Advisor Class and existing Class E units of the ETF is that the Advisor Class charges higher management fees that include the Service Fees paid to the advisor (see note 10). The purchase and sale process for the Advisor Class units is identical to that of any other ETF listed on the TSX. 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. The investment objective of Horizons HAJ is to seek long-term returns consisting of regular dividend income and modest long-term capital growth. Horizons HAJ invests primarily in equity and equity related securities of companies with operations in emerging market economies. AlphaPro Management Inc. ( AlphaPro or the Manager ) is the manager and trustee of the ETF. The Manager has appointed Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Investment Manager ), an affiliate of the Manager, to act as the investment manager to the ETF. The Investment Manager is responsible for implementing the ETF s investment strategies and for engaging the services of Guardian Capital LP ( Guardian Capital or the Sub-Advisor ), to act as the sub-advisor to the ETF. The Manager and Investment Manager are both members of the Mirae Asset Financial Group ( Mirae Asset ). 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 August 10, 2016 by the Board of Directors of the Manager. (ii) Basis of measurement 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. (iii) Functional and presentation currency These financial statements are presented in Canadian dollars, which is the ETF s functional currency. 21