Horizons Active Floating Rate Senior Loan ETF (HSL, HSL.A:TSX)

Transcription

1 Interim Report June 30, 2015 Horizons Active Floating Rate Senior Loan ETF (HSL, HSL.A:TSX) ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...6 Past Performance...10 Summary of Investment Portfolio...11 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...13 FINANCIAL STATEMENTS Statements of Financial Position...14 Statement of Comprehensive Income...15 Statement of Changes in Financial Position...16 Statement of Cash Flows...17 Schedule of Investments...18 Notes to Financial Statements...20

3 Letter from the President: The first half of 2015 has been an interesting time to be an investor. The U.S. and Canadian equity markets have both delivered modest gains on a total return basis; however, those positive returns have been overcast by growing concerns about an inflated stock market and increasing volatility in the global bond market. At Horizons ETFs, we rarely focus over the short-term on where the markets are heading. Instead, we provide investors with the tools they need to navigate changing market conditions and implement their short and long-term perspective. While U.S. investors are bracing for a potential interest rate hike later this year, Canadian investors saw their interest rates decline. In late January, the Bank of Canada cut interest rates and, as a result, the Canadian market was impacted in different ways. The Canadian dollar fell precipitously, followed by drops in the Canadian preferred share market, while investmentgrade bonds rose in value. In a market where assets don t move in tandem, active managers are able to use their expertise to allocate assets in a manner which they believe provides the best opportunity to outperform their respective benchmarks given they aren t restricted to mimicking index constituents and/or weightings. We ve been very pleased with the growth and recognition of our actively managed ETF family and the strong outperformance of many of the mandates. We think the next six months are going to be a critical period for investors to redefine their short and long-term risk versus reward strategy. Many investors haven t really had to revisit their portfolio s asset allocations, with both stocks and bonds having delivered exceptional returns over the last 5 years. If we see interest rates rise in the U.S. - the first time in more than six years - it will likely force investors to rethink their asset allocation strategies since low interest rates have been a key driver of returns for the last half-decade. We believe our diverse suite of Canadian ETF solutions can help you transition your portfolio and provide a more flexible, responsive asset allocation strategy for the ever-changing market conditions. I urge you to visit our website at where we offer a range of resources designed to help you become a better ETF investor. We wish you continued investment success. Thank you, Howard Atkinson President Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance for Horizons Active Floating Rate Senior Loan ETF ( Horizons HSL 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 HSL is to seek to provide unitholders with a high level of current income by investing primarily in a diversified portfolio of U.S. senior secured floating rate loans, which are generally rated below investment grade (loans rated at or below BB+ by Standard & Poor s, or a similar rating by a designated rating organization) and debt securities, with capital appreciation as a secondary objective. Horizons HSL, to the best of its ability, seeks to hedge its non-canadian dollar currency exposure to the Canadian dollar at all times. To achieve its investment objectives, Horizons HSL principally invests in a portfolio of U.S. senior secured floating rate loans which are generally rated below investment grade (loans rated at or below BB+ by Standard & Poor s, or a similar rating by a designated rating organization) and debt securities. Horizons HSL may also invest in exchange traded funds that provide exposure to senior loans. Senior loans, compared to equivalently rated unsecured high yield bonds, typically offer a higher recovery rate because of the added protection offered by their secured nature. This security may be achieved by liens on physical or non-physical assets and, even if not realized through liquidation, can increase recovery in a reorganisation scenario. Under normal market conditions, Horizons HSL will have the majority of its net assets invested directly or indirectly in senior secured loans, which may include secured loans that have a lower than first lien priority on collateral of the borrower, secured loans to foreign borrowers, secured loans in foreign currencies and other secured loans with characteristics that the ETF s sub-advisor, AlphaFixe Capital Inc. ( AlphaFixe or the Sub-Advisor ), believes qualify as senior secured loans. 1

5 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Senior Loan ETF Risk AlphaFixe seeks to maintain borrower and industry diversification among Horizons HSL s senior loan portfolio. When selecting senior loans, AlphaFixe seeks to implement a fundamental analysis approach of risk/return characteristics. Senior loans may be purchased by the Sub-Advisor on the primary and secondary market as the opportunities for investment present themselves. Senior loans may be sold on the secondary market if, in the opinion of AlphaFixe, the risk-return profile deteriorates or to pursue more attractive investments. The ETF generally does not invest more than 5% of its assets in a single senior loan issue. Horizons HSL generally maintains an average rating for the senior loan portfolio of BB-/B+ rating and does not invest in securities of issuers rated below B- or in unrated securities. The ETF primarily invests in issues with a minimum tranche size of USD $400 million and does not invest in any issues where the tranche is less than USD $100 million. Horizons HSL may invest up to 20% of its net assets in cash, cash equivalents and/or other floating rate debt instruments. The ETF may also invest up to 20% of its net assets in investment grade corporate bonds and 20% of its net assets in high yield debt securities. Horizons HSL may make these investments by investing in exchange traded funds that provide exposure to the applicable asset classes. At all times, at least 10% of Horizons HSL s portfolio will be comprised of cash and/ or securities that settle within three business days. Horizons HSL, to the best of its ability, seeks to hedge its non-canadian dollar currency exposure to the Canadian dollar at all times. Please refer to the ETF s most recent prospectus for a complete description of Horizons HSL 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 subscribing for 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 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 No guaranteed return Derivatives risk Interest rate risk Foreign currency risk Credit risk Income trust investment risk Foreign stock exchange risk High yield bond risk and risk of other lower rated investments Loan credit risk Senior loan risk Loan settlement risk Income risk Call risk Risk of difference between quoted and actionable market price

6 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Senior Loan ETF Results of Operations For the six-month period ended June 30, 2015, the Class E units and Advisor Class units of the ETF returned 2.26% and 1.97%, respectively, when including distributions paid to unitholders. This compares to a return of 2.87% for the Credit Suisse Leveraged Loan Index (the Index ) for the same period. General Market Review During the second quarter of 2015, the bank loan market witnessed a sharp increase in the volume of issues, $ billion compared to $ 48.3 billion in the first quarter of the year. However, the volume of issues has decreased in comparison to same six-month period last year ($205.8 billion in 2015 versus $304.8 billion in 2014). Since the beginning of the year, we also saw an increase in Collateralized Loan Obligation ( CLO ) issuance ($69.2 billion versus $63.6 billion in 2014). In fact, June was the month with the second largest CLO issuance volume for the period ($14.6 billion). In addition, due to an imbalance between supply and demand, we witnessed a downward pressure on credit spreads. This has caused a change in market conditions leading to rate re-pricing activities, which represented 39% of the volume of issues (compared to 26% in the first half of 2014). Portfolio Review The Food and Drug sector reported the best year-to-date returns in the senior loan asset class. The portfolio s overweight in this industry has been a contributing factor to the overall performance. The Metals/Minerals sector was the worst performing industry for the same period. As the ETF s portfolio was not invested in this sector, this contributed to the outperformance versus the Index. AlphaFixe s strategy consists of selecting the most stable industries, including Healthcare, which underperformed in The majority of the portfolio s underperformance was due to the 99 Cents Only Stores security selection, which encountered operational difficulties leading to organizational changes. However, corrective measures were quickly taken by the company s board of directors and company owners. The company retains the ability to fulfill its commitments to its creditors. The ETF participated in the following new issues during the period: Staples Inc. (acquisition of Office Depot Inc.), Sterigenics-Nordion Holdings, LLC (change of control), and Cirque du Soleil (change of control). These firms are key brands in their respective industries. Some loans held in the portfolio were repaid in full, including Biomet Inc., Charter Communications Operating LLC and Genpact International Inc. Outlook Spreads tightened in the second quarter and AlphaFixe expects the pressure on spreads to remain during the upcoming quarter. CLO issuance is expected to keep a healthy pace which should increase the demand for loans, resulting in higher prices. Not only is the volume of new CLO increasing but also their size i.e. jumbo CLOs around $1 billion. Another important factor will be the U.S. Federal Reserve s plan to normalize interest rates. An increase could lead to important inflows into loan funds. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units This is the first full interim reporting period for the ETF since it effectively began operations on October 14, For the six-month period ended June 30, 2015, the ETF generated gross comprehensive income (loss) from investments and 3

7 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Senior Loan ETF derivatives of $874,014. The ETF paid management, operating and transaction expenses of $224,205 of which $55,086 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 $661,217 to Class E unitholders and $3,790 to Advisor Class unitholders during the period. Unitholder Activity An ETF is a stock exchange listed, open-ended, continuously offered fund. All orders to purchase units directly from the ETF must be placed by designated brokers and/or underwriters. On any trading day, a designated broker or an underwriter may place a subscription order for a prescribed number of units ( PNU ) or integral multiple PNU. The ETF reserves the absolute right to reject any subscription order placed by a designated broker and/or an underwriter. No fees will be payable by the ETF to a designated broker or an underwriter in connection with the issuance of units. On the issuance of units, the Manager may, at its discretion, charge an administrative fee to an underwriter or designated broker to offset any expenses incurred in issuing the units. All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. 4

8 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Senior Loan ETF 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. 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. For the period ended June 30, 2015, the ETF paid $43 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 since it effectively began operations on October 14, This information is derived from the ETF s audited annual financial statements and the current unaudited interim financial statements. Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. The ETF s Net Assets per Unit Class E Period Net assets, beginning of period (1) $ Increase from operations: Total revenue Total expenses (0.05) (0.02) Realized losses for the period (0.35) (0.12) Unrealized gains for the period Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.18) (0.03) From return of capital (0.06) Total distributions (3) (0.18) (0.09) Net assets, end of period (4) $

10 Financial Highlights (continued) Advisor Class Period Net assets, beginning of period (1) $ Increase from operations: Total revenue Total expenses (0.07) (0.03) Realized losses for the period (0.35) (0.12) Unrealized gains for the period Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.15) (0.03) From return of capital (0.04) Total distributions (3) (0.15) (0.07) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2015 and the audited annual financial statements as at December 31, Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 14, 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. 7

11 Financial Highlights (continued) Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 42,124 27,510 Number of units outstanding (000 s) 4,215 2,765 Management expense ratio (2) 0.86% 0.83% Management expense ratio before waivers or absorptions (3) 1.16% 2.02% Trading expense ratio (4) 0.03% 0.03% Portfolio turnover rate (5) 23.27% 0.09% Net asset value per unit, end of period $ Closing market price $ Advisor Class Period (1) Total net asset value (000 s) $ Number of units outstanding (000 s) Management expense ratio (2) 1.41% 1.39% Management expense ratio before waivers or absorptions (3) 1.72% 2.59% Trading expense ratio (4) 0.03% 0.03% Portfolio turnover rate (5) 23.27% 0.09% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2015 and December 31, 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. 5. The ETF s portfolio turnover rate indicates how actively its portfolio investments are traded. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. Generally, the higher the ETF s portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the ETF. 8

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 0.75%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 1.25%, 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 8% 57% 35% 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 shows 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% 4.00% Rate of Return 3.00% 2.00% 1.00% 0.00% Class E 0.34% 2.26% Advisor Class 0.16% 1.97% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 14,

14 Summary of Investment Portfolio As at June 30, 2015 % of ETF s Asset Mix Net Asset Value Net Asset Value U.S. Senior Loans $ 38,166, % Global Senior Loans 2,127, % Canadian Senior Loans 1,610, % Currency Forward Hedge* (564,725) -1.33% Cash and Cash Equivalents 5,997, % Other Assets less Liabilities (4,964,816) % $ 42,373, % % of ETF s Sector Mix Net Asset Value Net Asset Value Senior Loans $ 41,904, % Currency Forward Hedge* (564,725) -1.33% Cash and Cash Equivalents 5,997, % Other Assets less Liabilities (4,964,816) % $ 42,373, % *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, 2015 Top Holdings* % of ETF s Net Asset Value PowerShares Senior Loan Portfolio 9.92% Allison Transmission Inc. 5.30% Genpact International Inc. 5.02% CHS / Community Health Systems Inc. 5.01% Pinnacle Foods Finance LLC 5.00% Custom Sensors & Technologies Inc. 4.99% CHG Healthcare Services Inc. 4.99% Post Holdings Inc. 4.97% Zebra Technologies Corp. 4.92% Media General Inc. 4.65% 99 Cents Only Stores 4.63% Activision Blizzard Inc. 4.61% Albertson s Holdings LLC 4.44% Dollar Tree Inc. 4.43% PetSmart Inc. 4.27% Restaurant Brands International Inc. 3.80% Revlon Consumer Products Corp. 3.45% Sterigenics-Nordion Holdings LLC 2.95% MultiPlan Inc. (MPH Acquisition Holdings LLC) 2.55% Cirque du Soleil 2.36% Staples Inc. 2.06% Gates Global LLC 2.02% Dell Inc. 1.98% Neiman Marcus Group Inc. (The) 0.57% * Note all of the Top 25 Holdings, excluding PowerShares Senior Loan Portfolio, are the aggregate 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 Floating Rate Senior Loan 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. Howard Atkinson 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, 2015 and December 31, 2014 June 30, December 31, Assets Cash and cash equivalents $ 5,997,933 $ 16,942,424 Investments 41,904,867 26,854,131 Amounts receivable relating to accrued income 72,889 51,636 Amounts receivable relating to portfolio assets sold 996,078 Derivative assets (note 3) 40,229 48,502 Total assets 49,011,996 43,896,693 Liabilities Accrued expenses 34,801 16,025 Amounts payable relating to securities redeemed 5,946 Amounts payable for portfolio assets purchased 5,867,535 15,920,709 Distribution payable 125,501 94,572 Derivative liabilities (note 3) 604, ,088 Total liabilities 6,638,737 16,138,394 Total net assets (note 2) $ 42,373,259 $ 27,758,299 Total net assets, Class E (note 2) $ 42,123,577 $ 27,509,715 Number of redeemable units outstanding, Class E (note 9) 4,215,035 2,765,000 Total net assets per unit, Class E (note 2) $ 9.99 $ 9.95 Total net assets, Advisor Class (note 2) $ 249,682 $ 248,584 Number of redeemable units outstanding, Advisor Class (note 9) 25,000 25,000 Total net assets per unit, Advisor Class (note 2) $ 9.99 $ 9.94 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Howard Atkinson 14

18 Statement of Comprehensive Income (unaudited) For the Period Ended June 30, Income Dividend income $ 64,621 Interest income for distribution purposes 718,226 Net realized loss on sale of investments and derivatives (718,860) Net realized loss on foreign exchange (569,202) Net change in unrealized appreciation of investments and derivatives 1,855,888 Net change in unrealized depreciation of foreign exchange (476,659) 874,014 Expenses Management fees (note 10) 155,813 Audit fees 7,894 Independent Review Committee fees 93 Custodial fees 3,273 Legal fees 501 Securityholder reporting costs 18,584 Administration fees 24,741 Transaction costs 4,939 Withholding taxes 8,178 Other expenses ,205 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (55,086) 169,119 Increase in net assets for the period (note 2) $ 704,895 Increase in net assets, Class E (note 2) $ 700,007 Increase in net assets per unit, Class E (note 2) 0.19 Increase in net assets, Advisor Class (note 2) $ 4,888 Increase in net assets per unit, Advisor Class (note 2) 0.20 (See accompanying notes to financial statements) 15

19 Statement of Changes in Financial Position (unaudited) For the Period Ended June 30, Total net assets at the beginning of the period (note 2) $ 27,758,299 Increase in net assets (note 2) 704,895 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 18,082,705 Aggregate amounts paid on redemption of securities of the investment fund (3,508,015) Securities issued on reinvestment of distributions 382 Distributions: From net investment income (665,007) Total net assets at the end of the period (note 2) $ 42,373,259 Total net assets at the beginning of the period, Class E (note 2) $ 27,509,715 Increase in net assets, Class E (note 2) 700,007 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 18,082,705 Aggregate amounts paid on redemption of securities of the investment fund (3,508,015) Securities issued on reinvestment of distributions 382 Distributions: From net investment income (661,217) Total net assets at the end of the period, Class E (note 2) $ 42,123,577 Total net assets at the beginning of the period, Advisor Class (note 2) $ 248,584 Increase in net assets, Advisor Class (note 2) 4,888 Distributions: From net investment income (3,790) Total net assets at the end of the period, Advisor Class (note 2) $ 249,682 (See accompanying notes to financial statements) 16

20 Statement of Cash Flows (unaudited) For the Period Ended June 30, Cash flows from operating activities: Increase in net assets for the period (note 2) $ 704,895 Adjustments for: Net realized loss on sale of investments and derivatives 718,860 Less: net realized loss on currency forward contracts (1,199,744) Net change in unrealized appreciation of investments and derivatives (1,855,888) Net change in unrealized depreciation of foreign exchange 540,969 Purchase of investments (30,439,578) Proceeds from the sale of investments 7,182,501 Amounts receivable relating to accrued income (21,253) Accrued expenses 18,776 Net cash used in operating activities (24,350,462) Cash flows from financing activities: Amount received from the issuance of units 18,082,705 Amount paid on redemptions of units (3,502,069) Distributions paid to unitholders (633,696) Net cash from financing activities 13,946,940 Net decrease in cash and cash equivalents during the period (10,403,522) Effect of exchange rate fluctuations on cash and cash equivalents (540,969) Cash and cash equivalents at beginning of period 16,942,424 Cash and cash equivalents at end of period $ 5,997,933 Interest received $ 696,973 Dividends received, net of withholding taxes $ 56,443 (See accompanying notes to financial statements) 17

21 Schedule of Investments (unaudited) As at June 30, 2015 Horizons Active Floating Rate Senior Loan ETF Par Value/Shares/ Average Fair Security Contracts Cost Value U.S. SENIOR LOANS (90.07%) Corporate Issuers (80.15%) 99 Cents Only Stores, Term Loan, 4.50%, 2019/01/11 1,689,640 $ 1,966,482 $ 1,962,635 Activision Blizzard Inc., Term Loan, 3.25%, 2020/10/12 1,558,407 1,819,279 1,955,102 Albertson s Holdings LLC, Term Loan, 5.50%, 2021/08/25 1,496,250 1,739,773 1,880,412 Allison Transmission Inc., Term Loan, 3.50%, 2019/08/23 1,790,666 2,146,911 2,244,303 Cirque du Soleil, Term Loan, 5.00%, 2022/06/24 800, ,127 1,000,449 CHG Healthcare Services Inc., Term Loan, 4.25%, 2019/11/19 1,691,527 1,993,044 2,114,375 CHS / Community Health Systems Inc., Term Loan, 3.75%, 2019/12/13 596, , ,028 CHS / Community Health Systems Inc., Term Loan, 4.00%, 2021/01/27 1,097,486 1,276,621 1,374,811 Custom Sensors & Technologies Inc., Term Loan, 4.50%, 2021/09/30 1,689,744 1,977,530 2,115,766 Dell Inc., Term Loan, 5.50%, 2020/04/29 670, , ,143 Dollar Tree Inc., Term Loan, 3.50%, 2022/05/26 1,500,000 1,851,844 1,875,571 Gates Global LLC, Term Loan, 4.25%, 2021/07/05 694, , ,872 Media General Inc., Term Loan, 4.00%, 2020/07/30 1,574,750 1,842,079 1,969,321 MultiPlan Inc. (MPH Acquisition Holdings LLC), Term Loan, 3.75%, 2021/03/31 870,408 1,044,050 1,082,286 Neiman Marcus Group Inc. (The), Term Loan, 4.25%, 2020/10/25 194, , ,118 PetSmart Inc., Term Loan, 4.25%, 2022/03/10 1,450,000 1,818,346 1,809,692 Pinnacle Foods Finance LLC, Term Loan, 3.00%, 2020/04/29 1,700,000 1,967,322 2,117,694 Post Holdings Inc., Term Loan, 3.75%, 2021/06/02 1,689,723 1,270,688 2,104,196 Revlon Consumer Products Corp., Term Loan, 4.00%, 2019/10/08 1,169,516 1,332,371 1,463,012 Staples Inc., Term Loan, 3.50%, 2021/04/23 700, , ,073 Sterigenics-Nordion Holdings LLC, Term Loan, 4.25%, 2022/05/15 1,000,000 1,237,448 1,249,000 Zebra Technologies Corp., Term Loan, 4.75%, 2021/10/27 1,649,387 1,940,331 2,085,846 31,535,199 33,961,705 Exchange Traded Funds (9.92%) PowerShares Senior Loan Portfolio 141,500 4,028,712 4,204,490 TOTAL U.S. SENIOR LOANS 35,563,911 38,166,195 GLOBAL SENIOR LOANS (5.02%) Corporate Issuers (5.02%) Genpact International Inc., Term Loan, 3.50%, 2019/08/30 1,696,456 2,050,050 2,127,910 TOTAL GLOBAL SENIOR LOANS 2,050,050 2,127,910 18

22 Schedule of Investments (unaudited) (continued) As at June 30, 2015 Par Value/Shares/ Average Fair Security Contracts Cost Value CANADIAN SENIOR LOANS (3.80%) Corporate Issuers (3.80%) Restaurant Brands International Inc., Term Loan, 3.75%, 2021/12/12 1,289,016 1,618,097 1,610,762 TOTAL CANADIAN SENIOR LOANS 1,618,097 1,610,762 DERIVATIVES (-1.33%) Currency Forwards (-1.33%) Currency forward contract to buy US$1,950,000 for C$2,397,818 maturing September 16, ,229 Currency forward contract to buy C$43,717,472 for US$35,450,000 maturing September 16, 2015 (604,954) (564,725) TOTAL DERIVATIVES (564,725) Transaction Costs (2,439) TOTAL INVESTMENT PORTFOLIO (97.56%) $ 39,229,619 $ 41,340,142 Cash and cash equivalents (14.15%) 5,997,933 Other assets less liabilities (-11.71%) (4,964,816) TOTAL NET ASSETS (100.00%) (note 2) $ 42,373,259 (See accompanying notes to financial statements) 19

23 Notes to Financial Statements (unaudited) June 30, REPORTING ENTITY Horizons Active Floating Rate Senior Loan ETF (the ETF or Horizons HSL ) is an investment trust established under the laws of the Province of Ontario by Declaration of Trust and effectively began operations on October 14, The address of the ETF s registered office is: c/o AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2. The ETF is offered for sale on a continuous basis by its prospectus in both class E units ( Class E ) and advisor class units ( Advisor Class ) which trade on the Toronto Stock Exchange ( TSX ) under the symbols HSL and HSL.A, respectively. Advisors are directly compensated with a service fee on a trailing quarterly basis (the Service Fee ). The only difference between the Advisor Class and existing Class E units of the ETF is that the Advisor Class charges higher management fees that include the Service Fees paid to the advisor (see note 10). The purchase and sale process for the Advisor Class units is identical to that of any other ETF listed on the TSX. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors are able to trade units of the ETF in the same way as other securities traded on the TSX, including by using market orders and limit orders and may incur customary brokerage commissions when buying or selling units. The investment objective of Horizons HSL is to seek to provide unitholders with a high level of current income by investing primarily in a diversified portfolio of U.S. senior secured floating rate loans, which are generally rated below investment grade (loans rated at or below BB+ by Standard & Poor s, or a similar rating by a designated rating organization) and debt securities, with capital appreciation as a secondary objective. Horizons HSL, to the best of its ability, seeks to hedge its non- Canadian dollar currency exposure to the Canadian dollar at all times. AlphaPro Management Inc. ( AlphaPro or the Manager ) is the manager and trustee of the ETF. The Manager has appointed Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Investment Manager ), an affiliate of the Manager, to act as the investment manager to the ETF. The Investment Manager is responsible for implementing the ETF s investment strategies and for engaging the services of AlphaFixe Capital Inc. ( AlphaFixe or the Sub-Advisor ), to act as the sub-advisor to the ETF. The Manager and Investment Manager are both members of the Mirae Asset Financial Group ( Mirae Asset ). 2. BASIS OF PREPARATION (i) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. These financial statements were authorized for issue on August 14, 2015 by the Board of Directors of the Manager. (ii) Basis of measurement The financial statements have been prepared on the historical cost basis except for financial instruments at fair value though profit or loss, which are measured at fair value. (iii) Functional and presentation currency 20 These financial statements are presented in Canadian dollars, which is the ETF s functional currency.

24 Notes to Financial Statements (unaudited) (continued) June 30, SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Financial instruments (i) Recognition, initial measurement and classification Financial assets and financial liabilities at fair value through profit or loss ( FVTPL ) are initially recognized on the trade date, at fair value (see below), with transaction costs recognised in profit or loss. Other financial assets and financial liabilities are recognised on the date on which they are originated at fair value. The ETF classifies financial assets and financial liabilities into the following categories: Financial assets at fair value through profit or loss: - Held for trading: derivative financial instruments - Designated as at fair value through profit or loss: debt securities and equity investments Financial assets at amortized cost: All other financial assets are classified as loans and receivables Financial liabilities at fair value through profit or loss: - Held for trading: derivative financial instruments Financial liabilities at amortized cost: all other financial liabilities are classified as other financial liabilities (ii) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the ETF has access at that date. The fair value of a liability reflects its non-performance risk. Investments are valued at fair value as of the close of business on each day upon which a session of the TSX is held ( Valuation Date ) and based on external pricing sources to the extent possible. Investments held that are traded in an active market through recognized public stock exchanges, over-the-counter markets, or through recognized investment dealers, are valued at their closing sale price. However, such prices may be adjusted if a more accurate value can be obtained from recent trading activity or by incorporating other relevant information that may not have been reflected in pricing obtained from external sources. Short-term investments, including notes and money market instruments, are valued at amortized cost which approximates fair value. Investments held that are not traded in an active market, including some derivative financial instruments, are valued using observable market inputs where possible, on such basis and in such manner as established by the Manager. Derivative financial instruments are recorded in the statements of financial position according to the gain or loss that would be realized if the contracts were closed out on the Valuation Date. Margin deposits, if any, are included in the schedule of investments as margin deposits. See also the summary of fair value measurements in note 7. Fair value policies used for financial reporting purposes are the same as those used to measure the net asset value ( NAV ) for transactions with unitholders. The fair value of other financial assets and liabilities approximates their carrying values due to the short-term nature of these instruments. 21

25 Notes to Financial Statements (unaudited) (continued) June 30, 2015 (iii) Offsetting Financial assets and liabilities are offset and the net amount presented in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis for gains and losses from financial instruments at fair value through profit or loss and foreign exchange gains and losses. (iv) Specific instruments Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and short-term, interest bearing notes with a term to maturity of less than three months from the date of purchase. Forward foreign exchange contracts Forward foreign exchange contracts, if any, are valued at the current market value thereof on the Valuation Date. The value of these forward contracts is the gain or loss that would be realized if, on the Valuation Date, the positions were to be closed out and recorded as derivative assets and/or liabilities in the statements of financial position and as a net change in unrealized appreciation (depreciation) of investments and derivatives in the statements of comprehensive income. When the forward contracts are closed out or mature, realized gains or losses on forward contracts are recognized and are included in the statements of comprehensive income in net realized gain (loss) on foreign exchange. The Canadian dollar value of forward foreign exchange contracts is determined using forward currency exchange rates supplied by an independent service provider. Redeemable units The redeemable units, which are classified as financial liabilities, are measured at the present value of the redemption amounts and are considered a residual amount of the net assets attributable to holders of redeemable units. (b) Investment income Investment transactions are accounted for as of the trade date. Realized gains and losses from investment transactions are calculated on a weighted average cost basis. The difference between fair value and average cost, as recorded in the financial statements, is included in the statements of comprehensive income as part of the net change in unrealized appreciation (depreciation) of investments and derivatives. Interest income for distribution purposes from investments in bonds and short-term investments represents the coupon interest received by the ETF accounted for on an accrual basis. The ETF does not amortize premiums paid or discounts received on the purchase of fixed income securities. The ETF does not use the effective interest method. Dividend income is recognized on the ex-dividend date. Distribution income from investments in other funds or ETFs is recognized when earned. Income from derivatives is shown in the statements of comprehensive income as net realized gain (loss) on sale of investments and derivatives; net change in unrealized appreciation (depreciation) of investments and derivatives; and, interest income for distribution purposes, in accordance with its nature. 22