Horizons Active Floating Rate Preferred Share ETF (HFP:TSX)

Transcription

1 Interim Report June 30, 2017 (HFP: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...9 Past Performance...13 Summary of Investment Portfolio...14 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...16 FINANCIAL STATEMENTS Statements of Financial Position...17 Statements of Comprehensive Income...18 Statements of Changes in Financial Position...19 Statements of Cash Flows...20 Schedule of Investments...21 Notes to Financial Statements...30

3 Letter from the President and Co-CEO: The first six months of 2017 have been full of important developments for both the global capital markets, ETFs generally and, in particular, for Horizons ETFs Management (Canada) Inc. Much of the momentum for the world s equity markets from late 2016 has carried into the first half of From an economic perspective, the global economy seems to finally be in-sync in its recovery from the global financial crisis. While U.S. equities continued to rise, previously underperforming regions of the world such as Europe and a China-led recovery in emerging markets saw even stronger returns. Now with 77 ETFs listed, Horizons ETFs offers a breadth of actively and passively managed products to benefit from this global surge in equity prices. To date, Horizons ETFs has raised more than CAD$1.1 billion in net new assets this year, which are dispersed widely across a number of asset classes. Of particular note, more than half of these inflows have come into our benchmark family of ETFs, which are predominantly comprised of our innovative family of Total Return Index (TRI) ETFs. This is an important development for our firm because, although more than half of our assets are in our actively managed family of ETFs, we are becoming an important player in Canada in offering tax-efficient index ETF strategies. On the Canadian equity side, Horizons ETFs offers arguably the lowest-cost family of index ETFs in Canada. The Horizons S&P/TSX 60 Index ETF (HXT) is the lowest-cost ETF in Canada and the Horizons Cdn High Dividend Index ETF (HXH) is one of the lowest-cost Canadian dividend focused ETFs. For investors seeking more specific sector exposure, the Horizons S&P/ TSX Capped Energy Index ETF (HXE) and the Horizons S&P/TSX Capped Financials Index ETF (HXF) are the lowest-cost ETFs in Canada offering exposure to these two large segments of the Canadian economy. We are quickly becoming a go-to ETF provider for investors looking for tax efficient core equity allocations to add to their portfolios. Of course, we have also continued our tradition of being Canada s leading provider of innovative ETF solutions. April saw the most noteworthy ETF launch in our firm s history, with the listing of the Horizons Marijuana Life Sciences Index ETF ( HMMJ ). As the world s first marijuana-focused ETF, we received global news coverage from such publications as the Wall Street Journal and The Economist. It was also one of the fastest-growing ETFs in Canadian history, as HMMJ surpassed more than $100 million in assets a mere three days after its launch. Our undertaking to you is to continue to bring forward new and innovative ETF solutions to the Canadian market. The one constant about the Canadian investment landscape is that it is always evolving. We work hard to be the ETF provider of choice for investors looking for ETF strategies to take advantage of all market conditions. For more information on all our strategies, please visit our website at where we offer a range of resources designed to help you become a more skilled ETF investor. Thank you for your continued support and wishing you strong returns for the rest of 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 ( HFP 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 HFP is to generate income consistent with prevailing short-term preferred share yields while stabilizing the market value of the ETF from the effects of interest rate fluctuations. HFP invests primarily in preferred shares of Canadian companies and may also invest in preferred shares of companies located in the United States, fixedincome securities of Canadian and U.S. issuers, including other income generating securities, and exchange traded funds that issue index participation units ( Listed Funds ). HFP will generally maintain a portfolio duration of less than 2 years. HFP may use derivatives, including interest rate swaps and futures contracts, to contribute to the ability of the ETF to seek to deliver a floating rate of income. HFP, to the best of its ability, seeks to hedge its non-canadian dollar currency exposure to the Canadian dollar at all times. To achieve HFP s investment objective, the ETF s sub-advisor, Fiera Capital Corporation ( Fiera or the Sub-Advisor ), uses fundamental research to select companies that, based on the Sub-Advisor s view on the company s industry and growth prospects, should be included in the ETF s investment portfolio. An extensive credit analysis for each security as well as an assessment of each company s risk profile is completed in order to confirm the selection and relative weight of each security held by the ETF. HFP primarily invests in a portfolio of perpetual, fixed floating rate, retractable and floating rate preferred securities of Canadian issuers whose debt, generally, at a minimum, has an investment grade rating at the time of purchase. 1

5 Management Discussion of Fund Performance (continued) Risk HFP may also invest in preferred shares of companies located in the United States, fixed-income securities of Canadian and U.S. issuers, including other income generating securities and Listed Funds that have attractive yields. To hedge the portfolio s interest rate risk, HFP may enter into one or more interest rate swaps pursuant to which the ETF pays a counterparty a fixed return based on a portfolio of preferred securities in exchange for a floating rate of income or use long or short futures contracts. HFP maintains a portfolio duration that is generally not more than two years. The Sub-Advisor may, from time to time, invest in non-investment grade securities which generally in the aggregate will not exceed 10% of the ETF s net assets. In anticipation of, or in response to, adverse conditions or for defensive purposes, HFP may temporarily hold a portion of its assets in cash, money market instruments, bonds or other debt securities generally not to exceed 20% of the ETF s net assets. In accordance with applicable securities rules, the Sub-Advisor may purchase, for HFP, securities of issuers that are related or connected to the Sub-Advisor. The Sub-Advisor may also rely on exemptions from the securities regulatory authorities allowing it to purchase debt securities of a related issuer of the Sub-Advisor which are not exchange traded if certain conditions are met. In particular, the investment must be consistent with, or necessary to meet, the investment objective of HFP. The investment must also be approved by the ETF s Independent Review Committee ( IRC ) and is subject to certain other provisions of National Instrument ( NI ). Please refer to the ETF s most recent prospectus for a complete description of HFP s investment restrictions. The Manager performs a review of the ETF s risk rating at least annually, as well as when there is a material change in the ETF s investment objective or investment strategies. The current risk rating for the ETF is: low to medium. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on a blend of the historical rolling 3-year and 5-year standard deviations of its return, the return of an underlying index, or of an applicable proxy index. In cases where the Manager believes that this methodology produces a result that is not indicative of the ETF s future volatility, the risk rating may be determined by the ETF s category. Risk ratings are not intended for use as a substitute for undertaking a proper and complete suitability or financial assessment by an investment advisor. 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. 2

6 Management Discussion of Fund Performance (continued) 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 (up to April 28, 2017) No guaranteed return Derivatives and counterparty risk Interest rate risk Foreign currency risk Credit risk Income trust investment risk Foreign stock exchange risk Call risk Liquidity risk Results of Operations For the six-month period ended June 30, 2017, the Class E units of the ETF returned 10.43%, when including distributions paid to unitholders. By comparison, the S&P/TSX Preferred Share Index (the Index ) and the Solactive Laddered Canadian Preferred Share Index (the Laddered Index ) returned 8.72% and 9.83%, respectively, on a total return basis, and the 3-month Canadian Dealer Offered Rate ( CDOR ) returned 0.47%, for the same period. For the period from January 1 to their termination on April 28, 2017, Advisor Class units of the ETF returned 8.56%. For the same period, the Index, the Laddered Index and CDOR returned 7.52%, 8.12% and 0.40%, respectively. The S&P/TSX Preferred Share Index is designed to track the performance of the Canadian preferred stock market. Preferred stocks pay dividends at a specified rate and receive preference over common stocks in terms of dividend payments and liquidation of assets. The Solactive Laddered Canadian Preferred Share Index includes preferred shares that generally have an adjustable dividend rate and are laddered using equal weights in annual reset term buckets. Securities are market capitalization weighted within the annual term buckets. Constituents are subject to minimum market capitalization, quality and liquidity screens. CDOR is a key industry-determined financial benchmark in Canada. CDOR is the rate at which contributors are willing to extend credit to corporate clients utilizing a bankers acceptance facility. General Market Review The Canadian preferred share market was the star performer in the first quarter with the Index up 7.51% and the Laddered Index (which is 100% fixed-reset preferreds) up 8.39%. This was due to strong demand from retail and institutional investors, a robust credit tone, and lack of supply. The floating rate and fixed-reset preferred shares outperformed, 3

7 Management Discussion of Fund Performance (continued) 4 particularly the issues with a low or average reset level that traded at a discount. Meanwhile, the fixed-for-life perpetual preferreds and the fixed-reset issues with a floor or a high reset level that traded at premium underperformed. The energy and utility sectors outperformed in the first quarter as their allocation of discounted fixed-reset preferreds and lower quality P3-rated securities is higher than in other sectors. For the first few months of 2017, structured notes issued by financial institutions were key drivers of the market s performance. These notes are backed by investing in an underlying ETF, which in turn has to systematically buy preferred shares from the market as it gets inflows. Since there are significantly less sellers than buyers, these inflows into the market have been pressuring prices upwards. Canadian bond market sentiment swung dramatically in June as remarks by Bank of Canada Deputy Governor Wilkens and Governor Poloz indicated the Bank is contemplating removing the interest rate cuts it undertook in 2015 following the drop in oil prices. Both suggested the Canadian economy has adjusted to this shift and no longer requires this additional monetary stimulus. Up to then, markets had been very complacent about potential Bank actions with rate hikes not anticipated until next year. Following these remarks the market quickly built in a rate hike for as early as July (which ended up occurring) and perhaps two by the end of the year. International reaction was also swift as the Canadian dollar gained over 5 cents against the U.S. dollar over the balance of the second quarter. The sharpest adjustment in bond yields was seen in the front-end. From mid-june prior to the Governor s statements, the five-year Government of Canada bond yields (the Canada 5-Year ) rose 44 basis points ( bps ) to 1.39% while 30-year Government of Canada bond yields rose 11 bps to 2.15%. The Bank of Canada s pivot to a more hawkish stance came as a surprise, but was not an isolated event. Just as the Canadian economy has been performing above expectations for several quarters, similar results were being observed in Europe where the European Central Bank has noted an improving inflation outlook. With the resounding defeat of the anti- Euro party in the French elections, markets may now contemplate an end to the central bank s asset purchase program. Similarly in the U.S., the U.S. Federal Reserve (the Fed ) continued its moderate rate hike program with the second 0.25% move of the year in June, bringing the Fed funds target rate to 1.25%. The accompanying Federal Open Market Committee ( FOMC ) statement and subsequent remarks confirmed that further moderate rate hikes are planned and that a program to reduce the Fed s balance sheet over the coming years will likely commence this year. Credit markets were relatively stable during the second quarter and showed continued resilience to headline grabbing geo-political risks, economic growth and policy uncertainties. The Canadian preferred share market was more volatile, with the Index up only 1.12%, as additional supply of new preferreds and a lower Canada 5-Year rate brought some pressure in May. The tone completely shifted after the hawkish comments by the Bank of Canada in June and the market finished on a strong and positive note. Floating-rate preferred shares outperformed in the second quarter while the fixedreset preferreds underperformed, particularly the issues with a floor or high reset level that traded at premium. The bank sector underperformed while the utility and telecommunication sectors outperformed. Portfolio Review For the first half of 2017, the ETF outperformed the Index and Laddered Index by 171 bps and 60 bps, respectively. The security selection in the fixed-reset preferred shares (focusing on issues with a low or average reset level that traded at discount), the overweight position in floating-rate preferreds, and the underweight position in the fixed-for-life perpetual preferreds explained the outperformance. The pick-up in Canada 5-Year interest rates in the last several weeks of the period, combined with significant inflows into the market for the first quarter played out positively for the ETF. The portfolio s discounted fixed- reset preferred shares benefited from the rising interest rates, unlike perpetual preferred shares. As mentioned above, inflows into the preferred

8 Management Discussion of Fund Performance (continued) shares market have been positive for preferred shares as these passively managed ETFs must buy the underlying securities in order to cover these inflows, thus driving prices up. Outlook Despite the most recent strength of the Canadian preferred share market, Fiera continues to think that its performance will continue to be higher than the coupon rate over a 12 months period. The Bank of Canada s policy shift is a game changer for the Canadian preferred share market and is a strong positive. The Bank of Canada s suggestion that its insurance cuts of 50 basis points may no longer be needed has brought the rate hiking cycle forward by several quarters versus earlier expectations and markets have now priced at least one rate action by the end of the year (which already occurred in July). Rate hikes beyond these will require evidence the output gap continues to close and that core-inflation is rising back towards the Bank s 2% target. We believe this will occur over the course of the coming year and that it will put continued upward pressure on bond yields, which should be positive for the discounted rate-reset issues. Conditions outside of Canada are likely to support this view. The U.S. economy continues to operate near full-employment and the FOMC is signaling further moderate rate hikes are coming along with a reduction in Treasury bond and mortgage-backed securities purchases. The European economy also appears to be on the mend and with anti-euro risks having moderated following the French elections the European Central Bank may have more leeway to begin weaning markets from its asset-purchase program later this year. All in, it appears a more coordinated global expansion is occurring. Credit markets should remain well supported going forward. Removal of stimulus does not mean policy makers are slamming on the breaks; rather they are acting pre-emptively ahead of real inflation pressures in order to extend the cycle. We believe business conditions will remain robust over the coming quarters. We expect demand for preferred shares to stay strong as investors should continue to seek the higher available yields of preferred shares versus high yield and investment grade corporate bonds and the tax advantages of dividend income relative to investment income. Fixed reset and floating-rate preferred shares with low or average reset levels should continue to outperform as the Canadian 5-Year yield increases to a more normal level. However, some security selection is still needed on the discounted fixed-reset issues as some of them are getting more expensive. The global credit tone and flow into the passively managed ETFs will continue to bring volatility into the preferred share market. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2017, the ETF generated gross comprehensive income (loss) from investments and derivatives of $11,475,469. This compares to ($3,360,401) for the six-month period ended June 30, The ETF incurred management, operating and transaction expenses of $463,426 (2016 $321,764) of which $47,716 (2016 $46,002) 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 $2,218,465 to Class E unitholders and $11,417 to Advisor Class unitholders during the period (2016 Class E: $1,755,951, Advisor Class: $23,835). 5

9 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. Subject to regulatory and other necessary third party approvals, a stock exchange sponsored execution program may become available which would allow investors to purchase and sell Class E units of the ETF based on transaction prices calculated as at the end-of-day net asset value, plus any fee payable to the investor s dealer for the dealer s facilitation of the purchase or sale. The Manager will issue a news release announcing the details of any such stock exchange sponsored execution program. 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, is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Recent Developments Other than indicated below, there are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Conversion and Termination of Advisor Class units The Manager completed the previously announced conversion (the Conversion ) of the ETF s advisor class units ( Advisor Class units ) into the ETF s common class units ( Class E units ) at the close of business on April 28, 2017 (the Conversion Date ). 6 The remaining unitholders of record of the Advisor Class units as at the Conversion Date received a number of whole

10 Management Discussion of Fund Performance (continued) Class E units of the ETF with an aggregate net asset value ( NAV ) equal to the aggregate NAV of the Advisor Class units converted, based on the respective NAVs of the two classes as at the Conversion Date (the Conversion Ratio ). The ETF s Conversion Ratio was , meaning, that for each Advisor Class unit of the ETF subject to the Conversion, the unitholder received Class E units of the ETF. The conversion of Advisor Class units into whole Class E units of the ETF did not give rise to a disposition by unitholders of converting Advisor Class units for tax purposes on any whole units converted. Any remaining fractional Advisor Class units were redeemed for cash and such redemption is considered a disposition for tax purposes. Immediately following the completion of the Conversion, the Advisor Class units were terminated. 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 wholly-owned 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. Other Related Parties During the period, an affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) held an indirect minority interest in the Manager, and NBC holds an indirect minority interest in Fiera, the sub-advisor of the ETF. NBF acted as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may have created an actual or perceived conflict of interest which investors may have considered in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may have profited from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have had economic interests which may have differed from and were adverse to those of unitholders. NBF s potential roles as a designated broker and a dealer of the ETF was 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 have extended 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 was a related party to the Manager during the period. The Manager was permitted to execute these transactions without seeking advance approval from the ETF s Independent 7

11 Management Discussion of Fund Performance (continued) Review Committee ( IRC ), provided the Manager complied with the predetermined list of requirements agreed upon with the IRC. For the periods ended June 30, 2017 and 2016, the ETF paid $1,979 ( $1,500) to NBF, and/or its affiliates in broker commissions on portfolio transactions. Effective June 30, 2017, Horizons Management acquired the minority interest of AlphaPro owned by an affiliate of NBC and as a result, is the sole shareholder of AlphaPro. Accordingly, NBC and NBF, along with Fiera, are no longer considered affiliates or related parties of AlphaPro or the Investment Manager. 8

12 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 1, 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 (1) Net assets, beginning of period $ Increase (decrease) from operations: Total revenue Total expenses (0.03) (0.06) (0.07) (0.09) (0.03) Realized gains (losses) for the period 0.04 (0.17) (0.12) (0.03) (0.02) Unrealized gains (losses) for the period (1.47) Total increase (decrease) from operations (2) (1.24) Distributions: From net investment income (excluding dividends) (0.18) From dividends (0.34) (0.31) (0.27) (0.02) From net realized capital gains (0.02) (0.01) From return of capital (0.03) (0.05) (0.05) (0.05) Total distributions (3) (0.18) (0.37) (0.36) (0.34) (0.08) Net assets, end of period (4) $

13 Financial Highlights (continued) Advisor Class Period (1) Net assets, beginning of period $ Increase (decrease) from operations: Total revenue Total expenses (0.04) (0.11) (0.12) (0.15) (0.04) Realized losses for the period (0.17) (0.12) (0.03) (0.02) Unrealized gains (losses) for the period (1.38) (0.07) 0.01 Total increase (decrease) from operations (2) (1.20) Distributions: From net investment income (excluding dividends) (0.10) From dividends (0.30) (0.27) (0.23) (0.01) From net realized capital gains (0.05) (0.01) From return of capital (0.02) (0.04) (0.04) Total distributions (3) (0.10) (0.32) (0.31) (0.28) (0.06) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2017, for Class E units, and the audited annual financial statements as at December 31 of the other years shown for both Class E and Advisor Class units. Unaudited Advisor Class information for 2017 is presented as at the termination date of those units on April 28, Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 1, Information is presented in accordance with IFRS. 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. 10

14 Financial Highlights (continued) Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 124, ,167 76,002 49,060 8,901 Number of units outstanding (000 s) 13,202 11,852 9,041 4, Management expense ratio (2) (5) 0.62% 0.62% 0.63% 0.62% 0.62% Management expense ratio excluding proportion of expenses from underlying investment funds 0.62% 0.62% 0.62% 0.62% 0.62% Management expense ratio before waivers and absorptions (3) 0.71% 0.73% 0.77% 1.07% 3.63% Trading expense ratio (4) (5) 0.10% 0.11% 0.16% 0.21% 0.40% Trading expense ratio excluding proportion of costs from underlying investment funds 0.10% 0.11% 0.16% 0.21% 0.40% Portfolio turnover rate (6) 20.76% 27.45% 68.83% 39.45% 7.56% Net asset value per unit, end of period $ Closing market price $ Advisor Class Period (1) Total net asset value (000 s) $ 967 1,092 1, Number of units outstanding (000 s) Management expense ratio (2) (5) 1.21% 1.21% 1.22% 1.19% 1.19% Management expense ratio excluding proportion of expenses from underlying investment funds 1.21% 1.21% 1.21% 1.19% 1.19% Management expense ratio before waivers and absorptions (3) 1.30% 1.33% 1.36% 1.64% 4.19% Trading expense ratio (4) (5) 0.10% 0.11% 0.16% 0.21% 0.40% Trading expense ratio excluding proportion of costs from underlying investment funds 0.10% 0.11% 0.16% 0.21% 0.40% Portfolio turnover rate (6) 20.76% 27.45% 68.83% 39.45% 7.56% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2017, for Class E units, April 28, 2017, for Advisor Class units (the termination date of those units) and December 31 of the other years shown. Information is presented in accordance with IFRS. 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. Transaction costs related to the purchase and/or sale of fixed income securities are typically imbedded in the price of those transactions and are therefore not included in the trading expense ratio. 5. The ETF s management expense ratio (MER) and trading expense ratio (TER) include an estimated proportion of the MER and TER for any underlying investment funds held in the ETF s portfolio during the period. 6. 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. 11

15 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 0.55%, plus applicable sales taxes, of the net asset value of the ETF s Class E units, calculated and accrued daily and payable monthly in arrears. Up until the termination of the ETF s Advisor Class units on April 28, 2017, as described in the section on Recent Developments, the ETF also received a monthly management fee at the annual rate of 1.05%, 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. In addition, up until the termination of the Advisor Class units, the Manager, and not the ETF, paid to registered dealers a service fee equal to 0.50% 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 table below details, in percentage terms, the services received by the ETF from the Manager in consideration of the management fees paid during the period. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 6% 80% 14% 12

16 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 % 10.00% 5.00% Rate of Return 0.00% -5.00% % % Class E 0.77% 4.56% % 8.38% 10.43% Advisor Class 0.63% 3.93% % 7.77% 8.56% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 1, The Advisor Class returns for 2017 are up to the termination date of that class of units on April 28,

17 Summary of Investment Portfolio As at June 30, 2017 % of ETF s Asset Mix Net Asset Value Net Asset Value Canadian Preferred Securities $ 114,592, % U.S. Fixed Income Securities 2,412, % Global Fixed Income Securities 414, % Canadian Fixed Income Securities 309, % Currency Forward Hedge* 150, % Interest Rate Swaps* (1,007,444) -0.81% Cash and Cash Equivalents 4,628, % Other Assets less Liabilities 2,910, % $ 124,409, % % of ETF s Sector Mix Net Asset Value Net Asset Value Financials $ 64,075, % Energy 28,970, % Utilities 12,350, % Telecommunication Services 7,437, % Corporate Bonds 3,135, % Industrials 1,518, % Consumer Discretionary 240, % Currency Forward Hedge* 150, % Interest Rate Swaps* (1,007,444) -0.81% Cash and Cash Equivalents 4,628, % Other Assets less Liabilities 2,910, % $ 124,409, % *Positions in forward and interest rate swap contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 14

18 Summary of Investment Portfolio (continued) As at June 30, 2017 Top 25 Holdings* % of ETF s Net Asset Value Enbridge Inc. 9.92% Royal Bank of Canada 8.17% BCE Inc. 5.98% Bank of Nova Scotia (The) 5.86% Toronto-Dominion Bank (The) 5.83% Manulife Financial Corp. 5.31% TransCanada Corp. 4.58% Brookfield Asset Management Inc. 4.10% Brookfield Office Properties Inc. 3.93% National Bank of Canada 3.87% Canadian Imperial Bank of Commerce 3.68% Bank of Montreal 3.58% AltaGas Ltd. 3.50% Pembina Pipeline Corp. 3.16% Brookfield Renewable Power Preferred Equity Inc. 2.24% Husky Energy Inc. 2.13% Fortis Inc. 1.94% HSBC Bank Canada 1.60% Fairfax Financial Holdings Ltd. 1.52% Brookfield Renewable Partners L.P. 1.41% Sun Life Financial Inc. 1.34% Element Fleet Management Corp. 1.22% Laurentian Bank of Canada 1.00% Emera Inc. 0.99% Citigroup Inc. 0.84% * Note all of the Top 25 Holdings represent the aggregate preferred securities and/or debt instruments of that issuer in the ETF s portfolio. 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 15

19 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. 16

20 Statements of Financial Position (unaudited) As at June 30, 2017 and December 31, Assets Cash and cash equivalents $ 4,628,077 $ 5,841,338 Investments 117,727, ,629,348 Amounts receivable relating to accrued income 170, ,275 Amounts receivable relating to portfolio assets sold 1,203,518 85,370 Accounts receivable relating to securities issued 5,371,304 Derivative assets (note 3) 150, Total assets 129,251, ,808,236 Liabilities Accrued management fees 58,715 49,245 Accrued operating expenses 4,525 6,391 Amounts payable relating to securities redeemed 470,010 Amounts payable for portfolio assets purchased 2,917, ,750 Distribution payable 384, ,387 Derivative liabilities (note 3) 1,007,444 1,218,699 Total liabilities 4,842,456 2,549,472 Total net assets (note 2) $ 124,409,251 $ 104,258,764 Total net assets, Class E $ 124,409,251 $ 103,167,029 Number of redeemable units outstanding, Class E (note 9) 13,201,951 11,852,334 Total net assets per unit, Class E $ 9.42 $ 8.70 Total net assets, Advisor Class $ $ 1,091,735 Number of redeemable units outstanding, Advisor Class (note 9) 125,438 Total net assets per unit, Advisor Class $ $ 8.70 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 17

21 Statements of Comprehensive Income (unaudited) For the Periods Ended June 30, Income Dividend income $ 2,360,139 $ 1,845,488 Interest income for distribution purposes 105,685 71,837 Securities lending income (note 8) Net realized gain (loss) on sale of investments and derivatives 435,843 (1,278,776) Net realized gain (loss) on foreign exchange 25,684 (3,405) Net change in unrealized appreciation (depreciation) of investments and derivatives 8,550,668 (3,995,427) Net change in unrealized depreciation of foreign exchange (2,822) (312) 11,475,469 (3,360,401) Expenses Management fees (note 10) 337, ,604 Audit fees 8,557 8,383 Independent Review Committee fees Custodial fees 7,334 3,686 Legal fees 3,229 Securityholder reporting costs 23,578 17,406 Administration fees 21,799 19,597 Transaction costs 56,226 46,437 Withholding taxes 8,216 3,018 Other expenses , ,764 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (47,716) (46,002) 415, ,762 Increase (decrease) in net assets for the period $ 11,059,759 $ (3,636,163) Increase (decrease) in net assets, Class E $ 10,971,073 $ (3,542,036) Increase (decrease) in net assets per unit, Class E 0.90 (0.39) Increase (decrease) in net assets, Advisor Class $ 88,686 $ (94,127) Increase (decrease) in net assets per unit, Advisor Class 0.78 (0.65) (See accompanying notes to financial statements) 18