INTERIM REPORT JUNE 30, 2016 QUESTRADE RUSSELL US MIDCAP GROWTH INDEX ETF HEDGED TO CAD (QMG)

Transcription

1 INTERIM REPORT JUNE 30, 2016 QUESTRADE RUSSELL US MIDCAP GROWTH INDEX ETF HEDGED TO CAD (QMG) 1

2 This interim management report of fund performance contains financial highlights and is included with the unaudited interim financial report of the ETF. You may get a copy of the interim financial report at your request, and at no cost, by calling , by writing to us at etfs@questrade.com or by visiting our website at or SEDAR at Unitholders may also contact us using one of these methods to request a copy of the ETF s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. 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 in and the risks detailed from time to time in the ETFs 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, Questrade Wealth Management Inc. ( QWM ) does not undertake, and specifically disclaims, any intention or obligation to update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Questrade Smart ETFs is a registered trademark licensed to QWM. FTSE, Russell, MTS, FTSE TMX and FTSE Russell and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies. The Questrade ETFs are not sponsored, endorsed, sold or promoted by the London Stock Exchange Group companies and makes no representation regarding the advisability of investing in the Questrade ETFs. 1

3 Management Report of Fund Performance Investment Objective and Strategies Questrade Russell US Midcap Growth Index ETF Hedged to CAD (the ETF ) seeks to replicate, to the extent reasonably possible, and before fees and expenses, the performance of the Russell Midcap Growth Index, which Index is hedged to the Canadian dollar (the Index ). The ETF invests directly or indirectly primarily in mid-capitalization U.S. equities that exhibit growth characteristics. In order to achieve its investment objective and to obtain direct or indirect exposure to the Constituent Securities (as defined in the prospectus) of the applicable index, the ETF or the Manager, Questrade Wealth Management Inc. (the Manager and Portfolio Manager ), may hold the Constituent Securities of the applicable index in approximately the same proportion as they are reflected in that index or may hold securities of one or more exchange traded ETFs ( Reference ETF ) that replicate the applicable Index. The ETF may, in certain circumstances and at the discretion of the Manager, employ a sampling strategy. Under a sampling strategy, the ETF may not hold all of the Constituent Securities that are included in the applicable index, but instead will hold a portfolio of securities selected by the Manager that closely matches the aggregate investment characteristics (e.g., market capitalization, industry sector, weightings, credit quality, yield and term to maturity) of the securities included in the applicable Index. It is expected that the Manager may use this sampling methodology where it is difficult to acquire the necessary Constituent Securities of the applicable Index, where the asset levels of the ETF do not allow for the holding of all of the Constituent Securities or where it is otherwise beneficial to the ETF to do so. Risk For the period ended June 30, 2016, there were no changes to the ETF that materially affected the overall risk level associated with an investment in the ETF. The risk associated with an investment in the ETF are listed below and are discussed in greater detail in the ETF s most recent prospectus. The most recent prospectus is available at or SEDAR at General Risks of Investments Risk of Error in Replicating or Tracking the Applicable Index Asset Class Risk Sampling Methodology Risk Index Investment Strategy and Passive Rebalancing and Subscription Risk Investment Risks Calculation and Termination of the Indices Cease Trading of Units Issuer Risk Counterparty Risk Associated with Illiquid Securities Securities Lending Reliance on Key Personnel Country Risk Trading Price of Units Currency Hedging Risk Fluctuations in NAV Exchange Rate Risk Cease Trading of Securities Risk General Risks of Foreign Investments Concentration Risk Growth Securities Risk Use of Derivative Instruments Sector Risk Changes in Legislation Mid-Capitalization Issuer Risk 2

4 Taxation of the Questrade ETFs Underlying Fund Risk Lack of Operating History Value Securities Risk Results of Operations Market Review The US Equity markets were mixed in the first six months of 2016 with the S&P 500 gaining 3.84% and the Nasdaq Composite Index down 2.61%. Over the past quarter to June 30, 2016 the same indices were up 2.46% and down 0.22%. Global equity markets were unchanged in the first six months of 2016 with the FTSE All World Index ex-us down 0.63%, stabilizing from a decline of 9.31% year-over-year. Having recovered from the China devaluation of the yuan in 2015, geopolitical risk continued to dominate the market landscape with the Brexit referendum in the United Kingdom. The uncertainty stemming from the UK s decision to leave the European Union has resulted in the continuation of low and negative interest rate policies from central banks around the world. The so-called Internationalists in the Federal Reserve have echoed this sentiment citing the vote as the main reason for leaving interest rates unchanged. Bond markets are reflecting this with a less than 10% chance of a rate hike prior to Bonds markets in the US were beneficiaries of the continuation of the loose monetary policy worldwide. Negative interest rates in Europe and Japan coupled with the post Brexit flight-to-quality trade pushed Treasuries higher, gaining 5.61% in the first half of the year with the 10 year yield at 1.47%, down a third since the beginning of the year. Corporate bonds in the US have also benefitted gaining 9.19% year-to-date as measured by the ishares IBOXX Investment grade ETF. Commodities posted their best quarter since 2010 despite Brexit uncertainty with the Bloomberg Commodity Index up 13% so far this year (to June 30). This broad based rally was led by a recovery in oil amid oversupply conditions. The economic recovery in the US reached the seven year milestone in 2016; longer than the average five year life cycle. This is partly due to the slower than average pace which was characterized by stagnant wage growth despite reaching 4.7% unemployment, currently 4.9% as at June 30. Consumer confidence remains high with the University of Michigan Consumer Confidence and Conference Board Consumer Confidence numbers 93.5 and 97.4 respectively for June. Portfolio Review Mid caps in the US rallied 7.93% and 3.99% year-to-date and in the second quarter of 2016 as measured by the S&P 400 Midcaps Index. The Russell 1000 Midcap Growth Index Hedged to CAD was up 1.74% and 1.61% for the same period as compared to the Questrade Midcap Growth Index Hedged to CAD ETF gained 0.26% and 1.49%. The net asset value per unit of the ETF increased from $18.86 to $18.91 from December 31, 2015 to June 30, For the period ended June 30, 2016 the ETF s unannualised return was 0.26% versus the Index return of 1.74%. The difference in the performance of the ETF relative to the Index during the period resulted primarily from the management fees and transactions cost, and certain other factors which may include volatility in currency markets, timing differences versus the index and withholding taxes paid on income. Over the similar period the US Dollar declined 6.61% which was hedged to its Canadian counterpart. 3

5 Recent Developments Though the market has largely shrugged off Brexit fears, there remain uncertainties over the overall tone of international trade, not only within Europe and the UK, but also for companies that have a significant amount of economic integration with that region. Small and midcap stocks in the US tend to derive their revenue more from domestic markets and thus are less susceptible to international volatility than their large cap counterparts. This was reflected by midcaps outperforming large caps in so far in QMG is well positioned to take advantage of this potential outperformance. Related Party Transactions Questrade Wealth Management Inc., a wholly owned subsidiary of Questrade Financial Group, is the Manager, Trustee and Portfolio Manager of the ETF. The Manager is responsible for managing the day-to-day business of the ETF, and as such, is deemed to be a related party of the ETF. From time to time, the Manager may on behalf of the ETF enter into transactions or arrangements with or involving subsidiaries and affiliates of Questrade Financial Group Inc. ( QFG ) or certain other persons or companies that are related or connected to the Manager of the ETF. These transactions or arrangements may include transactions or arrangements with or involving subsidiaries and affiliates of QFG and may involve the purchase or sale of ETF securities through or from Questrade, Inc. or the provision of services to the Manager. As at June 30, 2016, the Manager and key officers of the Manger held 160 units of the ETF with a total market value of $ 3,157. During the period and in respect to transactions in securities of related issuers, the Manager relied on an approval and standing instructions provided by the ETF s Independent Review Committee ( IRC ). The standing instructions requires the related-party trading activities be conducted in accordance with the Manager s written policy and procedures and violations (if any) of the standing instructions be reported to the ETF s Compliance Committee and, if necessary, the Board of Directors and the IRC. The Manager s policy and procedures requires that an investment decision in respect of transactions in securities of related issuers (i) is made free from any influence of the Manager or its associates or affiliates and without taking into account any considerations relevant to the Manager or its associates or affiliates, (ii) represents the business judgement of the portfolio manager, uninfluenced by considerations other than the best interests of the ETF, and (iii) achieves a fair and reasonable result for the ETF. The Manager is entitled to receive a management fee as compensation for its services and for further details, please refer to the Management Fee section. Financial Highlights The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance for the period ended June 30, 2016 and December 31, Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. 4

6 The ETF s Net Assets per Unit (1) (5) Net Assets, beginning of period $ Increase (decrease) from operations: Total revenue $ Total expenses (0.09) (0.17) Realized loss for the period 0.13 (0.89) Unrealized gains (losses) for the period 0.04 (0.31) Total increase (decrease) from operations (2) $ 0.13 (1.19) Distributions: From income (excluding dividends) From dividends - - From capital gains - - Return of capital - - Total Distributions (3) Net Assets, end of period (4) $ (1) 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, The term net assets attributable to holder of redeemable units presented in the financial statements and the term net assets used in this management report on ETFs performance are interchangeable. (2) Net assets per unit and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. (3) Distributions, if any, were either paid in cash or reinvested in additional units of the ETF, or both. (4) The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. (5) Results for the period from date of commencement of operations March 17, 2015 to December 31, Ratios and Supplementary Data Total net asset value (000s) (1) $ 5,674 5,659 Number of units outstanding (1) 300, ,000 Management expense ratio (2) 0.93% 0.96% Management expense ratio before waivers or absorptions (2) 0.93% 0.96% Trading expense ratio (3) 0.01% 0.01% Portfolio turnover rate (4) 29.65% 24.16% Net asset value per unit $ Closing market price $ (1) This information is provided as at June 30, 2016 and December 31, (2) 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 period. Out of its management fees, the Manager pays for such services to the ETF as portfolio advisor compensation, administration, service 5

7 fees and marketing. The Manager, at its discretion, may waive and/or absorb a portion of the fees and/or expenses otherwise payable by the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The ETF s portfolio turnover rate indicates how actively the ETF s portfolio adviser manages 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 the period. The higher the ETF s portfolio turnover rate in a period, the greater the trading costs payable by the ETF in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between a high turnover rate and the performance of the ETF. Management Fee The Manager is responsible for managing the day-to-day business of the ETF, including portfolio management services, negotiating contractual agreements with service providers, certain administrative services and preparing reports to unitholders and securities regulatory authorities. As compensation for its services the Manager is entitled to receive a monthly fee at the annual rate of 0.75%, plus applicable sales taxes, of the net asset value of the ETF. The management fee, plus applicable taxes, including HST, will be accrued daily and paid out monthly in arrears. The ETF pays certain operating expenses directly, including all reasonable costs and expenses incurred in relation to compliance with NI , including compensation and expenses payable to Independent Review Committee ("IRC") members and any independent counsel or other advisors employed by the IRC, the costs of the orientation and continuing education of IRC members and the costs and expenses associated with IRC meetings; taxes of all kinds to which the ETF is or might be subject to; and cost of complying with any new governmental or regulatory requirement introduced after the ETF s were established. The following table shows the allocation of management fees. Portfolio management fee, general Waived/absorbed expenses of the ETF Ticker administration and profit QMG CN 100% - 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. 6

8 Year-by-Year Returns The following chart shows the ETFs performance for the periods indicated below. The chart shows, in percentage terms, how much an investment made on the first day of the financial period would have increased or decreased by the last day of the financial period. 5.00% 0.00% 0.26% -5.00% % -5.68% Returns for the period from March 17, 2015 to December 31, Returns for the period from January 1, 2016 to June 30, Returns are unannualised and are based on the net asset value per unit. 7

9 Summary of Investment Portfolio As at June 30, 2016 Portfolio Allocation** % of Net Asset Value Consumer Discretionary 24.7 Financial Services 14.8 Health Care 14.3 Technology 14.2 Producer Durables 12.1 Consumer Staples 7.7 Materials & Processing 6.5 Energy 1.3 Utilities 0.3 Derivative Assets 0.4 Cash and Cash Equivalents 3.8 Other Assets, less Liabilities (0.1) Total 100.0% Top 25 Holdings** % of Net Asset Value Dollar General Corp 1.0 Equinix Reit Inc. 1.0 Oreilly Automotive Inc. 0.9 Intuitive Surgical Inc. 0.9 Fiserv Inc. 0.9 Nvidia Corp. 0.9 Autozone Inc. 0.8 Linkedin Corp. Class A 0.8 Ross Stores Inc. 0.8 Electronic Arts Inc. 0.8 Zoetis Inc. Class A 0.8 Newell Brands Inc. 0.8 Dollar Tree Inc. 0.8 Edwards Lifesciences Corp 0.8 Illumina Inc. 0.7 Paychex Inc. 0.7 Omnicom Group Inc. 0.7 Kellogg 0.7 Dr. Pepper Snapple Group Inc. 0.6 C R Bard Inc. 0.6 Cerner Corp. 0.6 Amphenol Corp. Class A 0.6 Delphi Automotive Plc 0.6 Conagra Foods Inc. 0.6 Hershey Foods 0.6 Total 19.0% Total Net Asset Value $ 5,673,942 8

10 The summary of investment portfolio may change due to ongoing portfolio transactions of the investment fund and a quarterly update us available on **In accordance with the Canadian Securities Administrators requirements, as the ETF invests a significant part of its assets in ishares Russell Mid-Cap Growth ETF (the Reference ETF ), the above portfolio allocation and top 25 holdings are of the Reference ETF. Information on the Reference ETF is available at 9

11 Manager s Responsibility for Financial Reporting The accompanying unaudited interim financial statements of Questrade Russell US Midcap Growth Index ETF Hedged to CAD (the ETF ) have been prepared by the manager and trustee of the ETF, Questrade Wealth Management Inc. (the Manager ) and approved by the Board of Directors of the Manager. They have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Some of the information in these statements is based on the Manager s best estimates and judgements, where appropriate. The Manager has developed and maintains a system of internal controls designed to provide reasonable assurance that all financial information is recorded timely, accurately and reliably, that the interim financial statements accurately report the ETF s financial results, and that the ETF s assets are properly safeguarded. Edward Kholodenko President and CEO Questrade Wealth Management Inc. August 19, 2016 Dean Percy CFO Questrade Wealth Management Inc. August 19,

12 Statements of Financial Position (unaudited) As at June 30, 2016 December 31, 2015 Assets Cash and cash equivalents (note 3) $ 214,466 80,686 Prepaid expenses Investments, at fair value (note 6) 5,440,772 5,819,676 Derivative assets (note 6) 22,184 - Total Assets $ 5,678,177 5,900,741 Liabilities Management fees payable 4,126 4,096 Other accrued expenses Derivative liabilities (note 6) - 237,174 Total Liabilities $ 4, ,621 Total Net Assets Attributable to Holders of Redeemable Units $ 5,673,942 5,659,120 Total Net Assets Attributable to Holders of Redeemable Units per Unit $ (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Edward Kholodenko Dean Percy 11

13 Statements of Comprehensive Income (unaudited) For the period from January 1 to June 30, 2016 March 17 to June 30, 2015 Income Interest for distribution purposes $ - 20 Dividend revenue 16,160 3,882 Changes in fair value of investments and derivatives Net realized loss on sale of investments and derivatives (31,511) (3,807) Net realized gain on foreign currency 102,530 84,615 Net change in unrealized appreciation (depreciation) of investments and 12,443 (107,785) derivatives Total Investment Gain (Loss) (note 8) 99,622 (23,075) Other Income Foreign exchange (loss) gain on cash (29,224) 728 Total Gain (Loss) 70,398 (22,347) Expenses Management fees (note 9) 23,376 4,674 Independent review committee fees 3,477 1,651 Transaction costs Withholding taxes 2, Total Expense 29,501 6,933 Increase (Decrease) in Net Assets Attributable to Holders of Redeemable Units from Operations (excluding distributions) (note 3) $ 40,897 (29,280) Increase (Decrease) in Net Assets Attributable to Holders of Redeemable Units from Operations (excluding distributions) per Unit (note 3) $ 0.13 (0.29) (See accompanying notes to financial statements) 12

14 Changes in Net Assets Attributable to Holders of Redeemable Units (unaudited) For the period from January 1 to June 30, 2016 March 17 to June 30, 2015 Increase (Decrease) in Net Assets Attributable to Holders of Redeemable Units from Operations (excluding distributions) $ 40,897 (29,280) Distributions Paid or Payable to Holders of Redeemable Units From net investment income - - From net realized capital gain - - Return of capital - - Total distributions paid to holders of redeemable units - - Redeemable Unit Transactions Amount received from the issuance of units 935,960 2,000,000 Amount received from reinvestment of distributions - - Amount paid on redemptions of units (962,035) - Net increase (decrease) from redeemable unit transactions (26,075) 2,000,000 Increase in Net Assets Attributable to Holders of Redeemable Units 14,822 1,970,720 Net Assets Attributable to Holders of Redeemable Units at the Beginning of Period 5,659,120 - Net Assets Attributable to Holders of Redeemable Units at End of Period $ 5,673,942 1,970,720 (See accompanying notes to financial statements) 13

15 Statements of Cash Flows (unaudited) For the period from January 1 to June 30, 2016 March 17 to June 30, 2015 Cash flows from operating activities Increase (decrease) in net assets attributable to holders of redeemable units from operations (excluding distributions) $ 40,897 (29,280) Adjustments for: Foreign exchange loss (gain) on cash 43 (119) Net realized loss on sale of investments and derivatives 31,511 3,807 Net change in unrealized (appreciation) depreciation of investments and derivatives (12,443) 107,785 Purchase of investments (1,650,570) (2,171,079) Proceeds from the sale of investments 1,751, ,473 Other receivables (376) - Other liabilities (212) 2,902 Net cash from (used in) operating activities 159,898 (1,967,511) Cash flows from financing activities Amount received from the issuance of units 935,960 2,000,000 Amount paid on redemptions of units (962,035) - Net cash from (used in) financing activities (26,075) 2,000,000 Increase in Cash during the Period 133,823 32,489 Foreign Exchange (Gain) Loss on Cash (43) 119 Cash & Cash equivalents at Beginning of Period 80,686 - Cash & Cash equivalents at End of Period $ 214,466 32,608 Supplementary Information Dividends received, net of withholding taxes $ - 20 Dividends received, net of withholding taxes $ 13,697 3,306 (See accompanying notes to financial statements) 14

16 Schedule of Investment Portfolio (unaudited) As at June 30, 2016 EXCHANGE TRADED FUNDS (95.9%) Shares Average Cost Fair Value ishares Russell Mid-Cap Growth ETF 45,002 5,517,253 5,440,772 5,517,253 5,440,772 TOTAL EXCHANGE TRADED FUNDS 5,517,253 5,440,772 Transaction costs (304) TOTAL INVESTMENTS 5,516,949 5,440,772 Derivative assets (0.4%) 22,184 Other Assets, less Liabilities (3.7%) 210,986 TOTAL NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS (100.0%) 5,673,942 (See accompanying notes to financial statements) 15

17 Schedule of Investment Portfolio (unaudited) (Cont d) As at June 30, 2016 Schedule of Derivative Assets and Liabilities - Forward Foreign Currency Contracts Counterparty Credit Rating of Counterparty Currency Buy Position Currency Sell Position Contract Rate Settlement Date Unrealized Gain CIBC World Markets A-1 CAD 5,189,200 USD 4,000, /31/ ,184 The credit rating of each counterparty (as rated by Standard & Poor s, a division of McGraw-Hill Financial Inc.) of the forward foreign currency contracts held by the ETF meets or exceeds the minimum approved credit rating, prescribed by securities regulation. (See accompanying notes to financial statements) 16

18 Notes to the Financial Statements (unaudited) For the period ended June 30, Reporting entity Questrade Russell US Midcap Growth Index ETF Hedged to CAD (the ETF ) is an exchange-traded fund established under the laws of the Province of Ontario as an open-ended trust by a Declaration of Trust. The ETF is offered for sale on a continuous basis by its prospectus on the Toronto Stock Exchange ( TSX ) under the ticker symbol QMG CN. The ETF seeks to replicate, to the extent reasonably possible before fees and expenses, the performance of the Russell Midcap Growth Index (the Index ), or any successor thereto, which Index is hedged to the Canadian dollar. The ETF invests directly or indirectly primarily in mid-capitalization U.S. equities that exhibit growth characteristics. Questrade Wealth Management Inc. (the Manager ) is the Manager, Trustee and Portfolio Manager of the ETF s. The address of the ETF registered office is Questrade Wealth Management Inc., 5650 Yonge Street, Suite 1700, Toronto, Ontario, M2M 4G3. The Board of Directors of the Manager authorized the interim financial statements for issue on August 19, Basis of preparation I. Statement of compliance These financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board. In the preparation of the financial statements, the ETF has consistently applied these standards. Any reference of net assets, net asset value, total net asset or increases (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. II. Basis of measurement The financial statements have been prepared on the historical cost basis except for financial instruments at fair value through profit and loss, which are measured at fair value. III. Functional and presentational currency The ETF s financial statements are presented in Canadian dollars, which is the ETF s functional currency. 3. Summary of significant accounting policies The following accounting policies have been consistently applied to all periods detailed in these financial statements. I. Financial instruments (I) Recognition and initial measurement Financial assets and financial liabilities at fair value through profit and loss ( FVTPL ) are initially recognized on the trade date at fair value (see below), with transaction costs recognized in the Statement of Comprehensive Income. Other financial assets and financial liabilities are recognized on the date on which they are originated at fair value. 17

19 (II) Classification The ETF classifies financial assets and financial liabilities into the following categories. Financial assets at FVTPL: Held for trading: derivative financial instruments. Designated at FVTPL: debt and equity investments. Financial liabilities at FVTPL: Held for trading: derivative financial instruments. All other financial assets and liabilities are measured at amortized cost, and are classified as loans and receivables and other financial liabilities, respectively. Redeemable units are measured at present value of the redemption amount and are considered a residual. A financial instrument is classified as held for trading if: it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; on initial recognition, it is part of a portfolio that is managed together and for which there is evidence of a recent pattern of short-term profit taking; or it is a derivative, other than a designated and effective hedging instrument. The ETF designates all equity investments at FVTPL on initial recognition because it manages these securities on a fair value basis in accordance with its documented investment strategy. Internal reporting and performance measurement of these securities are on a fair value basis. (III) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the ETF has access at that date. The fair value of a liability reflects its non-performance risk. When available, the ETF measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. For publicly traded securities, fair value means the close or last traded price when the price falls within the day s bid-ask spread. Whereas for bonds and debentures, fair value means the most recent price provided by independent security pricing services. If the close or last traded price falls outside of the bid-ask spread, then fair value is determined by using bid price for long positions and ask price for short positions, or a different point within the bid-ask spread that Manager determines to be more representative of fair value. Forward currency contract are valued using the relevant exchange rates of the underlying currency. Any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. The change in value of forward currency contracts is included in the Statement of Comprehensive Income as net change in unrealized appreciation (depreciation) of investments and derivatives. When the contract is closed or delivered on the settlement date, any gain or loss is recognized as Net realized gain (loss) on foreign currency in the Statements of Comprehensive Income. 18

20 If there is no quoted price in an active market, then the ETF uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. Fair value policies used for financial reporting purposes are the same as those used to measure the net asset value for transactions with unitholders. The fair value of other financial assets and liabilities approximates their carrying values due to the short-term nature of these instruments. (IV) Offsetting Financial assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis for gains and losses from financial instruments at fair value through profit or loss and foreign exchange gains and losses. II. Cost of investments The cost of portfolio investments is the amount paid for each security and is determined on an average cost basis. III. Cash and cash equivalents Cash and cash equivalents are comprised of cash and deposits, foreign currency holdings, banker acceptances and short-term investments with a term to maturity of less than three months from the date of purchase. IV. Foreign currency translation Transactions in foreign currencies are translated at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the period-end exchange rate. Foreign exchange gains and losses and are presented as Net realized gains (loss) on foreign currency in the Statement of Comprehensive Income. Translations arising from financial instruments at FVTPL, are recognized as a component within Net realized gain (loss) on sales of investments and derivatives, and Net change in unrealized appreciation (depreciation) of investments and derivatives in the Statement of Comprehensive Income. V. Forward foreign exchange currency agreements The ETF may purchase forward foreign exchange currency agreements to hedge assets and liabilities denominated in foreign currencies. Unrealized gains and losses on foreign currency denominated financial instruments used to hedge foreign currency assets and liabilities are recorded on the Statement of Financial Position and recognized in the Statement of Comprehensive Income as net change in unrealized appreciation (depreciation) of investments and derivatives. Upon the closing out of the instrument, any gain or loss on forward foreign exchange currency agreements is disclosed in the Statement of Comprehensive Income as net realized gain (loss) on foreign currency. VI. Investment Income Investment transactions are accounted for as of the trade date. Realized gains and losses from investment transactions are calculated on a weighted average cost basis. The difference between fair value and average cost, as recorded in the financial statements, is included in the statements of comprehensive income as part of 19

21 the net change in unrealized appreciation (depreciation) of investments and derivatives. Interest income for distribution purposes from investments in bonds and short-term investments represents the coupon interest received by the ETF accounted for on an accrual basis. Dividend income is recognized on the ex-dividend date. Distribution income from investments in other funds or ETFs is recognized when earned. Income from derivatives is shown in the statements of comprehensive income as net realized gain (loss) on sale of investments and derivatives; net change in unrealized appreciation (depreciation) of investments and derivatives; and, interest income for distribution purposes, in accordance with its nature. Income from securities lending, if any, is included in Securities lending income on the statements of comprehensive income and is recognized when earned. Any securities on loan continue to be displayed in the schedule of investments and the market value of the securities loaned and collateral held is determined daily. If the ETF incurs withholding taxes imposed by certain countries on investment income and capital gains, such income and gains are recorded on a gross basis and the related withholding taxes are shown as a separate expense in the statements of comprehensive income. VII. Transaction cost Transaction costs are incremental costs incurred in the purchase and sale of securities such as fees and commissions paid to brokers and dealers. Transactions costs are expensed and are recognized in the Statement of Comprehensive Income. VIII. Redeemable units Redeemable units are classified as financial liabilities as there is a requirement to distribute net income and capital gains earned by the ETF. Redeemable units are measured at the present value of the redemption amounts redeemable to the unitholders and are considered a residual amount of the net assets attributable to the holders of redeemable units. For each ETF unit sold, the ETF receives an amount equal to the net asset value per unit at the date of sale, which amount is included in net assets attributable to holders of redeemable units. Units are redeemable at the option of unitholders at their net asset value on the redemption date. For each unit redeemed, net assets attributable to holders of redeemable units is reduced by the net asset value of the unit at the date of redemption. IX. Increase (Decrease) in net assets attributable to holders of redeemable units from operations (excluding distributions) per unit The increase (decrease) in net assets attributable to holders of redeemable units per unit in the statement of comprehensive income is calculated by dividing the increase (decrease) in net assets attributable to holders of redeemable units by the weighted average number of units outstanding during the period. X. Accounting standards issued but not yet effective Standards issued but not yet effective are listed below. The Manager will adopt the applicable standards at the time they become effective. 20

22 IFRS 9, Financial Instruments - Classification and Measurement The IASB issued the most recent version of IFRS 9 Financial Instruments in July It addresses impairment and hedge accounting, classification and measurement. The new standard requires assets to be carried at amortized cost, fair value through profit and loss or fair value through comprehensive income based on the entity s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. The classification and measurement of liabilities remains generally unchanged, with the exception of liabilities recorded at fair value through profit and loss. For these liabilities, fair value changes attributable to changes in the entity s own credit risk are to be presented in other comprehensive income unless they affect amounts recorded in income. The new standard also addresses impairment of financial assets. Furthermore, it introduced a new hedge accounting model which expands the scope of eligible hedged items and risks eligible for hedge accounting, and aligns hedge accounting more closely with risk management. The new standard is effective for the ETF for its fiscal year beginning January 1, The ETF is evaluating the impact of this standard on its financial statements. 4. Critical accounting estimates and judgments In preparing these financial statements, the Manager has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively The ETF may hold financial instruments that are not quoted in active markets, including derivatives. In preparing the financial statements, the ETF has the most significant accounting judgements and estimates in the determination of the fair value of these instruments. See note 3(i) for additional information on the fair value measurement of the ETF s financial instruments. 5. Financial instrument risk The ETF s investment activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk (including price risk, foreign exchange risk, and interest rate risk). To assist with managing and mitigating risk, the Manager employs professional and experienced portfolio advisors, monitoring the ETF s underlying positions, and by ensuring the investment portfolio is within the constraints of the investment mandate. The Manager also maintains a governance structure that oversees the ETF s investment activities and monitors compliance with the ETF s stated investment strategy and securities regulations. I. Credit risk Credit risk on financial instruments is the risk of a financial loss occurring as a result of the default of a counterparty on its obligation to the ETF. It arises principally from debt securities held, and also from derivative financial assets, cash and cash equivalents, and other receivables. The ETF s maximum credit risk exposure as at the reporting date is represented by the respective carrying amounts of the financial assets in the statements of financial position. The ETF s credit risk policy is to minimize its exposure to counterparties with perceived higher risk of default by dealing only with counterparties that meet the credit standards set out in the ETF s prospectus and by taking collateral. 21

23 The ETF has provided the custodian with a general lien over the financial assets held in custody as security for the custodian s exposures relation to the provision of custody services to the ETF. The terms under which the general lien is provided are usual and customary for custody agreements. All transactions executed by the ETF in listed securities are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. The ETF's investments in debt instruments, including bonds, represent the main concentration of credit risk. The market value of debt instruments includes consideration of the creditworthiness of the issuer and, accordingly, represents the maximum credit risk exposure of the ETF. The ETF s policy over credit risk is to minimize its exposure to counterparties with perceived higher risk of default by dealing with counterparties that are credit worthy. The ETF s cash is held with CIBC Mellon who is rated Aa3 by Moody s as at October 27, As at June 30, 2016 and December 31, 2015, due to the nature of its portfolio investments, the ETF did not have any material credit risk exposure. II. Currency risk Currency risk is the risk that the fair value or future cash flows of financial instruments, denominated in currencies other than the functional currency of the ETF, fluctuates due to changes in foreign exchange rates. The ETF exposure to currency risk is concentrated to investments in financial instruments that are denominated in currencies other than the functional currency of the ETF. For hedging the currency risk, and as part of the ETF s investment objective and strategy, the ETF enters into forward currency contracts and, as such, the exposure to currency risk is minimized. As of the reporting date, the ETF did not have any material net currency risk exposure. As at June 30, 2016 and December 31, 2015, the ETF s currency risk was the following: As at June 30, 2016 Currency Financial Instruments Forward Currency Contracts Net Currency Exposure Net Currency Exposure as % of net assets Impact on Net Assets ($) ($) ($) (%) ($) United States dollar 5,576,197 (5,167,016) 409, ,459 As at December 31, 2015 Currency Financial Instruments Forward Currency Contracts Net Currency Exposure Net Currency Exposure as % of net assets Impact on Net Assets ($) ($) ($) (%) ($) United States dollar 5,836,592 (5,811,414) 25, ,259 22

24 The table above reflects the foreign currencies and the notional amount of forward foreign currency contracts to which the ETF had significant exposure to in Canadian dollar terms. With all other variables held constant, the table also illustrates the potential Impact on Net Assets attributable to holders of redeemable units of the ETF if the Canadian dollar strengthens or weakens by 5% in relation to each of the other currencies. III. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate as a result of changes in market interest rates. The ETF s exposure to interest rate risk is primarily concentrated in its investments in interest-bearing instruments. The value of interest-bearing instruments will rise when interest rates fall, and on the contrary interest-bearing instruments will fall when interest rates rise. As at June 30, 2016 and December 31, 2015, the ETF did not have any material interest rate exposure. IV. Liquidity risk Liquidity risk is the risk that the ETF may not meet its obligations associated with financial liabilities that are settled by delivering cash or another financial assets. The ETF s exposure to liquidity risk is primarily concentrated in the daily redemption of units. The settlement of redemptions is mainly done by delivering securities therefore the ETF is not exposed to any significant liquidity risk. In addition, to keeping sufficient cash and cash equivalent positions to maintain liquidity, the ETF also invests in securities that are mostly traded in active markets which can be readily disposed of in case of a cash redemption. As at June 30, 2016 and December 31, 2015, the ETF had minimal exposure to liquidity risk and all financial liabilities of the ETF have maturities of less than three months. V. Concentration risk Concentration risk is the risk that arises as a result of concentration exposure within a particular industry, sector, asset group or geographic region. The ETF generally concentrates its investments to approximately the same extent as its index. The ETF may be adversely affected by the performance of a particular industry, sector, asset group or geographic region, and it may be subject to increased volatility. Concentration of investments in the same category have similar characteristics and may be more susceptible to any single economic, market, political or regulatory occurrence affecting that category. The Schedule of Investment Portfolio provides detailed information on the ETFs concentration risk exposure. VI. Other price risk Other price risk is the risk that the fair value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in a market or market segment. Other assets and liabilities are monetary items that are short-term in nature and not subject to other price risk. 23

25 As at June 30, 2016 and December 31, 2015, the net assets attributable to holders of redeemable units of the ETF would have increased or decreased by approximately $261,917 and $275,925, respectively, had the value of the Russell Midcap Growth Index Hedged to CAD increased or decreased by 5% based on a historical correlation, with all other factors remaining constant. Historic correlation may not be indicative of future correlation and actual results may differ from this sensitivity analysis. 6. Fair value measurement The ETF measure fair value by classifying financial instruments into a fair value hierarchy. The fair value hierarchy is based on three levels, and the inputs are as follows. Level 1: Inputs that are quoted market prices (unadjusted) in an active market for identical instruments. Level 2: Inputs other than quoted prices included within Level 1 that observable inputs either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques for which all significant inputs are directly or indirectly observable from market data Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The following table details inputs used as at June 30, 2016 and December 31, 2015 in valuing the ETF's financial assets and financial liabilities, carried at fair value: 24