Active A.I. Global Equity ETF (MIND)

Transcription

1 Horizons Active A.I. Global Equity ETF (MIND) Sub-advised by: Mirae Asset Global Investments Co., Ltd Innovation is our capital. Make it yours.

2 General Investment Objective The Horizons Active A.I. global Equity ETF (MIND) seeks long-term equity returns through investments in major global equity indices using a basket of primarily North American-listed exchange traded funds ( ETFs ). The ETF allocates its equity index exposure using a proprietary artificial intelligence selection process that extracts patterns from analyzing data. Investment Strategy MIND seeks to harvest excess returns by optimally weighting regional investments as compared to each region s existing market capitalization. An adaptive artificial intelligence ( A.I. ) system will overweight certain regions, countries and indices that are expected to outperform and underweight, or not allocate to, certain regions, countries and indices that are expected to underperform. The primary global regions followed are North America, Europe, Asia, Australasia and Emerging Markets. The A.I. System may also allocate up to 30% of Horizons MIND s portfolio to cash and cash equivalents. The ETF uses a learning computer adaptive technology which supports algorithms to gather information and analyze enormous data sets to solve problems, rather than traditional manual programming functions. Machine learning mimics the brain by constructing artificial neural networks so the computer is trained to recognize patterns and make decisions, much like how the human brain operates but at hyper-fast speeds. Artificial intelligence is a completely autonomous technology in that it effectively teaches itself how to access and evaluate relevant information and to independently make better decisions based on its experience. ETF Snapshot Name: Horizons Active A.I. Global Equity ETF Ticker: MIND Launch Date: November 1, 2017 CUSIP: 44054Q105 Management Fee: 0.55% (plus applicable sales tax) Investment Manager: Horizons ETFs Management (Canada) Inc. ( Horizons ETFs ) Sub-advisor: Mirae Asset Global Investments Co., Ltd. ( MAGI Seoul ) Distribution Frequency: Quarterly (if any) Eligibility: All registered and non-registered investment accounts

3 Moment of Disruption The emergence of artificial intelligence is poised to disrupt large cross sections of data-intensive industries, and potentially none more so than the investment management industry. Typically, when investors think of A.I., they might naturally be concerned about the automation of money management. How can a machine do a better job of managing money than a human? This is a difficult question to answer. Since the investment management industry is a business focused on relationships and client service, it may seem like money management is heavily reliant on people. However, over the last two decades, the asset management industry has seen a proliferation of technology that has automated many of the investment processes that were historically conducted by people, even if this isn t widely disseminated by the industry. Consider the following: 1) There has been approximately USD $4 trillion invested in ETFs, with about $3.5 trillion of that total invested in index strategies*. What is index investing, if not a form of automation? After all, investors who purchase index strategies have opted for a passive methodology that does not rely on a human portfolio management input beyond the initial methodology of the strategy. *Source: ETFGI, as at September 30, ) Over 60% of the equity assets in the United States are held by quantitative strategies, and only 10% of the daily trading volume in U.S. equities is driven by traditional human stock pickers. Chart Source: Bloomberg, as at May 30, 2017.

4 Horizons Active A.I. Global Equity ETF (MIND) Investors have already embraced automated investing. It s not a big leap of logic to assume that they will ultimately have a relatively decent comfort level with A.I.-driven investing... Innovation is our capital. Make it yours.

5 enter A.I. Investors have already embraced automated investing. It s not a big leap of logic to assume that they will ultimately have a relatively decent comfort level with A.I.-driven investing, assuming that this type of program is in fact successful at picking securities. MIND will be the first ETF in Canada to be completely driven by an A.I. program, and is the first ETF in the world to use A.I. to manage a global equity strategy. MIND represents a notable shift in the world of finance as a computer makes market predictions with no intervention from humans. MIND will be the first ETF in Canada to apply deep neural network machine learning to a globally focused portfolio of ETFs. In a recent survey by the CFA Institute, 49% of participants globally viewed advanced technologies including A.I. to be a key opportunity to pursue. Many large asset managers, such as BlackRock, Morgan Stanley and Goldman Sachs have already invested significant amounts in machine-learning programs. Many of these programs being developed today use what is referred to as Deep Neural Network Learning. These are extremely complex systems, but at their core is the idea that machine-learning processes can mimic the human brain. The design of these networks is inspired by the processes of the human mind. Of course, unlike the human brain, these neural networks can process nearly unfathomable amounts of data that would never be possible for a human. The neural network system MAGI Seoul is using to develop the global ETF portfolio was designed by Qraft Technologies ( Qraft ), a financial technology firm based in Korea. 1950s 1960s 1970s 1980s 1990s 2000s 2006s 2010s 2012s 2017s

6 Horizons Active A.I. Global Equity ETF (MIND) MIND will be the first ETF in Canada to apply deep neural network machine learning to a globally focused portfolio of ETFs. Innovation is our capital. Make it yours.

7 Qraft technologies Qraft is a provider of artificial intelligence investment systems and currently offers services to various financial institutions in Korea including Mirae Asset and KEB Hana Bank. Qraft has already developed deep neural network systems that make investment decisions for investment funds based in South Korea, including Mirae Asset AI Smart Beta, Smart Beta Market Hedged Funds and Mirae Asset AI ASEAN Fund. Qraft is a founding member of the Mirae Asset Intelligent Finance Research Center and continues to develop artificial intelligence technology that can be applied directly to financial business in cooperation with Korea University. The development of the neural network process was originally used for healthcare research, by Dr. Junhee Seok, an Assistant Professor, School of Electrical Engineering, Korea University, as well as Adjunct Assistant Professor of Health and Biomedical Informatics, Northwestern University Feinberg School of Medicine. Qraft has taken Dr. Seok s work and applied it to investment management, including building an A.I.-driven investment fund in Korea which uses A.I. to select Korean equities. Horizons ETFs believed this A.I. System could be applied to a much larger universe of securities using the MSCI All-Country World ( ACWI ) Index as a benchmark. We wanted to present the A.I. with an asset allocation opportunity, rather than a stock-picking one. As ETFs continue to proliferate, we see more investors asking about ETF allocation strategies and anticipate this will likely be the next big growth area of product development in the ETF space. The large amount of index, geographic and factor information available has created a very deep pool of data for an A.I. to examine and a vast and growing number of investment options through which to execute an investment strategy. Building an A.I. System to select individual stocks would require a significantly greater amount of data analysis. Fortunately, ETFs offer a diversified and simpler way for the A.I. to create a strategy that seeks to generate better risk-adjusted returns of the global stock market.

8 Quantitative vs. A.I. Systems Artificial intelligence effectively teaches itself how to invest and independently makes investment decisions based on past experiences. This is a huge differentiating factor from quantitative systems, which can be designed to tackle extremely complex tasks, but do not evolve their process. Quantitative systems in the capital markets are limited by the fact that market conditions can, and do, change, sometimes very quickly and dramatically. This can render quantitative systems ineffective as the market evolves and valuations adapt to changes in how investors deploy their money. Quantitative Designed and managed by humans Can do extremely complex tasks Does not deviate from tasks No discretion beyond parameters of design Does not evolve without human input can lose advantage quickly A.I. Designed and trained (but not managed) by humans Learns to do increasingly complex tasks Has discretion to change investment approach Constantly learning Investment strategy evolves as A.I. processes new data

9 the A.I. advantage The neural network A.I. System that Qraft utilizes teaches itself how to optimally invest based on the universe of securities, and then autonomously runs an investment strategy of its own design. This might sound scary to some people, who are concerned that they ve left their investments in the hands of robots! Actually, there is a litany of behavioral finance research that suggests that one of the biggest impediments to investment success are ingrained human behaviours which often derail disciplined investment processes. Some of these include: Representativeness: Results in investors labeling an investment as good or bad based on its recent performance Cognitive dissonance: Actively seeking to discount data or evidence that disturbs deeply held beliefs Disposition effect: Selling winners and keeping losers to validate investment prowess Risk Aversion: Inability to maximize risk/return due to fear of loss Overconfidence: Taking too much risk due to a lack of fear of loss Familiarity bias: Having a preference for familiar investments despite the seemingly obvious gains from diversification Anchoring: The tendency to hold on to a belief and then apply it as a subjective reference point for making future judgments MIND s Investment Process The primary global regions followed by the ETF are North America, Europe, Asia, Australasia and Emerging Markets. The sub-advisor seeks to harvest excess returns by optimally weighting regional investments compared to each region s existing market capitalization and additionally overweighting individual country ETFs expected to outperform within each region. The ETF limits its portfolio budgeted risk by monitoring the risk contributed by each investment. The initial framework of the A.I. programming monitors more than 50 investment metrics as the key development inputs. Some of the these primary inputs include: 80-Day Simple Moving Average, Beta, Sharpe Ratio, Money Flow, 6-Month Relative Performance, 90-Day Volatility, Simple RSI, Exponential RSI, Wilder Smoothing RSI, Moving Average Cross Overs, Maximum Drawdown, Short Interest and Correlation. The A.I. needs to learn how to invest in the universe of securities that it is seeking to outperform. For this reason, we developed a 10-year back-test of live investment data for the A.I. to teach itself how to optimally invest. In this case, we selected 30 countries and regions, represented by a universe of 32 ETFs. Central to the security selection, is a broad number of ETFs offered by Mirae s Global ETF business (U.S. and Canada listed only to minimize currency risk exposure). The A.I. portfolio will be rebalanced on a monthly basis. This gives the A.I. greater asset allocation flexibility to change the asset mix of the portfolio on a more frequent basis.

10 Horizons Active A.I. Global Equity ETF (MIND List of eligible etfs Region Country ETF Name Ticker North America Canada Horizons S&P/TSX 60 Index ETF HXT.U North America United States Horizons S&P 500 Index ETF HXS.U North America United States ishares Russell 2000 ETF IWM North America United States Horizons NASDAQ-100 ETF HXQ.U Europe Austria ishares MSCI Austria Capped ETF EWO Europe Belgium ishares MSCI Belgium Capped ETF EWK Europe Denmark ishares MSCI Denmark Capped ETF EDEN Europe Finland ishares MSCI Finland Capped ETF EFNL Europe France ishares MSCI France ETF EWQ Europe Germany ishares MSCI Germany ETF EWG Europe Ireland ishares MSCI Ireland Capped ETF EIRL Europe Israel ishares MSCI Israel Capped ETF EIS Europe Italy ishares MSCI Italy Capped ETF EWI Europe Netherlands ishares MSCI Netherlands ETF EWN Europe Norway ishares MSCI Norway Capped ETF ENOR Europe Portugal Global X MSCI Portugal ETF PGAL Europe Spain ishares MSCI Spain Capped ETF EWP Europe Sweden ishares MSCI Sweden ETF EWD Europe Switzerland ishares MSCI Switzerland Capped ETF EWL Europe United Kingdom ishares MSCI United Kingdom ETF EWU Europe Germany Recon Capital Dax DAX Emerging Markets Emerging Markets Vanguard Emerging Markets Stock Index Fund VWO Emerging Markets China ishares MSCI China ETF MCHI Emerging Markets India ishares MSCI India ETF INDA Emerging Markets Brazil ishares MSCI Brazil Capped ETF EWZ Asia Pacific Hong Kong Horizons China High Dividend Yield Index ETF HCN Asia Pacific Japan ishares MSCI Japan ETF EWJ Asia Pacific New Zealand ishares MSCI New Zealand Capped ETF ENZL Asia Pacific Singapore ishares MSCI Singapore ETF EWS Asia Pacific Asia (ex Japan) ishares MSCI All Country Asia ex Japan ETF AAXJ Asia Pacific Australia ishares MSCI Australia ETF EWA Asia Pacific South Korea ishares MSCI South Korea Capped ETF EWY

11 Managing Risk MIND doesn t conceptualize risk the same way a person would. It doesn t have feelings of regret, nor is it worried about losing its job, the way a human portfolio manager may be, when they are considering their risk profile. MIND simply doesn t care about how an investor might feel about its investment decisions because it does not have any emotions. Its decision-making is completely systematic. We recognize that this is a new experience for investors, which is why a number of constraints exist on this portfolio. In order to ensure sufficient diversification and control risk, the aggregate portfolio limits per type of security that have been established are as follows: Permitted Asset Classes Minimum Exposure (%) Maximum Exposure (%) Cash & Cash Equivalents 0 30 Regional Restrictions - - North America Europe Asia Pacific 5 20 Emerging Markets (includes China) 0 15 Single Country Restrictions - - United States 0 65 Single Equity Exposure (excluding USA) 0 20 Commodities (including gold bullion)* 0 0 *The fund is restricted from investing its net assets in gold bullion or gold certificates. In addition, there are some risk constraints on the portfolio. The standard deviation of the ACWI tends to be between 10-15%. We put a target standard deviation of 15% on a rolling 252-day basis for the A.I. to target. The expectation is that the A.I. will deliver a much lower standard deviation than that target. The ETF has a maximum standard deviation cap of 18%, which if surpassed on a rolling 252-day basis, requires an immediate re-balance back to the 15% target.

12 Horizons Active A.I. Global Equity ETF (MIND) MIND doesn t conceptualize risk the same way a person would. It doesn t have feelings of regret, nor is it worried about losing its job, the way a human portfolio manager may be... Innovation is our capital. Make it yours.

13 The Future of Investing Horizons ETFs believes that A.I. Systems will play an increasingly important role in portfolio management and will represent the same sort of disruptive upheaval that ETFs created for the traditional mutual fund industry. We believe the timing for this type of strategy is ideal. A.I. would not have been a feasible strategy five years ago. However, the track record and selection of ETFs available today provides the depth and breadth of a market for a neural network system to be successful, as it allows for a much more robust data set from which to learn. MIND provides a compelling opportunity for investors to get in on the ground level of A.I.-driven investing, particularly for those looking to diversify their equity exposure globally. MIND also capitalizes on the benefits of ETF investing which reduces the cost of owning a global equity portfolio and increases its overall breadth and depth of equity selection. MIND represents the apex of investment technology using cutting-edge A.I. Systems to leverage the power of ETF investing. The future of investing is now. Innovation is our capital. Make it yours.

14 Horizons Active A.I. Global Equity ETF (MIND) HorizonsETFs.com/MIND Horizons ETFs is a member of Mirae Asset Global Investments. Commissions, management fees and expenses all may be associated with an investment in the Horizons Active A.I. Global Equity ETF managed by Horizons ETFs Management (Canada) Inc. (the ETF ). The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing _H Innovation is our capital. Make it yours.