Horizons Active Preferred Share ETF (HPR, HPR.A:TSX)

Transcription

1 Interim Report June 30, 2016 Horizons Active Preferred Share ETF (HPR, HPR.A:TSX) Innovation is our capital. Make it yours. ALPHA BENCHMARK BETAPRO

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...6 Past Performance...10 Summary of Investment Portfolio...11 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...13 FINANCIAL STATEMENTS Statements of Financial Position...14 Statements of Comprehensive Income...15 Statements of Changes in Financial Position...16 Statements of Cash Flows...17 Schedule of Investments...18 Notes to Financial Statements...28

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

4 MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance for Horizons Active Preferred Share ETF ( Horizons HPR or the ETF ) contains financial highlights and is included with the unaudited interim financial statements for the investment fund. You may request a copy of the ETF s unaudited interim or audited annual financial statements, interim or annual management report of fund performance, current proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures, at no cost, from the ETF s manager, AlphaPro Management Inc. ( AlphaPro or the Manager ), by calling toll free , or locally (416) , by writing to us at: 26 Wellington Street East, Suite 700, Toronto ON, M5E 1S2, or by visiting our website at or SEDAR at This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance, or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, and the effects of competition in the geographic and business areas in which the ETF may invest and the risks detailed from time to time in the ETF s prospectus. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. We caution that the foregoing list of factors is not exhaustive, and that when relying on forward-looking statements to make decisions with respect to investing in the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Manager does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Management Discussion of Fund Performance Investment Objective and Strategies The investment objective of Horizons HPR is to provide dividend income while preserving capital by investing primarily in preferred shares of Canadian companies. Horizons HPR 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, as well as Canadian equity securities and exchange traded funds that issue index participation units ( Listed Funds ). Horizons HPR, to the best of its ability, seeks to hedge its non-canadian dollar currency exposure to the Canadian dollar at all times. To achieve Horizons HPR s investment objectives, 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. Horizons HPR invests primarily in the preferred securities of Canadian issuers whose debt, generally, at a minimum, have an investment grade rating at the time of purchase. Horizons HPR 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, as well as Canadian equity securities and Listed Funds. Horizons HPR may also invest in Canadian equity securities that have attractive dividend yields and Listed Funds that pay dividend income. 1

5 Management Discussion of Fund Performance (continued) Risk In anticipation of, or in response to, adverse conditions or for defensive purposes, Horizons HPR 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 Horizons HPR, 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 Horizons HPR. 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 ). Horizons HPR may also invest in derivatives for currency hedging purposes only. Please refer to the ETF s most recent prospectus for a complete description of Horizons HPR s investment restrictions. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Restrictions on certain unitholders Highly volatile markets Multi-class risk No guaranteed return Derivatives and counterparty risk Interest rate risk Foreign currency risk Credit risk Income trust investment risk Foreign stock exchange risk Call risk Risk of difference between quoted and actionable market price Liquidity risk 2

6 Management Discussion of Fund Performance (continued) Results of Operations For the six-month period ended June 30, 2016, the Class E units and Advisor Class units of the ETF returned -1.79% and -2.07%, respectively, when including distributions paid to unitholders. This compares to a return of -2.93% for the S&P/ TSX Preferred Share Index (the Index ) on a total return basis for the same period. The 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. General Market Review The Canadian preferred share market opened the year poorly, with the Index posting returns of % and -3.64% in January and February, respectively, amidst a global risk off environment. The weak start to the year was driven by continued softness in commodity prices and a weaker global outlook, led by slower growth in China and deflationary risks in Europe. This difficult environment resulted in wider credit rates, lower interest rates along the yield curve, and increased the probability that the Bank of Canada could engage in more monetary policy easing - all negative factors for the preferred share market, and in particular to fixed reset preferred shares. The Index rebounded with a 9.32% return in March, followed by another 2.85% in the second quarter. This strong bounce was driven by a recovery in oil prices, rising interest rates, and relatively stronger credit sentiment, which all tend to be supportive factors for preferred shares, particularly for the fixed reset preferreds. As oil prices recovered, risk appetite improved and spreads began to recover. Global market conditions were also supportive for credit spreads. In Europe, the expansion of the European Central Bank s (ECB) bond purchase program to include investment grade corporate bonds gave a lift to credit related securities. The lower for longer global yield environment continues to be a major support for credit as investors seek higher yielding investments. At the end of June, the decision by U.K. voters to leave the European Union resulted in a repricing of interest rates and credit spreads. The result does leave a great deal of uncertainty in the market with respect to the ultimate impact on the U.K., European and global outlook. As a result, interest rates fell significantly in the last week of June in a flight to quality (Government of Canada 5-year bond yields fell 17 basis points between June 23 and June 30), which has put pressure once again on preferred shares. Portfolio Review Though the performance of the ETF has been slightly negative for the first half of the year, it has outperformed the Index. The ETF s underweight position in fixed-reset preferred shares and overweight position in floating and retractable preferred shares relative to the Index contributed to the ETF outpacing the Index (-4.38% versus -5.62% for the Index) in the first quarter. The focus on quality of issuers with attractive reset levels contributed to the outperformance while the small overweight position in the energy sector, mainly through pipeline and midstream companies, negatively affected the performance of the portfolio in the first quarter. During the second quarter, selection in floating rate preferred shares contributed significantly to the ETF s performance. Focus on quality issuers with higher reset levels, including bank Non-Viability Contingent Capital (NVCC) floating rate preferred shares, also contributed to the performance. Outlook Fiera expects the Canadian preferred share market to post a performance higher than the coupon rate over the next year in a slow but positive growth environment. Despite the first interest rate hike since the financial crisis in December 2015, 3

7 Management Discussion of Fund Performance (continued) 4 the U.S. Federal Reserve should remain patient with its tightening strategy due to low inflation and uncertainty in the global economy. The Bank of Canada will remain accommodative but should be on the sideline given the recent fiscal stimulus from the Federal Government, and despite the weakening of the commodities sector. Fiera is expecting that interest rates will remain low; however, they should increase slightly over the next year. We expect to see investors come back to the preferred shares market to benefit from both the higher available yields versus investment grade corporate bonds and the fiscal advantages of dividend income relative to investment income. Fixed-floating and floating-rate preferred shares should outperform as the 5-year interest rate increases to a more normal level. Supply, flow of funds into passively managed ETFs, and the general global credit tone will likely continue to bring volatility into the preferred shares market over the coming months. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $607,716. This compares to ($30,072,035) for the six-month period ended June 30, The ETF paid management, operating and transaction expenses of $2,381,506 (2015 $1,656,042) of which $25,173 (2015 $30,007) 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 $15,109,204 to Class E unitholders and $208,080 to Advisor Class unitholders during the period (2015 Class E: $8,545,583, Advisor Class: $192,915). Unitholder Activity An ETF is a stock exchange listed, open-ended, continuously offered fund. All orders to purchase units directly from the ETF must be placed by designated brokers and/or underwriters. On any trading day, a designated broker or an underwriter may place a subscription order for a prescribed number of units ( PNU ) or integral multiple PNU. The ETF reserves the absolute right to reject any subscription order placed by a designated broker and/or an underwriter. No fees will be payable by the ETF to a designated broker or an underwriter in connection with the issuance of units. On the issuance of units, the Manager may, at its discretion, charge an administrative fee to an underwriter or designated broker to offset any expenses incurred in issuing the units. All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring

8 Management Discussion of Fund Performance (continued) to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. Fiera, the sub-advisor of the ETF, is an affiliate of NBF and, as stated above, an affiliate of NBF holds an indirect minority interest in the Manager. As a result, Fiera may be considered to be an associate of the Manager. NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its affiliates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. The ETF, in its course of normal business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that is a related party to the Manager. The Manager is permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complies with the predetermined list of requirements agreed upon with the IRC. For the periods ended June 30, 2016 and 2015, the ETF paid $11,294 (2015 $11,063) to NBF and/or its affiliates in broker commissions on portfolio transactions. 5

9 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 current interim period and the past five fiscal years. This information is derived from the ETF s audited annual financial statements and the current unaudited interim financial statements. Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. The ETF s Net Assets per Unit Class E Period Net assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.03) (0.07) (0.07) (0.08) (0.06) (0.06) Realized gains (losses) for the period (0.02) (0.27) (0.09) (0.05) 0.04 (0.01) Unrealized gains (losses) for the period (0.18) (1.26) 0.28 (0.50) Total increase (decrease) from operations (2) (0.02) (1.15) 0.59 (0.14) Distributions: From net investment income (excluding dividends) (0.19) From dividends (0.34) (0.36) (0.36) (0.28) (0.42) From net realized capital gains (0.04) From return of capital (0.05) (0.05) (0.07) (0.12) (0.05) Total distributions (3) (0.19) (0.39) (0.41) (0.43) (0.44) (0.47) Net assets, end of period (4) $

10 Financial Highlights (continued) Advisor Class Period Net assets, beginning of period (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.05) (0.12) (0.13) (0.14) (0.12) (0.03) Realized gains (losses) for the period (0.02) (0.28) (0.09) (0.05) 0.04 Unrealized gains (losses) for the period (0.25) (1.40) 0.29 (0.50) Total increase (decrease) from operations (2) (0.11) (1.34) 0.54 (0.20) Distributions: From net investment income (excluding dividends) (0.17) From dividends (0.31) (0.30) (0.31) (0.30) (0.03) From net realized capital gains (0.02) From return of capital (0.03) (0.05) (0.06) (0.07) (0.06) Total distributions (3) (0.17) (0.34) (0.35) (0.37) (0.39) (0.09) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2016 and the audited annual financial statements as at December 31 of the other years shown. Class E units of the ETF have an initial net asset value of $10.00 as at November 22, Advisor Class units of the ETF have an initial net asset value of $9.94 as at October 12, 2011 which was the net asset value of Class E units on that date. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Net assets per unit and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is based on the weighted average number of units outstanding over the financial period. 3. Income, dividend and/or return of capital distributions, if any, are paid in cash, reinvested in additional units of the ETF, or both. Capital gains distributions, if any, may or may not be paid in cash. Noncash capital gains distributions are reinvested in additional units of the ETF and subsequently consolidated. They are reported as taxable distributions and increase each unitholder s adjusted cost base for their units. Neither the number of units held by the unitholder, nor the net asset per unit of the ETF change as a result of any non-cash capital gains distributions. Distributions classified as return of capital, if any, decrease each unitholder s adjusted cost base for their units. The characteristics of distributions, if any, are determined subsequent to the end of the ETF s tax year. Until such time, distributions are classified as from net investment income (excluding dividends) for reporting purposes. 4. The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. 7

11 Financial Highlights (continued) 8 Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 691, , , , ,285 10,885 Number of units outstanding (000 s) 86,168 63,583 39,209 25,717 11,178 1,075 Management expense ratio (2) (5) 0.65% 0.64% 0.64% 0.64% 0.63% 0.62% Management expense ratio excluding proportion of expenses from underlying investment funds 0.64% 0.64% 0.64% 0.64% 0.62% 0.62% Management expense ratio before waivers and absorptions (3) 0.65% 0.65% 0.67% 0.70% 0.91% 1.71% Trading expense ratio (4) (5) 0.12% 0.10% 0.09% 0.14% 0.12% 0.28% Trading expense ratio excluding proportion of costs from underlying investment funds 0.12% 0.10% 0.09% 0.14% 0.12% 0.28% Portfolio turnover rate (6) 18.19% 37.22% 40.30% 45.62% 61.25% 93.83% Net asset value per unit, end of period $ Closing market price $ Advisor Class Period (1) Total net asset value (000 s) $ 10,339 8,776 11,089 8,149 4, Number of units outstanding (000 s) 1,286 1,046 1, Management expense ratio (2) (5) 1.21% 1.21% 1.20% 1.24% 1.13% 1.16% Management expense ratio excluding proportion of expenses from underlying investment funds 1.20% 1.21% 1.20% 1.23% 1.12% 1.16% Management expense ratio before waivers and absorptions (3) 1.22% 1.22% 1.24% 1.29% 1.42% 2.24% Trading expense ratio (4) (5) 0.12% 0.10% 0.09% 0.14% 0.12% 0.28% Trading expense ratio excluding proportion of costs from underlying investment funds 0.12% 0.10% 0.09% 0.14% 0.12% 0.28% Portfolio turnover rate (6) 18.19% 37.22% 40.30% 45.62% 61.25% 93.83% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2016 and December 31 of the other years shown. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Management expense ratio is based on total expenses, including sales tax, (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Out of its management fees, the Manager pays for such services to the ETF as investment manager compensation, service fees and marketing. 3. The Manager, at its discretion, may waive and/or absorb a portion of the fees and/or expenses otherwise payable by the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. 4. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. 5. The ETF s 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.

12 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 and 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. The Manager, and not the ETF, will pay 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 9% 90% 1% 9

13 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 % 5.00% Rate of Return 0.00% -5.00% % % Class E 0.34% 6.36% 6.36% -0.73% 6.42% % -1.79% Advisor Class 2.86% 5.83% -1.32% 5.82% % -2.07% Class E units of the ETF have an initial net asset value of $10.00 as at November 22, 2010 and Advisor Class units of the ETF have an initial net asset value of $9.94 as at October 12,

14 Summary of Investment Portfolio As at June 30, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Canadian Preferred Securities $ 655,856, % U.S. Bonds 7,931, % Canadian Bonds 4,692, % Global Bonds 3,382, % Currency Forward Hedge* (389,049) -0.06% Cash and Cash Equivalents 32,783, % Other Assets less Liabilities (2,459,211) -0.35% $ 701,797, % % of ETF s Sector Mix Net Asset Value Net Asset Value Financials $ 433,915, % Energy 125,399, % Utilities 61,144, % Telecommunication Services 39,283, % Consumer Staples 9,631, % Consumer Discretionary 2,487, % Currency Forward Hedge* (389,049) -0.06% Cash and Cash Equivalents 32,783, % Other Assets less Liabilities (2,459,211) -0.35% $ 701,797, % *Positions in forward contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 11

15 Summary of Investment Portfolio (continued) As at June 30, 2016 Top 25 Holdings* % of ETF s Net Asset Value Royal Bank of Canada 9.15% Enbridge Inc. 7.78% Bank of Nova Scotia (The) 7.55% BCE Inc. 5.60% Manulife Financial Corp. 5.06% Toronto-Dominion Bank (The) 4.63% Great-West Lifeco Inc. 4.38% Bank of Montreal 4.33% Sun Life Financial Inc. 3.88% TransCanada Corp. 3.80% Brookfield Asset Management Inc. 3.03% National Bank of Canada 2.84% Brookfield Office Properties Inc. 2.61% AltaGas Ltd. 2.50% Power Financial Corp. 2.47% Pembina Pipeline Corp. 2.47% HSBC Bank Canada 2.09% Fortis Inc. 1.67% Brookfield Renewable Power Preferred Equity Inc. 1.66% Canadian Utilities Ltd. 1.58% Husky Energy Inc. 1.32% Fairfax Financial Holdings Ltd. 1.30% Canadian Imperial Bank of Commerce 1.29% Emera Inc. 1.27% Power Corp. of Canada 1.12% * 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 12

16 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying unaudited interim financial statements of Horizons Active Preferred Share ETF (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. 13

17 Statements of Financial Position (unaudited) As at June 30, 2016 and December 31, Assets Cash and cash equivalents $ 32,783,551 $ 8,234,317 Investments 671,862, ,709,208 Amounts receivable relating to accrued income 1,524,165 1,278,964 Amounts receivable relating to portfolio assets sold 5,328,361 2,450,304 Accounts receivable relating to securities issued 2,891,807 5,389,595 Derivative assets (note 3) 6,236 Total assets 714,390, ,068,624 Liabilities Accrued expenses 372, ,858 Amounts payable for portfolio assets purchased 9,016,456 4,823,045 Distribution payable 2,814,335 2,031,393 Derivative liabilities (note 3) 389, ,371 Total liabilities 12,592,593 7,694,667 Total net assets (note 2) $ 701,797,443 $ 541,373,957 Total net assets, Class E $ 691,458,800 $ 532,598,096 Number of redeemable units outstanding, Class E (note 9) 86,168,064 63,582,568 Total net assets per unit, Class E $ 8.02 $ 8.38 Total net assets, Advisor Class $ 10,338,643 $ 8,775,861 Number of redeemable units outstanding, Advisor Class (note 9) 1,286,319 1,045,988 Total net assets per unit, Advisor Class $ 8.04 $ 8.39 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 14

18 Statements of Comprehensive Income (unaudited) For the Periods Ended June 30, Income Dividend income $ 16,296,166 $ 9,835,080 Interest income for distribution purposes 278, ,492 Securities lending income (note 8) 7,014 1,625 Net realized loss on sale of investments and derivatives (1,104,542) (1,673,299) Net realized loss on foreign exchange (96,193) (416,096) Net change in unrealized depreciation of investments and derivatives (14,770,363) (37,931,237) Net change in unrealized appreciation (depreciation) of foreign exchange (3,204) 1, ,716 (30,072,035) Expenses Management fees (note 10) 1,862,402 1,312,509 Audit fees 15,791 12,086 Independent Review Committee fees 2,413 2,632 Custodial fees 38,976 19,982 Legal fees 3,229 5,636 Securityholder reporting costs 48,729 37,182 Administration fees 26,734 19,615 Transaction costs 364, ,453 Withholding taxes 18,684 26,527 Other expenses ,381,506 1,656,042 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (25,173) (30,007) 2,356,333 1,626,035 Decrease in net assets for the period $ (1,748,617) $ (31,698,070) Decrease in net assets, Class E $ (1,623,000) $ (30,842,776) Decrease in net assets per unit, Class E (0.02) (0.71) Decrease in net assets, Advisor Class $ (125,617) $ (855,294) Decrease in net assets per unit, Advisor Class (0.11) (0.75) (See accompanying notes to financial statements) 15

19 Statements of Changes in Financial Position (unaudited) For the Periods Ended June 30, Total net assets at the beginning of the period $ 541,373,957 $ 403,997,797 Decrease in net assets (1,748,617) (31,698,070) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 193,174,040 79,574,461 Aggregate amounts paid on redemption of securities of the investment fund (15,774,558) (1,451,145) Securities issued on reinvestment of distributions 89, ,176 Distributions: From net investment income (15,317,284) (8,738,498) Total net assets at the end of the period $ 701,797,443 $ 441,950,721 Total net assets at the beginning of the period, Class E $ 532,598,096 $ 392,909,003 Decrease in net assets, Class E (1,623,000) (30,842,776) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 191,203,790 79,074,471 Aggregate amounts paid on redemption of securities of the investment fund (15,699,524) (984,020) Securities issued on reinvestment of distributions 88, ,379 Distributions: From net investment income (15,109,204) (8,545,583) Total net assets at the end of the period, Class E $ 691,458,800 $ 431,875,474 Total net assets at the beginning of the period, Advisor Class $ 8,775,861 $ 11,088,794 Decrease in net assets, Advisor Class (125,617) (855,294) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 1,970, ,990 Aggregate amounts paid on redemption of securities of the investment fund (75,034) (467,125) Securities issued on reinvestment of distributions 1,263 1,797 Distributions: From net investment income (208,080) (192,915) Total net assets at the end of the period, Advisor Class $ 10,338,643 $ 10,075,247 (See accompanying notes to financial statements) 16

20 Statements of Cash Flows (unaudited) For the Periods Ended June 30, Cash flows from operating activities: Decrease in net assets for the period $ (1,748,617) $ (31,698,070) Adjustments for: Net realized loss on sale of investments and derivatives 1,104,542 1,673,299 Net realized gain (loss) on currency forward contracts 1,487,145 (188,857) Net change in unrealized depreciation of investments and derivatives 14,770,363 37,931,237 Net change in unrealized depreciation (appreciation) of foreign exchange 30 (154) Purchase of investments (262,642,141) (161,503,415) Proceeds from the sale of investments 106,308,415 77,480,971 Amounts receivable relating to accrued income (245,201) (123,681) Accrued expenses 61,895 30,477 Net cash used in operating activities (140,903,569) (76,398,193) Cash flows from financing activities: Amount received from the issuance of units 195,671,828 80,804,117 Amount paid on redemptions of units (15,774,558) (1,451,145) Distributions paid to unitholders (14,444,437) (8,171,518) Net cash from financing activities 165,452,833 71,181,454 Net increase (decrease) in cash and cash equivalents during the period 24,549,264 (5,216,739) Effect of exchange rate fluctuations on cash and cash equivalents (30) 154 Cash and cash equivalents at beginning of period 8,234,317 10,605,843 Cash and cash equivalents at end of period $ 32,783,551 $ 5,389,258 Interest received, net of withholding taxes $ 239,364 $ 38,078 Dividends received, net of withholding taxes $ 16,071,755 $ 9,757,286 (See accompanying notes to financial statements) 17

21 Schedule of Investments (unaudited) As at June 30, Horizons Active Preferred Share ETF Shares/ Average Fair Security Par Value/Contracts Cost Value CANADIAN PREFERRED SECURITIES (93.46%) Financials (60.23%) Artis REIT, Preferred, Series A, Variable Rate, Perpetual 15,819 $ 342,854 $ 279,996 Artis REIT, Preferred, Series C, Variable Rate, Perpetual 30, , ,654 Artis REIT, Preferred, Series E, Variable Rate, Perpetual 65,229 1,255, ,389 Bank of Montreal, Preferred, Class B, Series 14, 5.25%, Perpetual 248,040 6,426,104 6,347,344 Bank of Montreal, Preferred, Class B, Series 15, 5.80%, Perpetual 148,151 3,905,056 3,832,666 Bank of Montreal, Preferred, Class B, Series 16, 5.20%, Perpetual 37, , ,087 Bank of Montreal, Preferred, Class B, Series 17, Floating Rate, Callable 257,303 6,074,993 5,583,475 Bank of Montreal, Preferred, Class B, Series 25, Variable Rate, Callable 270,809 5,664,103 5,362,018 Bank of Montreal, Preferred, Class B, Series 27, 4.00%, Callable 115,622 2,203,150 2,150,569 Bank of Montreal, Preferred, Class B, Series 29, Variable Rate, Perpetual 186,100 3,719,460 3,440,989 Bank of Montreal, Preferred, Class B, Series 31, Non-Cumulative, Variable Rate, Perpetual 122,739 2,645,024 2,244,896 Bank of Montreal, Preferred, Class B, Series 33, Non-Cumulative, Variable Rate, Perpetual 24, , ,795 Bank of Montreal, Preferred, Class B, Series 35, 5.00%, Non-Cumulative, Perpetual 1,760 43,427 44,264 Bank of Nova Scotia (The), Preferred, Series 16, 5.25%, Non-Cumulative, Callable 342,092 8,875,040 8,757,555 Bank of Nova Scotia (The), Preferred, Series 17, 5.60%, Non-Cumulative, Callable 160,170 4,169,064 4,098,750 Bank of Nova Scotia (The), Preferred, Series 19, Non-Cumulative, Variable Rate, Perpetual, Callable 219,762 5,198,971 5,050,132 Bank of Nova Scotia (The), Preferred, Series 20, Non-Cumulative, Variable Rate, Convertible, Perpetual 99,681 2,408,825 2,295,653 Bank of Nova Scotia (The), Preferred, Series 21, Non-Cumulative, Variable Rate, Perpetual, Callable 305,570 6,948,979 6,539,198 Bank of Nova Scotia (The), Preferred, Series 22, Non-Cumulative, Variable Rate, Convertible, Callable 144,672 3,617,760 3,405,579 Bank of Nova Scotia (The), Preferred, Series 23, Non-Cumulative, Floating Rate, Perpetual 102,655 2,419,134 2,245,065 Bank of Nova Scotia (The), Preferred, Series 30, Non-Cumulative, Variable Rate, Convertible, Callable 12, , ,729 Bank of Nova Scotia (The), Preferred, Series 31, Non-Cumulative, Variable Rate, Convertible, Perpetual 231,067 5,023,227 4,350,992 Bank of Nova Scotia (The), Preferred, Series 32, Non-Cumulative, Variable Rate, Convertible, Callable 689,954 15,176,609 13,730,085 Bank of Nova Scotia (The), Preferred, Series 36, Variable Rate, Perpetual 85,599 2,152,972 2,265,806 Brookfield Asset Management Inc., Preferred, Class A, Series 2, Variable Rate, Callable 35, , ,529 Brookfield Asset Management Inc., Preferred, Class A, Series 4, Variable Rate, Perpetual 1,300 13,520 13,247 Brookfield Asset Management Inc., Preferred, Class A, Series 9, Variable Rate, Callable 90,974 1,634,113 1,273,636 Brookfield Asset Management Inc., Preferred, Class A, Series 13, Floating Rate, Perpetual 96,478 1,412, ,146 Brookfield Asset Management Inc., Preferred, Class A, Series 17, 4.75%, Perpetual, Callable 22, , ,411

22 Schedule of Investments (unaudited) (continued) As at June 30, 2016 Shares/ Average Fair Security Par Value/Contracts Cost Value Brookfield Asset Management Inc., Preferred, Class A, Series 18, 4.75%, Convertible, Callable 17, , ,239 Brookfield Asset Management Inc., Preferred, Class A, Series 24, Variable Rate, Callable 64,978 1,065, ,214 Brookfield Asset Management Inc., Preferred, Class A, Series 26, Variable Rate, Convertible, Perpetual 60,334 1,144, ,853 Brookfield Asset Management Inc., Preferred, Class A, Series 28, Variable Rate, Convertible, Perpetual 53, , ,597 Brookfield Asset Management Inc., Preferred, Class A, Series 30, Variable Rate, Convertible, Callable 93,186 2,039,050 1,761,215 Brookfield Asset Management Inc., Preferred, Class A, Series 32, Variable Rate, Convertible, Callable 177,680 4,029,141 3,336,830 Brookfield Asset Management Inc., Preferred, Class A, Series 34, Variable Rate, Perpetual 109,777 2,339,700 1,911,217 Brookfield Asset Management Inc., Preferred, Class A, Series 36, 4.85%, Perpetual, Callable 54,977 1,133,288 1,179,806 Brookfield Asset Management Inc., Preferred, Class A, Series 37, 4.90%, Perpetual, Callable 29, , ,383 Brookfield Asset Management Inc., Preferred, Class A, Series 38, 4.40%, Perpetual, Callable 73,229 1,502,257 1,340,091 Brookfield Asset Management Inc., Preferred, Class A, Series 40, Variable Rate, Perpetual 185,124 4,263,357 3,563,637 Brookfield Asset Management Inc., Preferred, Class A, Series 42, Variable Rate, Perpetual 70,547 1,588,971 1,382,721 Brookfield Office Properties Inc., Preferred, Class AAA, Series G, 5.25%, Convertible, Perpetual 8, , ,804 Brookfield Office Properties Inc., Preferred, Class AAA, Series J, 5.00%, Convertible, Callable 2,311 58,057 58,099 Brookfield Office Properties Inc., Preferred, Class AAA, Series K, 5.20%, Convertible, Perpetual 70,194 1,794,873 1,762,571 Brookfield Office Properties Inc., Preferred, Class AAA, Series N, 6.15%, Callable 198,434 3,840,919 3,107,476 Brookfield Office Properties Inc., Preferred, Class AAA, Series P, Variable Rate, Convertible, Perpetual 75,707 1,552,635 1,174,216 Brookfield Office Properties Inc., Preferred, Class AAA, Series R, Variable Rate, Callable 292,503 5,616,809 4,981,326 Brookfield Office Properties Inc., Preferred, Class AAA, Series T, 4.60%, Perpetual 105,796 2,021,373 1,798,532 Brookfield Office Properties Inc., Preferred, Class AAA, Series V, Variable Rate, Perpetual 700 7,644 6,367 Brookfield Office Properties Inc., Preferred, Class AAA, Series AA, Variable Rate, Perpetual 287,550 6,231,549 5,175,900 Brookfield Property Split Corp., Preferred, Class A, Series 1, 5.25%, Perpetual 37 1,021 1,198 Canadian Imperial Bank of Commerce, Preferred, Class A, Series 39, Variable Rate, Perpetual 158,984 3,202,888 2,933,255 Canadian Imperial Bank of Commerce, Preferred, Class A, Series 41, Variable Rate, Perpetual 119,350 2,625,717 2,161,429 19