Horizons Active Cdn Municipal Bond ETF (HMP, HMP.A:TSX)

Transcription

1 Interim Report June 30, 2016 Horizons Active Cdn Municipal Bond ETF (HMP, HMP.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...23

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

4 MANAGEMENT REPORT OF FUND PERFORMANCE This interim management report of fund performance for Horizons Active Cdn Municipal Bond ETF ( Horizons HMP 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 HMP is to seek to provide unitholders with a high level of income by investing primarily in a portfolio of Canadian municipal bonds denominated in Canadian dollars. To achieve Horizons HMP s investment objective, the ETF s portfolio sub-advisor, Fiera Capital Corporation ( Fiera or the Sub-Advisor ), uses in-depth credit analysis and other fundamental research to select fixed income securities for Horizons HMP s investment portfolio. Horizons HMP primarily invests in a portfolio of Canadian municipal bonds denominated in Canadian dollars and the ETF will be substantially invested under normal conditions. Municipal bonds, sometimes referred to as munis, are debt securities generally issued by cities, municipalities or municipal finance authorities to finance local capital expenditures such as the construction of bridges, highways, airports or schools. Issuers of municipal bonds may or may not be rated by a bond rating agency. The proportion of municipal bonds issued by unrated issuers in the ETF s portfolio will not exceed 75% of the net assets of Horizons HMP. The Sub-Advisor seeks diversification by issuer, and some diversification by geographic region, but the portfolio will generally be weighted more heavily towards Québec municipal bonds due to the predominance of Québec based issuers in the Canadian municipal bond market. A substantial number of municipal issuers, particularly in Québec, are not rated by any bond rating agency. 1

5 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Risk In order to manage the liquidity of the portfolio, Horizons HMP will generally invest between 10% and 20% of its net assets in cash and cash equivalents, Canadian provincial government bonds and/or bonds issued by Canadian federal government agencies. Please refer to the ETF s most recent prospectus for a complete description of Horizons HMP s investment restrictions. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Limited operating history Restrictions on certain unitholders Highly volatile markets Multi-class risk No guaranteed return Interest rate risk Credit risk Income trust investment risk High yield bond risk and risk of other lower rated investments Call risk Risk of difference between quoted and actionable market price Commodity price volatility risk Liquidity risk Municipal bond risk Results of Operations For the six-month period ended June 30, 2016, the Class E units and Advisor Class units of the ETF returned 1.03% and 0.76%, respectively, when including distributions paid to unitholders. General Review 2 The S&P Canada Provincial & Municipal Bond Index (the Index ) returned 4.59% for the six-month period ended June 30, The Index is a broad, comprehensive, market value-weighted index designed to measure the performance of Canadian dollar-denominated investment grade government-related bonds in provincial and municipal markets.

6 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF The Canadian bond market opened the year strongly with the 10-year Government of Canada bond yield briefly touching an all-time low yield of 0.91% in mid-february, before moving back to finish the first quarter at 1.23%. The strong opening was driven by continued softness in commodity prices and a weaker global outlook, led by slower growth in China and deflationary risks in Europe. Markets only began to recover as policy makers stepped up with renewed stimulative measures. The European Central Bank (ECB) pushed its policy rates further into negative territory and expanded its quantitative easing program to include purchases of corporate debt. The Bank of China cut bank reserve requirements to spur lending. Oil prices also found a floor after Saudi Arabia and Russia announced they would cap production levels. The second quarter was also strong for the Canadian bond market as both government and corporate bonds performed well. Much of the strength came late in the quarter when the Leave side won a surprising victory in the U.K. referendum on continued European Union membership ( Brexit ). Global bond markets rallied on the result, led by the U.K. and other European sovereign bonds. Following the vote the German 10-year Bund yield fell into negative territory for the first time, joining Switzerland and Japan with this extraordinary distinction. Prior to the Brexit vote, North American bond markets had been somewhat range bound as investors weighed the odds of a possible rate hike by the U.S. Federal Reserve (the Fed ) against mixed economic signals. In particular, U.S. job growth appeared to slow in April and May while other indicators pointed to a moderate bounce in second quarter GDP growth. In Canada, the recovery in oil prices towards $50/barrel provided some stability. The Brexit result immediately ended this debate and took the odds of near term rate action by the Fed off the table. By the end of the second quarter, the yield on the Canada five year bond was just 0.57%, down 11 basis points from the end of March and 16 basis points for the year to date. Sector performance was strong since the beginning of the year. Investors looking for safer but higher yields favored provincial and municipal bonds which tightened sectors spreads. Provincial bonds were the best performers and municipal and corporate bonds also outperformed federal bonds. Even with the Brexit vote in June, the average spread on corporate bonds narrowed by 10 basis points versus similarly dated Government of Canada bonds. Energy related issuers were among the best performers since the beginning of the year as firming oil prices provided support to these issuers. Other sectors also did well as investor demand picked up in the face of moderating yields. Portfolio Review The ETF is still overweight rated and non-rated municipal bonds in the province of Quebec with a large allocation to this segment. Fiera continues to see much value in this segment taking into account the fundamentals and large liquidity premiums. This is due to the large carry over other municipalities in Canada and over the Quebec Government yield curve. The ETF participated in multiple new issues where we were able to buy at attractive levels and select good municipalities according to Fiera s credit process. As the second quarter went by, municipal spreads tightened, but widened again following the Brexit event, to finally remain unchanged on the quarter. The ETF seized this opportunity to buy at attractive levels. Fiera expects the municipal bond sector to outperform the provincial bond sector over the next year as it offers an attractive carry. Outlook So far this year, the only constant has been change. Early in the year markets were mesmerized by oil as it plunged toward multi-decade lows, only to reverse as drilling activity ceased and prices recovered. This was followed by an apparent set back in the Fed s march to higher rates as U.S. job growth mysteriously slowed. Now Brexit adds to these uncertainties. The ramifications of the U.K. s exit from the European Union will have the biggest direct impact on the U.K. and its European partners; however it compounds the already sluggish outlook for global expansion and will dampen policy makers appetite for pulling back on already generous stimulus measures. Adding to this uncertainty is the upcoming U.S. Presidential campaign and the Fed s typical hesitancy to impact U.S. monetary policy leading up to elections. 3

7 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Under these circumstances Fiera finds it difficult to make a definitive statement on the direction of bond yields in the months ahead. It is likely the irresistible pull of negative yields in many developed economies and longer term deflationary trends will continue to keep yields at levels that our text books tell us are not possible. Given this, we expect to manage duration strategy close to benchmark until we have greater clarity on these events and prefer to direct our risk towards harvesting attractive credit and liquidity premiums. In this low yield environment, yield enhancing strategies should continue to do well. The municipal bond market should benefit from this environment as it offers an attractive carry and interesting risk-reward compared to the corporate bond sector. Finally, we are still managing the strategy with a diversified laddered approach, which translates into a higher yielding strategy along with a well-diversified portfolio. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $1,051,552. The period ended June 30, 2016 is the first full interim reporting period for the ETF, therefore there are no 2015 numbers with which to compare the 2016 operating items. The ETF paid management, operating and transaction expenses of $206,456 of which $41,182 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 $914,730 to Class E unitholders and $4,440 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 4 The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS.

8 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. Fiera, the sub-advisor of the ETF, is an affiliate of NBF and, as stated above, an affiliate of NBF holds an indirect minority interest in the Manager. As a result, Fiera may be considered to be an associate of the Manager. NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its affiliates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. The ETF, in its course of normal business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that is a related party to the Manager. The Manager is permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complies with the predetermined list of requirements agreed upon with the IRC. For the period ended June 30, 2016, the ETF did not make any payments 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 August 12, 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 (0.02) (0.02) Realized losses for the period (0.03) (0.01) Unrealized gains for the period Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.12) (0.05) From return of capital (0.01) Total distributions (3) (0.12) (0.06) 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 (0.05) (0.04) Realized losses for the period (0.03) (0.01) Unrealized gains for the period Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.09) (0.04) Total distributions (3) (0.09) (0.04) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2016 and the audited annual financial statements as at December 31, Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at August 12, 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) $ 107,425 36,862 Number of units outstanding (000 s) 10,778 3,693 Management expense ratio (2) 0.43% 0.42% Management expense ratio before waivers and absorptions (3) 0.54% 1.11% Trading expense ratio (4) 0.01% 0.02% Portfolio turnover rate (5) % 75.00% 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) 0.99% 0.99% Management expense ratio before waivers and absorptions (3) 1.10% 1.67% Trading expense ratio (4) 0.01% 0.02% Portfolio turnover rate (5) % 75.00% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2016 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 0.35%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 0.85%, plus applicable sales taxes, of the net asset value of the ETF s Advisor Class units, calculated and accrued daily and payable monthly in arrears. The Manager, and not the ETF, will pay to registered dealers a service fee equal to 0.50% per year of the net asset value of Advisor Class units held by clients of the registered dealer. No service fees are paid to registered dealers in respect of Class E units. The Investment Manager and Sub-Advisor are compensated for their services out of the management fees without any further cost to the ETF. Any expenses of the ETF which are waived or absorbed by the Manager are paid out of the management fees received by the Manager. The table below details, in percentage terms, the services received by the ETF from the Manager in consideration of the management fees paid during the period. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 9% 64% 27% 9

13 Past Performance Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF. Please read the prospectus before investing. The indicated rates of return are the historical total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any investor that would have reduced returns. An investment in the ETF is not guaranteed. Its value changes frequently and past performance may not be repeated. The ETF s performance numbers assume that all distributions are reinvested in additional units of the ETF. If you hold this ETF outside of a registered plan, income and capital gains distributions that are paid to you increase your income for tax purposes whether paid to you in cash or reinvested in additional units. The amount of the reinvested taxable distributions is added to the adjusted cost base of the units that you own. This would decrease your capital gain or increase your capital loss when you later redeem from the ETF, thereby ensuring that you are not taxed on this amount again. Please consult your tax advisor regarding your personal tax situation. Year-by-Year Returns The following chart presents the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period. 1.50% 1.25% 1.00% Rate of Return 0.75% 0.50% 0.25% 0.00% Class E 0.43% 1.03% Advisor Class 0.21% 0.76% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at August 12,

14 Summary of Investment Portfolio As at June 30, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Canadian Bonds $ 107,478, % Cash and Cash Equivalents 4,566, % Other Assets less Liabilities (4,122,158) -3.82% $ 107,922, % % of ETF s Sector Mix Net Asset Value Net Asset Value Municipal Bonds $ 101,609, % Provincial Bonds & Guarantees 5,867, % Federal Bonds & Guarantees 2, % Cash and Cash Equivalents 4,566, % Other Assets less Liabilities (4,122,158) -3.82% $ 107,922, % 11

15 Summary of Investment Portfolio (continued) As at June 30, 2016 Top 25 Holdings* % of ETF s Net Asset Value City of Montreal 9.01% City of Quebec 6.15% Municipal Finance Authority of British Columbia 4.76% City of Sherbrooke 4.70% Province of Ontario 3.91% Ville de Repentigny 3.21% Municipality of Levis 3.20% City of Candiac 3.11% Ville de Granby 3.01% Ville de Longueuil 2.81% Ville de Laval 2.47% Ville de Terrebonne 2.16% Ville de Rimouski 1.87% Ville de Beloeil 1.86% City of St-Jean-sur-Richelieu Quebec 1.79% City of Mirabel 1.74% Ville de Kirkland 1.62% Ville de Mont-Saint-Hilaire 1.57% Province of Quebec 1.53% Reseau de Transport de la Capitale 1.39% Ville de Mont-Tremblant 1.39% Municipality of Saint-Calixte 1.29% Ville de Saint-Lin-Laurentides 1.26% Ville D Alma 1.25% Ville de Saint-Felicien 1.24% * 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 12

16 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying unaudited interim financial statements of Horizons Active Cdn Municipal 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. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. NOTICE TO UNITHOLDERS The Auditors of the ETF have not reviewed these Financial Statements. AlphaPro Management Inc., the Manager of the ETF, appoints an independent auditor to audit the ETF s annual financial statements. The ETF s independent auditors have not performed a review of these interim financial statements in accordance with Canadian generally accepted auditing standards. 13

17 Statements of Financial Position (unaudited) As at June 30, 2016 and December 31, Assets Cash and cash equivalents $ 4,566,190 $ 367,331 Investments 107,478,952 36,904,523 Amounts receivable relating to accrued income 435, ,413 Amounts receivable relating to portfolio assets sold 3,176,556 Accounts receivable relating to securities issued 996,690 Total assets 116,653,413 37,421,267 Liabilities Accrued expenses 39,818 12,483 Amounts payable relating to securities redeemed 1,272 Amounts payable for portfolio assets purchased 8,484,765 Distribution payable 205,846 46,620 Total liabilities 8,730,429 60,375 Total net assets (note 2) $ 107,922,984 $ 37,360,892 Total net assets, Class E $ 107,424,510 $ 36,861,788 Number of redeemable units outstanding, Class E (note 9) 10,777,735 3,692,699 Total net assets per unit, Class E $ 9.97 $ 9.98 Total net assets, Advisor Class $ 498,474 $ 499,104 Number of redeemable units outstanding, Advisor Class (note 9) 50,008 50,000 Total net assets per unit, Advisor Class $ 9.97 $ 9.98 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 14

18 Statement of Comprehensive Income (unaudited) For the Period Ended June 30, Income Interest income for distribution purposes $ 972,292 Securities lending income (note 8) 7 Net realized loss on sale of investments and derivatives (195,315) Net change in unrealized appreciation of investments and derivatives 274,568 1,051,552 Expenses Management fees (note 10) 151,805 Audit fees 7,131 Independent Review Committee fees 92 Custodial fees 5,293 Legal fees 3,229 Securityholder reporting costs 16,500 Administration fees 19,790 Transaction costs 2,501 Other expenses ,456 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (41,182) 165,274 Increase in net assets for the period $ 886,278 Increase in net assets, Class E $ 882,581 Increase in net assets per unit, Class E 0.12 Increase in net assets, Advisor Class $ 3,697 Increase in net assets per unit, Advisor Class 0.07 (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 $ 37,360,892 Increase in net assets 886,278 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 70,744,875 Aggregate amounts paid on redemption of securities of the investment fund (150,369) Securities issued on reinvestment of distributions 478 Distributions: From net investment income (919,170) Total net assets at the end of the period $ 107,922,984 Total net assets at the beginning of the period, Class E $ 36,861,788 Increase in net assets, Class E 882,581 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 70,744,875 Aggregate amounts paid on redemption of securities of the investment fund (150,369) Securities issued on reinvestment of distributions 365 Distributions: From net investment income (914,730) Total net assets at the end of the period, Class E $ 107,424,510 Total net assets at the beginning of the period, Advisor Class $ 499,104 Increase in net assets, Advisor Class 3,697 Redeemable unit transactions Securities issued on reinvestment of distributions 113 Distributions: From net investment income (4,440) Total net assets at the end of the period, Advisor Class $ 498,474 (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 $ 886,278 Adjustments for: Net realized loss on sale of investments and derivatives 195,315 Net change in unrealized appreciation of investments and derivatives (274,568) Purchase of investments (153,857,113) Proceeds from the sale of investments 88,670,146 Amounts receivable relating to accrued income (285,612) Accrued expenses 27,335 Net cash used in operating activities (64,638,219) Cash flows from financing activities: Amount received from the issuance of units 69,748,185 Amount paid on redemptions of units (151,641) Distributions paid to unitholders (759,466) Net cash from financing activities 68,837,078 Net increase in cash and cash equivalents during the period 4,198,859 Cash and cash equivalents at beginning of period 367,331 Cash and cash equivalents at end of period $ 4,566,190 Interest received $ 686,680 (See accompanying notes to financial statements) 17

21 Schedule of Investments (unaudited) As at June 30, Horizons Active Cdn Municipal Bond ETF Average Fair Security Par Value Cost Value CANADIAN BONDS (99.59%) Municipal Bonds (94.15%) City of Beaconsfield, 1.70%, 2019/04/05 235,000 $ 233,566 $ 234,875 City of Beaconsfield, 1.90%, 2020/04/05 245, , ,491 City of Brossard, 2.10%, 2017/07/31 318, , ,172 City of Candiac, 1.50%, 2019/07/06 960, , ,648 City of Candiac, 1.70%, 2020/07/06 1,017,000 1,006,830 1,006,830 City of Candiac, 1.90%, 2021/07/06 1,410,000 1,396,083 1,396,041 City of Dorval, 1.70%, 2019/03/16 500, , ,912 City of Dorval, 2.00%, 2020/03/16 500, , ,144 City of Mirabel, 2.00%, 2018/09/09 1,220,000 1,233,176 1,224,398 City of Mirabel, 2.00%, 2020/08/26 650, , ,513 City of Montreal, 5.00%, 2018/12/01 2,970,000 3,275,923 3,235,495 City of Montreal, 5.45%, 2019/12/01 3,100,000 3,528,608 3,515,800 City of Montreal, 4.50%, 2021/12/01 2,600,000 2,954,433 2,976,430 City of Quebec, 2.10%, 2019/06/10 5,000,000 5,064,003 5,081,032 City of Quebec, 4.35%, 2019/12/16 300, , ,910 City of Quebec, 4.25%, 2020/02/17 600, , ,867 City of Quebec, 2.00%, 2020/12/08 560, , ,580 City of Sherbrooke, 2.35%, 2018/01/30 2,434,000 2,470,680 2,464,912 City of Sherbrooke, 1.25%, 2018/06/29 800, , ,448 City of Sherbrooke, 2.45%, 2019/02/20 450, , ,927 City of Sherbrooke, 1.95%, 2020/01/26 1,350,000 1,334,232 1,351,472 City of St-Georges Quebec, 1.40%, 2018/02/24 461, , ,612 City of St-Jean-sur-Richelieu Quebec, 1.60%, 2016/12/16 295, , ,165 City of St-Jean-sur-Richelieu Quebec, 4.15%, 2016/12/21 824, , ,450 City of St-Jean-sur-Richelieu Quebec, 1.40%, 2019/06/22 300, , ,487 City of St-Jean-sur-Richelieu Quebec, 2.20%, 2020/12/18 500, , ,500 City of Toronto, 4.50%, 2019/12/02 1,000,000 1,114,900 1,108,075 City of Vaudreuil-Dorion, 1.85%, 2018/11/03 718, , ,327 Gaspe Ville, 1.50%, 2018/02/16 300, , ,953 Municipal Finance Authority of British Columbia, 2.05%, 2019/06/02 4,020,000 4,110,997 4,122,398 Municipal Finance Authority of British Columbia, 1.75%, 2020/10/15 1,000,000 1,010,420 1,016,975 Municipalite de Lac-Beauport, 1.50%, 2017/12/21 147, , ,990 Municipalite de Lac-Beauport, 1.90%, 2018/12/21 151, , ,697 Municipalite de Lac-Beauport, 2.15%, 2019/12/21 157, , ,740 Municipalite de Lac-Beauport, 2.40%, 2020/12/21 478, , ,699 Municipalite de Notre-Dame-du-Mont-Carmel, 2.00%, 2020/03/22 289, , ,538 Municipalite de Rawdon, 1.50%, 2017/09/01 172, , ,670 Municipalite de Saint-Anselme, 2.15%, 2021/01/19 1,000, ,750 1,003,206 Municipalite de Saint-Damase, 1.60%, 2019/03/17 186, , ,976 Municipalite de Saint-Damase, 1.90%, 2020/03/17 300, , ,628

22 Schedule of Investments (unaudited) (continued) As at June 30, 2016 Average Fair Security Par Value Cost Value Municipalite de Saint-Jacques, 2.40%, 2018/02/20 376, , ,460 Municipalite de Saint-Philippe, 1.25%, 2017/03/22 107, , ,708 Municipalite de Saint-Philippe, 1.60%, 2019/03/22 113, , ,395 Municipalite de Saint-Philippe, 1.75%, 2020/03/22 117, , ,818 Municipalite de Saint-Roch-de-l Achigan, 1.25%, 2017/05/17 177, , ,595 Municipalite de St-Isidore, 1.40%, 2016/12/03 123, , ,961 Municipalite de St-Isidore, 1.65%, 2017/12/03 127, , ,006 Municipalite de St-Zacharie, 2.10%, 2018/07/23 187, , ,722 Municipalite d Eastman, 1.75%, 2018/12/21 158, , ,765 Municipality of Caplan Quebec, 2.35%, 2018/01/29 250, , ,555 Municipality of Les Cedres, 1.30%, 2017/01/26 126, , ,797 Municipality of Les Cedres, 1.50%, 2018/01/26 129, , ,602 Municipality of Levis, 4.20%, 2016/12/20 969, , ,887 Municipality of Levis, 4.40%, 2017/05/29 424, , ,111 Municipality of Levis, 1.20%, 2017/06/08 165, , ,817 Municipality of Levis, 1.85%, 2019/06/02 392, , ,555 Municipality of Levis, 2.30%, 2019/06/03 1,450,000 1,476,100 1,472,344 Municipality of Saint-Calixte, 1.30%, 2017/01/25 121, , ,803 Municipality of Saint-Calixte, 1.40%, 2018/01/25 124, , ,423 Municipality of Saint-Calixte, 2.00%, 2020/01/25 130, , ,902 Municipality of Saint-Calixte, 2.30%, 2021/01/25 1,000, ,350 1,012,910 Regional Municipality of York, 4.50%, 2020/06/30 1,000,000 1,126,510 1,122,544 Reseau de Transport de la Capitale, 1.30%, 2018/06/08 1,512,000 1,503,986 1,502,595 Reseau de Transport de Longueuil, 1.20%, 2018/05/18 230, , ,684 Reseau de Transport de Longueuil, 1.50%, 2019/05/18 239, , ,615 Reseau de Transport de Longueuil, 1.70%, 2020/05/18 249, , ,765 Sainte-Anne-des-Plaines, 1.65%, 2019/02/23 311, , ,471 Victoriaville Quebec, 2.90%, 2018/09/18 512, , ,237 Victoriaville Quebec, 2.35%, 2020/10/19 220, , ,567 Village de Val-David, 2.00%, 2019/07/28 157, , ,984 Village of Coaticook, 1.30%, 2017/03/01 235, , ,704 Village of Coaticook, 1.40%, 2018/03/01 241, , ,456 Village of Coaticook, 1.70%, 2019/03/01 247, , ,173 Village of Coaticook, 1.90%, 2020/03/01 253, , ,627 Ville D Alma, 2.20%, 2018/02/05 353, , ,150 Ville D Alma, 2.05%, 2021/03/02 1,000, , ,147 Ville de Beauharnois, 2.00%, 2019/12/21 122, , ,896 Ville de Beloeil, 2.45%, 2017/10/11 750, , ,023 Ville de Beloeil, 1.75%, 2018/09/08 600, , ,282 Ville de Beloeil, 2.85%, 2018/10/15 432, , ,974 Ville de Beloeil, 2.05%, 2019/12/01 209, , ,406 19

23 Schedule of Investments (unaudited) (continued) As at June 30, 2016 Average Fair Security Par Value Cost Value 20 Ville de Berthierville, 1.30%, 2017/02/17 361, , ,484 Ville de Berthierville, 1.70%, 2019/02/17 379, , ,983 Ville de Boucherville, 1.40%, 2018/05/04 221, , ,895 Ville de Brownsburg-Chatham, 2.45%, 2020/10/19 157, , ,829 Ville de Cap-Santé, 1.30%, 2017/01/25 133, , ,862 Ville de Chambly, 1.85%, 2019/08/18 106, , ,131 Ville de Cowansville, 1.50%, 2018/01/26 552, , ,298 Ville de Cowansville, 1.90%, 2020/01/26 280, , ,838 Ville de Dolbeau-Mistassini, 1.50%, 2018/03/15 859, , ,775 Ville de Dollard-des-Ormeaux, 2.00%, 2020/03/23 1,242,000 1,237,728 1,249,758 Ville de Farnham, 1.30%, 2017/02/16 150, , ,783 Ville de Farnham, 1.40%, 2018/02/16 154, , ,215 Ville de Farnham, 1.70%, 2019/02/16 157, , ,574 Ville de Fermont, 1.40%, 2016/11/24 117, , ,972 Ville de Gatineau, 4.25%, 2017/03/20 250, , ,984 Ville de Gatineau, 4.25%, 2019/12/02 160, , ,696 Ville de Gatineau, 2.20%, 2020/09/15 500, , ,947 Ville de Granby, 1.75%, 2017/12/16 446, , ,233 Ville de Granby, 1.50%, 2018/03/23 412, , ,985 Ville de Granby, 2.90%, 2018/09/18 279, , ,174 Ville de Granby, 1.85%, 2020/03/23 853, , ,591 Ville de Granby, 4.20%, 2021/02/22 252, , ,403 Ville de Granby, 1.75%, 2021/07/06 1,000, , ,900 Ville de Kirkland, 1.90%, 2020/02/02 1,742,000 1,725,068 1,745,654 Ville de La Prairie, 2.45%, 2017/09/10 223, , ,721 Ville de Lac-Brome, 2.30%, 2017/09/19 512, , ,960 Ville de Lachute, 1.50%, 2017/09/23 123, , ,739 Ville de Laval, 5.00%, 2019/03/11 1,462,000 1,598,258 1,598,808 Ville de Laval, 4.35%, 2019/11/04 975,000 1,060,858 1,061,768 Ville de L Île-Perrot, 1.70%, 2018/09/22 397, , ,476 Ville de Longueuil, 1.85%, 2017/11/19 750, , ,496 Ville de Longueuil, 1.80%, 2018/11/10 300, , ,010 Ville de Longueuil, 1.70%, 2020/07/13 1,000, , ,280 Ville de Longueuil, 1.85%, 2021/07/13 1,000, , ,790 Ville de Lorraine, 1.65%, 2019/02/23 182, , ,312 Ville de Mercier, 1.30%, 2016/09/22 241, , ,918 Ville de Mercier, 1.70%, 2018/09/22 256, , ,390 Ville de Mont-Saint-Hilaire, 2.15%, 2018/11/26 612, , ,276 Ville de Mont-Saint-Hilaire, 2.75%, 2018/11/27 1,062,000 1,087,817 1,080,606 Ville de Mont-Tremblant, 2.25%, 2018/01/23 1,485,000 1,501,397 1,502,187 Ville de Plessisville, 1.30%, 2017/03/22 243, , ,424 Ville de Plessisville, 1.50%, 2018/03/22 249, , ,677

24 Schedule of Investments (unaudited) (continued) As at June 30, 2016 Average Fair Security Par Value Cost Value Ville de Prevost, 1.65%, 2018/08/24 249, , ,290 Ville de Repentigny, 1.30%, 2017/03/30 254, , ,601 Ville de Repentigny, 1.40%, 2019/06/29 1,608,000 1,589,765 1,589,765 Ville de Repentigny, 1.60%, 2020/06/29 1,639,000 1,617,021 1,617,021 Ville de Rimouski, 2.60%, 2019/04/01 1,174,000 1,201,742 1,208,226 Ville de Rimouski, 2.30%, 2020/12/01 800, , ,682 Ville de Riviere-Du-Loup, 2.40%, 2020/11/24 162, , ,572 Ville de Roberval, 2.00%, 2020/09/01 500, , ,622 Ville de Rosemere, 1.30%, 2017/06/22 243, , ,033 Ville de Rosemere, 1.85%, 2018/11/18 376, , ,094 Ville de Rouyn-Noranda, 2.05%, 2017/02/27 440, , ,571 Ville de Rouyn-Noranda, 4.30%, 2017/03/21 107, , ,169 Ville de Rouyn-Noranda, 1.30%, 2017/03/30 632, , ,053 Ville de Saguenay, 2.60%, 2017/04/18 575, , ,487 Ville de Saint-Basile-Le-Grand, 1.50%, 2018/03/22 364, , ,976 Ville de Saint-Basile-Le-Grand, 1.85%, 2020/03/22 593, , ,126 Ville de Sainte Marthe-Sur Le-Lac, 2.00%, 2020/05/27 270, , ,642 Ville de Sainte-Adele, 1.60%, 2017/12/01 332, , ,263 Ville de Sainte-Catherine, 1.65%, 2019/02/23 452, , ,487 Ville de Sainte-Catherine-de-la-Jacques, 2.25%, 2017/12/04 300, , ,008 Ville de Sainte-Catherine-de-la-Jacques, 2.50%, 2018/08/27 406, , ,825 Ville de Sainte-Julie, 1.25%, 2017/04/19 592, , ,310 Ville de Sainte-Marie, 1.40%, 2018/04/27 366, , ,711 Ville de Sainte-Marie, 1.75%, 2020/04/27 500, , ,712 Ville de Saint-Felicien, 1.75%, 2018/01/27 200, , ,800 Ville de Saint-Felicien, 1.60%, 2019/02/02 560, , ,304 Ville de Saint-Felicien, 2.00%, 2020/02/02 575, , ,041 Ville de Saint-Hyacinthe, 4.25%, 2017/03/27 100, , ,037 Ville de Saint-Hyacinthe, 1.25%, 2017/05/19 384, , ,492 Ville de Saint-Hyacinthe, 1.60%, 2017/11/17 400, , ,452 Ville de Saint-Jerome, 4.65%, 2017/10/09 750, , ,765 Ville de Saint-Lin-Laurentides, 1.30%, 2017/02/09 235, , ,631 Ville de Saint-Lin-Laurentides, 1.75%, 2020/03/23 982, , ,108 Ville de Saint-Lin-Laurentides, 2.35%, 2020/10/20 155, , ,178 Ville de St-Bruno-De-Montarville, 1.40%, 2017/09/08 491, , ,265 Ville de St-Raymond, 1.65%, 2019/02/23 247, , ,374 Ville de St-Sauveur, 2.00%, 2020/09/01 600, , ,747 Ville de Terrebonne, 2.35%, 2016/08/22 630, , ,890 Ville de Terrebonne, 2.30%, 2017/11/28 1,685,000 1,706,197 1,703,911 Ville de Thetford Mines, 1.30%, 2016/09/01 474, , ,876 Ville de Thetford Mines, 2.10%, 2017/01/23 211, , ,846 21