Horizons Active Floating Rate Bond ETF (HFR, HFR.A:TSX)

Transcription

1 Annual Report December 31, 2016 Horizons Active Floating Rate Bond ETF (HFR, HFR.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...7 Past Performance...11 Summary of Investment Portfolio...13 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...15 INDEPENDENT AUDITORS REPORT...16 FINANCIAL STATEMENTS Statements of Financial Position...17 Statements of Comprehensive Income...18 Statements of Changes in Financial Position...19 Statements of Cash Flows...20 Schedule of Investments...21 Notes to Financial Statements...27

3 Letter from the President and Co-CEO: It was another noteworthy year in 2016 for both Horizons ETFs Management (Canada) Inc. ( Horizons ETFs ) and the Canadian ETF industry. The industry surpassed $100 billion in assets under management ( AUM ) with now more than 400 ETF listings. Meanwhile, our AUM surpassed $7.0 billion and we launched 10 new ETFs, giving us a total of 76 different tools available for our clients. It was gratifying that this success was spread out across all three of our ETF line-ups which include our benchmark index ETFs, actively managed ETFs and BetaPro ETFs for tactical investors. With the evolution of the investment landscape in Canada bringing greater fee 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 the Horizons Cdn High Dividend Index ETF ( HXH ), the Horizons NASDAQ-100 Index ETF ( HXQ ) and the Horizons EURO STOXX 50 Index ETF ( HXX ), which is the first ETF of its kind in Canada to provide investors with low-cost, tax-efficient exposure to the performance of 50 of the largest sector-leading companies in Europe. Along with these new offerings, we lowered the cost of the Horizons S&P 500 Index ETF ( HXS ), reducing its management fee from 0.15% to 0.10%. We also launched currency hedged versions of popular U.S.-focused index strategies, including the Horizons S&P 500 CAD Hedged Index ETF ( HSH ) and the Horizons US 7-10 Year Treasury Bond CAD Hedged ETF ( HTH ), which give investors access to U.S. asset classes with a hedge to protect returns from currency volatility between the Canadian and U.S. dollars. While most equity markets finished the year on a positive note something which has certainly helped the growth of our benchmark suite of index-replicating ETFs fixed income investors had a more difficult year in For the first time in more than a generation, we may be looking at a period of prolonged rising rather than falling interest rates. November was the worst month on record for bond losses globally, according to Bloomberg, as markets digested the unexpected results and ramifications of the U.S. presidential election. We believe that our low-cost family of actively managed fixed income ETFs have the flexibility to reduce duration and take advantage of these potentially seismic changes in the fixed income market. One of the primary beneficiaries of rising rates, for example, was in the Canadian preferred share asset class. The Horizons Active Preferred Share ETF ( HPR ) has been the top asset-gatherer in the preferred share space in Canada this year and was our top-selling actively managed ETF for the calendar year. HPR now has a solid six-year track record that demonstrates the value of active management in this asset class. Regardless of the direction of markets or interest rates, we have ETF solutions that allow investors of all types to customize their portfolio exposure. Markets do change, sometimes quickly, and our family of ETFs gives investors the tools they need to help meet their objectives. For more information on all our strategies, please visit our website at where we offer a range of resources designed to help you become a more skilled ETF investor. Thank you for your continued support and wishing you strong returns in 2017, Steven J. Hawkins, President & Co-CEO Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE This annual management report of fund performance for Horizons Active Floating Rate Bond ETF ( Horizons HFR or the ETF ) contains financial highlights and is included with the audited annual 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 HFR is to generate income that is consistent with prevailing short-term corporate bond yields while stabilizing the market value of the ETF from the effects of interest rate fluctuations. Horizons HFR invests primarily in a portfolio of Canadian debt securities and hedges the portfolio s interest rate risk to generally maintain a portfolio duration of less than two years. Horizons HFR may also invest in debt securities of U.S. companies, directly, or through investments in securities of other investment funds, including exchange traded funds. Horizons HFR may use derivatives, including interest rate swaps, to deliver a floating rate of income. Horizons HFR, 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 HFR s investment objectives, the ETF s sub-advisor, Fiera Capital Corporation ( Fiera or the Sub- Advisor ), uses fundamental credit research to select companies that, based on the Sub-Advisor s view on the company s industry and growth prospects, are believed to offer attractive risk adjusted returns. The Sub-Advisor seeks diversification by industry sector and geographic region and relies on its: in-depth fundamental credit research, view of market trends, analysis of the company s competitive position, and review of the return relative to the company s risk and general market conditions, to select securities for Horizons HFR. 1

5 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Bond ETF Risk Horizons HFR has entered into one or more interest rate swaps pursuant to which the ETF pays a counterparty a fixed return based on a portfolio of fixed-income securities in exchange for a floating rate of income. Horizons HFR maintains a portfolio duration that is generally not more than two years. The Sub-Advisor may, from time to time, invest in Canadian and foreign government debt, municipal bonds, exchange traded funds, cash and cash equivalents which generally in the aggregate will not exceed 40% of the ETF s net assets. At the time of purchase, debt securities must be rated at or above investment grade (BBB- by S&P, BBB low by DBRS or Baa3 by Moody s). The Sub-Advisor may sell short debt securities it believes will underperform on a relative basis or to otherwise assist the ETF in meeting its investment objectives. The Sub-Advisor of Horizons HFR may rely on exemptions from the securities regulatory authorities allowing it to purchase 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 HFR. 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 ). In lieu of specific security selections, from time to time the Sub-Advisor may purchase fixed-income related exchange traded funds. Horizons HFR may also use both long and short derivative instruments, including future contracts, to manage duration, credit exposure, portfolio yield and currency risk. Please refer to the ETF s most recent prospectus for a complete description of Horizons HFR s investment restrictions. The Manager performs a review of the ETF s risk rating at least annually, as well as when there is a material change in the ETF s investment objective or investment strategies. The current risk rating for the ETF is: low. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on the historical rolling ten-year standard deviation of its return, the return of an underlying index, or of an applicable proxy index. In cases where the Manager believes that this methodology produces a result that is not indicative of the ETF s future volatility, the risk rating may be determined by the ETF s category. Risk ratings are not intended for use as a substitute for undertaking a proper and complete suitability or financial assessment by an investment advisor. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. 2

6 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Bond ETF 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 Foreign stock exchange risk Short selling risk Call risk Risk of difference between quoted and actionable market price Results of Operations For the year ended December 31, 2016, the Class E units and Advisor Class units of the ETF returned 2.83% and 2.22%, respectively, when including distributions paid to unitholders. This compares to a return of 0.89% for the 3-month Canadian Dealer Offered Rate ( CDOR ), for the same period. CDOR is a key industry-determined financial benchmark in Canada. CDOR is the rate at which contributors are willing to extend credit to corporate clients utilizing a bankers acceptance facility. General Market Review The Canadian corporate bond market returned 3.59% in 2016 as measured by the Bank of America Merrill Lynch Canada Corporate Bond Index. This compares to a return of 1.54% for the broader Canadian bond market as a whole as measured by the Bank of America Merrill Lynch Canada Broad Market Index. The year opened poorly for Canadian credit markets as the continued plunge in oil prices from 2015 cast a shadow over the outlook for the Canadian economy and the important energy related sectors in particular. As oil prices recovered, risk appetite improved and spreads began to narrow. Global market conditions were also supportive for credit spreads. In Europe, the expansion of the European Central Bank s (the ECB ) bond purchase program to include investment grade corporate bonds gave a lift to credit related securities, while in the U.S., a slower pace of growth pushed out the need for the U.S. Federal Reserve (the Fed ) to raise its policy interest rate setting. Late in the second quarter, the decision by U.K. voters to leave the European Union resulted in a moderate repricing of credit spreads, but the reaction to date has been quite measured. The result still leaves a great deal of uncertainty in the 3

7 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Bond ETF 4 market with respect to the ultimate impact on the U.K. bond markets, which did suffer a brief correction in September when the ECB and Bank of Japan ( BOJ ) failed to add to their asset purchase programs, as had been expected. However, bond markets rallied once again following the September Federal Open Market Committee (FOMC) meeting that once again failed to deliver a much discussed rate hike. The U.S. elections were the main focus in the fourth quarter, with the Fed s mid-december decision to raise its benchmark overnight lending rate being the second main event. The unexpected win of the U.S. presidency by Donald Trump in early November resulted in significant market volatility afterwards. The potentially pro-growth environment marketed by the Trump presidential team lead equities higher and drove growth forecasts and inflation expectations higher, with North- American interest rates increasing to year-high levels. In this environment, corporate bonds did extremely well this year, with generic corporate spreads tightening between basis points (bps). Spread compression that began in mid-february continued into year-end. BBB-rated bonds performed 20 bps better than A-rated credits, with a 50 bps compression versus 30 bps. Broad corporate BBB-rated bonds were the best performers among the various index segments in 2016, posting a total return of 5.15%. That performance was more than 150 bps ahead of the next closest component, which was in broad corporate A-rated bonds, at 3.60%. The performance in broad corporate A-rated bonds was more than 150 basis points better than the next two index segments, broad corporate AA-rated bonds and municipal bonds, both of which returned 1.98%. Sector wise, energy and telecommunication services were the best performers for the year, outperforming the broader corporate universe by 167 and 58 bps, respectively. Portfolio Review The ETF has maintained a fairly low net duration throughout the year and had an average duration of 0.31 at the end of the The ETF s positive performance was mainly helped by the portfolio yield that sits around 2.4% and a tightening of corporate spreads. Lower yields on corporate bonds due to spreads tightening might bring lower carry, which is the value of an investment in corporate bonds versus similar government bonds, but for the moment, demand for yield assets remains high, especially as global yields remain at historically low levels. Fiera continues to focus on the quality of issuing companies rather than taking undue credit risk since the ETF is mostly exposed to corporate bonds. We constantly seek for the best opportunities in a variety of industries and along the corporate term structure. Outlook Credit markets should continue to be supported by a moderate improvement in economic growth if accompanied by a moderate response by monetary authorities. We think Canadian businesses will find good support from the weaker Canadian dollar, ample excess capacity, and some stabilization in the energy sector. Fiera views the current compensation for carry remains attractive and expect 2017 will offer plenty of opportunities to be tactical and for issuer selection. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $11,714,389. This compares to $2,026,963 for the year ended December 31, The ETF incurred management, operating and transaction expenses of $1,800,049 (2015 $1,981,719) of which $100,160 (2015 $79,955) 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.

8 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Bond ETF The ETF distributed $6,977,211 to Class E unitholders and $45,459 to Advisor Class unitholders during the year (2015 Class E: $8,273,185, Advisor Class: $69,061). 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 Other than indicated below, there are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Termination of Advisor Class Units On December 29, 2016, the Manager announced that it plans to eliminate the Advisor Class units of the ETF. As of January 31, 2017, investment professionals will no longer be able to purchase Advisor Class units on behalf of their clients and this class of units is expected to be fully eliminated by the end of April,

9 Management Discussion of Fund Performance (continued) Horizons Active Floating Rate Bond 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, and NBC holds an indirect minority interest in Fiera, the sub-advisor of the ETF. 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. 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 years ended December 31, 2016 and 2015, the ETF did not make any payments to NBF, and/or its affiliates in broker commissions on portfolio transactions. 6

10 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 past five fiscal years. This information is derived from the ETF s audited annual 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 Year Net assets, beginning of year (1) $ Increase from operations: Total revenue Total expenses (0.05) (0.05) (0.05) (0.05) (0.05) Realized gains (losses) for the year (0.05) (0.07) (0.02) 0.01 (0.05) Unrealized gains (losses) for the year 0.13 (0.12) 0.03 (0.04) 0.20 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.20) (0.20) (0.22) (0.22) (0.22) From net realized capital gains (0.01) (0.03) From return of capital (0.01) (0.02) Total annual distributions (3) (0.20) (0.21) (0.22) (0.25) (0.25) Net assets, end of year (4) $

11 Financial Highlights (continued) Advisor Class Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.11) (0.11) (0.11) (0.11) (0.10) Realized gains (losses) for the year (0.05) (0.07) (0.02) 0.01 (0.05) Unrealized gains (losses) for the year 0.13 (0.11) 0.04 (0.04) 0.16 Total increase (decrease) from operations (2) 0.21 (0.05) Distributions: From net investment income (excluding dividends) (0.14) (0.15) (0.16) (0.17) (0.15) From net realized capital gains (0.01) (0.04) From return of capital (0.01) Total annual distributions (3) (0.14) (0.15) (0.16) (0.19) (0.19) Net assets, end of year (4) $ This information is derived from the ETF s audited annual financial statements as at December 31 of the years shown. Class E units of the ETF have an initial net asset value of $10.00 as at December 12, 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. 8

12 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 367, , , , ,630 Number of units outstanding (000 s) 36,654 34,646 41,981 34,816 12,950 Management expense ratio (2) 0.46% 0.46% 0.46% 0.46% 0.45% Management expense ratio before waivers and absorptions (3) 0.49% 0.48% 0.48% 0.52% 0.63% Trading expense ratio (4) 0.01% 0.00% 0.00% 0.00% 0.96% Portfolio turnover rate (5) 27.03% 18.78% 32.94% 29.37% 61.11% Net asset value per unit, end of year $ Closing market price $ Advisor Class Year (1) Total net asset value (000 s) $ 1,653 3,881 4,977 2,937 1,272 Number of units outstanding (000 s) Management expense ratio (2) 1.06% 1.05% 1.05% 1.06% 0.99% Management expense ratio before waivers and absorptions (3) 1.06% 1.02% 1.03% 1.09% 1.15% Trading expense ratio (4) 0.01% 0.00% 0.00% 0.00% 0.96% Portfolio turnover rate (5) 27.03% 18.78% 32.94% 29.37% 61.11% Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the 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 year. 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 year. 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. 9

13 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 0.40%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 0.90%, 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 year. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 7% 87% 6% 10

14 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% 4.00% 3.00% Rate of Return 2.00% 1.00% 0.00% -1.00% Class E 0.54% 1.44% 4.93% 2.12% 2.42% 0.09% 2.83% Advisor Class 0.37% 4.36% 1.51% 1.82% -0.50% 2.22% Class E units of the ETF have an initial net asset value of $10.00 as at December 12, 2010 and Advisor Class units of the ETF have an initial net asset value of $9.94 as at October 12,

15 Past Performance (continued) Annual Compound Returns The following table presents the ETF s annual compound total return since inception and for the periods shown ended December 31, 2016 along with a comparable market index. The table is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the ETF or future returns on investments in the ETF. Period Class E Return % Advisor Class Return % 3-Month CDOR Return % 1 Year 2.83% 2.22% 0.89% 3 Year 1.77% 1.17% 1.06% 5 Year 2.47% 1.87% 1.16% Since Inception: Class E 2.36% 1.18% Advisor Class 1.87% 1.16% Class E units of the ETF have an initial net asset value of $10.00 as at December 12, 2010 and Advisor Class units of the ETF have an initial net asset value of $9.94 as at October 12,

16 Summary of Investment Portfolio As at December 31, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Long Positions Canadian Fixed Income Securities $ 319,312, % U.S. Fixed Income Securities 40,827, % Global Fixed Income Securities 2,233, % Currency Forward Hedge* (100,189) -0.03% Interest Rate Swaps* (2,253,666) -0.61% Cash and Cash Equivalents 4,738, % Margin Deposits 1,663, % Other Assets less Liabilities 2,631, % Short Positions Futures Contracts Interest Rate Hedge* 387, % $ 369,440, % % of ETF s Sector Mix Net Asset Value Net Asset Value Long Positions Corporate Bonds $ 362,372, % Currency Forward Hedge* (100,189) -0.03% Interest Rate Swaps* (2,253,666) -0.61% Cash and Cash Equivalents 4,738, % Margin Deposits 1,663, % Other Assets less Liabilities 2,631, % Short Positions Futures Contracts Interest Rate Hedge* 387, % $ 369,440, % *Positions in forward, futures and interest rate swaps contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 13

17 Summary of Investment Portfolio (continued) As at December 31, 2016 Top 25 Holdings* % of ETF s Net Asset Value Royal Bank of Canada 5.36% Toronto-Dominion Bank (The) 4.78% Canadian Imperial Bank of Commerce 4.22% Bank of Montreal 4.07% Laurentian Bank of Canada 3.91% HSBC Bank Canada 3.21% Manufacturers Life Insurance Co. (The) 2.80% BMW Canada Inc. 2.58% Bell Canada 2.52% Choice Properties REIT 2.41% Canadian Western Bank 1.90% Loblaw Cos. Ltd. 1.90% AltaGas Ltd. 1.89% Bank of America Corp. 1.88% Rogers Communications Inc. 1.87% RioCan REIT 1.71% Ford Credit Canada Ltd. 1.70% Goldman Sachs Group Inc. (The) 1.67% Daimler Canada Finance Inc. 1.63% Enbridge Inc. 1.56% Cominar REIT 1.56% John Deere Canada Funding Inc. 1.52% Home Trust Co. (The) 1.49% Manulife Bank of Canada 1.48% TELUS Corp. 1.45% * Note all of the Top 25 Holdings represent 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 14

18 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Active Floating Rate Bond 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 and have been audited by KPMG LLP, Chartered Professional Accountants, Licensed Public Accountants, on behalf of unitholders. The independent auditors report outlines the scope of their audit and their opinion on the financial statements. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. 15

19 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Active Floating Rate Bond ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2016 and 2015, the statements of comprehensive income, changes in financial position and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ETF s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the ETF as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 15, 2017 Toronto, Canada 16

20 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 4,738,852 $ 11,290,230 Investments 362,372, ,942,306 Margin deposits (note 12) 1,663,862 1,472,236 Amounts receivable relating to accrued income 2,185,585 1,542,549 Accounts receivable relating to securities issued 1,254,120 Derivative assets (note 3) 1,370,391 Total assets 373,585, ,247,321 Liabilities Accrued expenses 146, ,806 Amounts payable relating to securities redeemed 497,485 Distribution payable 661, ,092 Derivative liabilities (note 3) 3,336,874 8,262,279 Total liabilities 4,144,827 9,554,662 Total net assets (note 2) $ 369,440,816 $ 348,692,659 Total net assets, Class E $ 367,787,498 $ 344,811,291 Number of redeemable units outstanding, Class E (note 9) 36,653,856 34,646,038 Total net assets per unit, Class E $ $ 9.95 Total net assets, Advisor Class $ 1,653,318 $ 3,881,368 Number of redeemable units outstanding, Advisor Class (note 9) 164, ,629 Total net assets per unit, Advisor Class $ $ 9.96 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 17

21 Statements of Comprehensive Income For the Years Ended December 31, Income Interest income for distribution purposes $ 8,732,368 $ 9,594,051 Securities lending income (note 8) 9,732 14,526 Net realized loss on sale of investments and derivatives (1,655,583) (2,859,917) Net realized loss on foreign exchange (21,220) (113,690) Net change in unrealized appreciation (depreciation) of investments and derivatives 4,650,239 (4,608,901) Net change in unrealized appreciation (depreciation) of foreign exchange (1,147) ,714,389 2,026,963 Expenses Management fees (note 10) 1,589,926 1,803,925 Audit fees 18,104 18,655 Independent Review Committee fees 5,140 6,673 Custodial fees 41,288 29,290 Legal fees 3,229 5,473 Securityholder reporting costs 56,411 62,968 Administration fees 57,392 39,409 Transaction costs 22,269 12,823 Withholding taxes 5,965 2,249 Other expenses ,800,049 1,981,719 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (100,160) (79,955) 1,699,889 1,901,764 Increase in net assets for the year $ 10,014,500 $ 125,199 Increase in net assets, Class E $ 9,944,661 $ 147,770 Increase in net assets per unit, Class E Increase (decrease) in net assets, Advisor Class $ 69,839 $ (22,571) Increase (decrease) in net assets per unit, Advisor Class 0.21 (0.05) (See accompanying notes to financial statements) 18

22 Statements of Changes in Financial Position For the Years Ended December 31, Total net assets at the beginning of the year $ 348,692,659 $ 431,291,617 Increase in net assets 10,014, ,199 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 140,802,685 63,584,333 Aggregate amounts paid on redemption of securities of the investment fund (123,124,250) (138,118,056) Securities issued on reinvestment of distributions 77, ,812 Distributions: From net investment income (7,021,767) (7,843,471) Return of capital (903) (498,775) Total net assets at the end of the year $ 369,440,816 $ 348,692,659 Total net assets at the beginning of the year, Class E $ 344,811,291 $ 426,314,665 Increase in net assets, Class E 9,944, ,770 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 140,802,685 63,584,333 Aggregate amounts paid on redemption of securities of the investment fund (120,871,820) (137,114,091) Securities issued on reinvestment of distributions 77, ,799 Distributions: From net investment income (6,976,821) (7,776,370) Return of capital (390) (496,815) Total net assets at the end of the year, Class E $ 367,787,498 $ 344,811,291 Total net assets at the beginning of the year, Advisor Class $ 3,881,368 $ 4,976,952 Increase (decrease) in net assets, Advisor Class 69,839 (22,571) Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (2,252,430) (1,003,965) Securities issued on reinvestment of distributions 13 Distributions: From net investment income (44,946) (67,101) Return of capital (513) (1,960) Total net assets at the end of the year, Advisor Class $ 1,653,318 $ 3,881,368 (See accompanying notes to financial statements) 19

23 Statements of Cash Flows For the Years Ended December 31, Cash flows from operating activities: Increase in net assets for the year $ 10,014,500 $ 125,199 Adjustments for: Net realized loss on sale of investments and derivatives 1,655,583 2,859,917 Net realized gain (loss) on currency forward contracts 238,792 (905,680) Net change in unrealized depreciation (appreciation) of investments and derivatives (4,650,239) 4,608,901 Net change in unrealized appreciation of foreign exchange (215) (235) Purchase of investments (111,868,311) (71,629,205) Proceeds from the sale of investments 89,897, ,433,880 Margin deposits (191,626) (966,292) Amounts receivable relating to accrued income (643,036) 923,965 Accrued expenses 3,964 (39,143) Net cash from (used in) operating activities (15,542,736) 85,411,307 Cash flows from financing activities: Amount received from the issuance of units 139,548,565 63,584,333 Amount paid on redemptions of units (123,621,735) (137,620,571) Distributions paid to unitholders (6,935,687) (8,306,267) Net cash from (used in) financing activities 8,991,143 (82,342,505) Net increase (decrease) in cash and cash equivalents during the year (6,551,593) 3,068,802 Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at beginning of year 11,290,230 8,221,193 Cash and cash equivalents at end of year $ 4,738,852 $ 11,290,230 Interest received, net of withholding taxes $ 8,083,367 $ 10,515,767 (See accompanying notes to financial statements) 20

24 Schedule of Investments As at December 31, 2016 Horizons Active Floating Rate Bond ETF Par Value/ Average Fair Security Contracts/Notional Cost Value CANADIAN FIXED INCOME SECURITIES (86.43%) Corporate Bonds (86.43%) Algonquin Power Co., Callable, 5.50%, 2018/07/25 2,300,000 $ 2,429,853 $ 2,411,587 Alimentation Couche-Tard Inc., 2.86%, 2017/11/01 1,000,000 1,000,000 1,012,344 Alimentation Couche-Tard Inc., Callable, 4.21%, 2020/08/21 1,000,000 1,000,000 1,073,988 Alimentation Couche-Tard Inc., Series 5, Restricted, Callable, 3.60%, 2025/06/02 2,165,000 2,165,000 2,221,892 Allied Properties REIT, Series A, Callable, 3.75%, 2020/05/13 365, , ,141 Allied Properties REIT, Series B, Callable, 3.93%, 2022/11/14 582, , ,341 AltaGas Ltd., Callable, 4.55%, 2019/01/17 2,600,000 2,859,344 2,742,976 AltaGas Ltd., Callable, 3.72%, 2021/09/28 2,490,000 2,589,365 2,630,198 AltaGas Ltd., Callable, 4.40%, 2024/03/15 1,500,000 1,499,100 1,624,432 Aon Finance N.S. 1 ULC, Callable, 4.76%, 2018/03/08 475, , ,467 Artis REIT, Series A, 3.75%, 2019/03/27 2,300,000 2,326,626 2,337,858 Bank of Montreal, 1.88%, 2021/03/31 2,577,000 2,576,871 2,574,440 Bank of Montreal, 1.61%, 2021/10/28 2,432,000 2,396,201 2,387,470 Bank of Montreal, Series F, Variable Rate, Callable, 6.17%, 2023/03/28 2,847,000 3,353,510 3,004,331 Bank of Montreal, Variable Rate, 3.12%, 2024/09/19 912, , ,073 Bank of Montreal, Variable Rate, Callable, 3.32%, 2026/06/01 6,028,000 6,074,058 6,128,127 Bank of Nova Scotia (The), 2.80%, 2021/07/21 1,150,000 1,229,469 1,556,721 Bank of Nova Scotia (The), Variable Rate, Callable, 2.90%, 2022/08/03 2,000,000 2,016,793 2,016,628 Bell Canada, Series M-22, Callable, 4.40%, 2018/03/16 3,000,000 3,228,980 3,109,229 Bell Canada, Callable, 4.88%, 2018/04/26 350, , ,972 Bell Canada, Callable, 5.52%, 2019/02/26 2,600,000 2,912,390 2,812,587 Bell Canada, Callable, 3.25%, 2020/06/17 2,900,000 2,848,169 3,028,523 BMW Canada Inc., Series L, Floating Rate, 1.30%, 2017/02/24 1,895,000 1,895,000 1,895,608 BMW Canada Inc., Series I, Restricted, 2.33%, 2018/05/23 3,255,000 3,254,382 3,299,569 BMW Canada Inc., Series K, Restricted, 2.33%, 2018/09/26 500, , ,530 BMW Canada Inc., Series M, Restricted, 2.27%, 2018/11/26 441, , ,505 BMW Canada Inc., Series N, Floating Rate, 1.56%, 2019/06/14 3,400,000 3,400,000 3,417,270 Brookfield Asset Management Inc., Callable, 3.95%, 2019/04/09 1,000,000 1,022,470 1,041,632 Brookfield Office Properties Inc., Callable, 4.30%, 2017/01/17 500, , ,205 Caisse Centrale Desjardins du Quebec, 2.44%, 2019/07/17 4,000,000 4,007,190 4,088,808 Calloway REIT, Series J, 3.39%, 2017/12/01 2,750,000 2,756,517 2,797,395 Calloway REIT, 3.73%, 2022/07/22 2,200,000 2,206,358 2,281,504 Canadian Imperial Bank of Commerce, 1.90%, 2021/04/26 4,237,000 4,288,677 4,235,440 Canadian Imperial Bank of Commerce, 1.64%, 2021/07/12 9,000,000 8,918,130 8,872,604 Canadian Imperial Bank of Commerce, Variable Rate, Callable, 3.42%, 2026/01/26 2,415,000 2,415,000 2,461,673 Canadian Natural Resources Ltd., Callable, 2.60%, 2019/12/03 2,165,000 2,139,042 2,186,444 Canadian Natural Resources Ltd., Series 2, Callable, 2.89%, 2020/08/14 1,977,000 2,015,196 2,003,348 Canadian Western Bank, 2.10%, 2017/06/26 850, , ,871 Canadian Western Bank, 2.53%, 2018/03/22 1,050,000 1,050,000 1,058,497 Canadian Western Bank, 3.08%, 2019/01/14 3,000,000 3,000,000 3,056,683 Canadian Western Bank, Variable Rate, Callable, 3.46%, 2024/12/17 2,000,000 2,000,000 2,032,239 21