Horizons Auspice Managed Futures Index ETF (HMF, HMF.A:TSX)

Transcription

1 Annual Report December 31, 2016 (HMF, HMF.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...8 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...23

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 HMF 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 Horizons HMF investment objectives are to seek investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the Auspice Managed Futures Excess Return Index (the Managed Futures Index ), hedged to the Canadian dollar. Horizons HMF seeks to benefit from trends in the commodity and financial futures markets. The Managed Futures Index is exposed to five or more broad sectors (e.g. energies, metals, agricultural commodities, interest rates, and currencies). Horizons HMF seeks to achieve its investment objective by gaining exposure to a portfolio of securities and other instruments that provide exposure to the five sectors of the commodity and financial futures markets hedged to the Canadian dollar (the Managed Futures Portfolio ). Until recently, Horizons HMF had entered into forward purchase and sale agreements (see the Forward Agreement below) with an acceptable counterparty pursuant to which the ETF gained exposure to the Managed Futures Portfolio. The Managed Futures Portfolio is comprised primarily of futures contracts, financial swaps, total return swaps, physical commodities and T-bills or short term interest rate derivatives, but may also include exchange-traded funds that directly or indirectly, and only, hold commodities, commodity futures or other derivatives linked to either commodities or commodity futures from time to time. Up until the end of March 2016, the Managed Futures Portfolio was held by the HAP 1

5 Management Discussion of Fund Performance (continued) Managed Futures Fund (the Fund ), which was managed by the Manager, advised by the ETF s investment manager and sub-advised by Auspice Capital Advisors Ltd. ( Auspice or the Sub-Advisor ). The Fund sought to gain exposure to a currency hedged portfolio of the constituent securities and other instruments of the Managed Futures Index in substantially the same proportion as the Managed Futures Index in order to provide investors with exposure to the return and performance of the Managed Futures Index hedged to the Canadian dollar, net of expenses. Concurrent with the termination of the Forward Agreements (see below), the Fund was terminated at the end of March The ETF now holds the Managed Futures Portfolio directly. The Managed Futures Index The Managed Futures Index is an index that is designed to capture the economic benefit derived from both rising and declining trends within the commodity and financial futures markets over time. The Managed Futures Index uses a rules based quantitative methodology to track the prices of a diversified portfolio of traditional commodity and financial futures contracts or components which will cover the energies, metals, and agricultural commodities sectors as well as interest rate and currency sectors. The Managed Futures Index components can vary in position size and can either be long or short at any time. The determination of position size and whether to be long or short is based on the methodology and changes can occur on any day. The Managed Futures Index uses a quantitative trend following strategy to determine component entries and exits. The Managed Futures Index is positioned either long or short in each component at all times depending on the direction of the prevailing trend. The Managed Futures Index allocates risk and sizes positions based on each component s historical volatility. Position sizes are normalized based on the volatility of the component s price. The size of the position that the Managed Futures Index takes in any component is dependent only upon the individual component s volatility and the total value of the Managed Futures Index (i.e. it is independent of any other component s volatility or position). Please refer to the ETF s most recent prospectus for a complete description of Horizons HMF s and the HAP Managed Futures Fund s investment restrictions. The Forward Agreements Until the end of March 2016, to achieve its investment objective, the ETF had entered into multiple forward purchase and sale agreements ( Forward Agreements ) each with a bank counterparty (each a Forward Counterparty ). The Forward Agreements provided both positive and negative exposure to the Managed Futures Portfolio. The ETF sought to achieve its investment objective through the net notional exposure of its respective Forward Agreements ( Net Notional Exposure ). To serve as collateral to the Forward Agreements, the ETF generally invested its assets in interest bearing accounts and short-term Canadian federal or provincial treasury bills ( T-bills ) to earn prevailing short-term market interest rates. The Forward Agreements were terminated at the end of March 2016 and the ETF now seeks to achieve its investment objective by holding the Managed Futures Portfolio directly. Forward Counterparties to any Forward Agreements entered into by the ETF must be a chartered Canadian bank or an affiliate of a chartered Canadian bank whose obligations are guaranteed by a chartered Canadian bank, and which had a designated rating. In respect of short-term securities or instruments (where the maturity date of the security or instrument is less than one year), Forward Counterparties must have a designated rating for Commercial Paper/Short-Term Debt no lower than (a) Dominion Bond Rating Service Limited ( DBRS ) - R-1(low) ; (b) Fitch Ratings ( Fitch ) - F1 ; (c) Moody s Investors Service ( Moody s ) - P-1 ; and (d) Standard & Poor s ( S&P ) - A-1(Low). 2

6 Management Discussion of Fund Performance (continued) Risk In respect of long-term securities or instruments (where the maturity date of the security or instrument is equal to or greater than one year), Forward Counterparties must have a designated rating for Long-Term Debt no lower than (a) DBRS - A ; (b) Fitch - A ; (c) Moody s - A2 ; and (d) S&P - A. Forward Counterparties are subject to the applicable short-term or long-term designated rating restrictions listed above. The Forward Counterparty to the Forward Agreements, National Bank of Canada ( NBC ), met those designated rating requirements for the period up until the Forward Agreements were terminated. Since the Forward Agreements, like most forward agreements, could settle the obligations of each party on a net basis, the exposure of the ETF to the credit risk of any one Forward Counterparty was limited to the positive mark-to-market of the Forward Agreements, in aggregate, entered into with that Forward Counterparty, which was calculated and accrued on a daily basis. 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: medium. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on 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. Investments in the units of the ETF are speculative, involve a degree of risk and are suitable only for persons who are able to assume the risk of losing their entire investment. 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 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 prospectus. A full description of each risk listed below may also be found in the prospectus. The prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. 3

7 Management Discussion of Fund Performance (continued) Commodity risk Contango or backwardation risk Risks relating to index replication strategy Correlation risk Leverage risk Risks relating to use of derivatives Concentration risk Spot vs. futures risk Changes to the Managed Futures Index Aggressive investment technique risk No assurance of meeting investment objectives Trading in derivatives is highly leveraged Market and market volatility risk Counterparty risk Regulatory risk Corresponding net asset value risk General risk of investing in exchange traded funds Exchange risk Liquidity risk Designated broker/dealer risk Cease trading of securities risk Tax risks Early closing risk Liability of unitholders Market for units Securities lending risk No ownership interest Redemption price Suspension of redemptions Significant redemptions Price limit risk General economic, political and market conditions No guaranteed return No replication of the performance of the price of commodities Risks of investing in commodity-based exchange traded funds Foreign currency risk Foreign security and exchange risk Failure of futures commission merchant Valuation Reliance on key personnel Distribution risk No assurance of continued participation Reliance on the Manager, Investment Manager and the Sub-Advisor Results of Operations For the year ended December 31, 2016, the Class E and Advisor Class units of the ETF returned 3.30% and 2.41%, respectively. This compares to the ETF s benchmark, the Managed Futures Index, which returned 4.87% for the same period. Strategy and Index The Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The Managed Futures Index uses a quantitative trend following methodology to track either long or short positions in a diversified portfolio of 21 exchange traded futures which cover the energy, metal, agricultural, interest rate, and currency sectors. The Managed Futures Index incorporates dynamic risk management and contract rolling methods. Index Performance Review This past year was one of historic events, some well-anticipated and others surprising - such as the results of the both the U.K. referendum to leave the European Union ( Brexit ) and Donald Trump s election to the U.S. presidency. Regardless, they were catalysts for market activity that was challenging for trends, inducing major reversals and whipsaws. However, with careful risk management demonstrated, this can lead to a positive environment for the agile Auspice strategy. 4

8 Management Discussion of Fund Performance (continued) While perhaps not as surprising as the U.S. election or Brexit, the U.S. Federal Reserve (the Fed ) raised its overnight lending rate at its December meeting, in a much-anticipated move, adding that it is planning another three moves in Interest rates had been rising (futures falling) since peaking in early July and accelerating in the post-u.s. election period. While expected, this appears to be another catalyst event as both financial and commodity markets continued to respond. For the year, both commodity and financial sectors contributed positively to performance, with a slight edge to commodities (2.7% versus 2.2%). The Managed Futures Index made gains in four of the five sub-sectors within the larger commodity and financial sectors. Agricultural futures, interest rate futures, metals, and currencies were all positive contributors to performance while the energy sector was the only negative, as it struggled with numerous trend changes. The ETF s portfolio finished 2016 long 6 of 12 commodity components (or 50%) and includes all three sectors energy, metals, and agriculture. This is a sharp contrast from a year ago when 11 of 12 commodity components were short. Commodities continued to have a very strong year, with benchmarks such as the Bloomberg Commodity Index gaining over 11% on the year. The trend in commodities ended the year quite positively. In the financial markets, there was a similar significant change as the portfolio transitioned to short interest rate futures (higher rates) for the first time in many years. Additionally, strength in the U.S. dollar has the portfolio positioned for short currencies vis-a-vis the U.S. dollar. The most profitable positions for the year were from both long and short exposures: long in sugar, soybeans, silver and the Japanese yen; and additional gains from shorts in bond futures and wheat. We reiterate a cautionary tone: given the high levels of global equity markets and macro volatility, coupled with a number of significant unknowns (including a new U.S. president and upcoming European elections), risk management and a rules-based process should lead any strategy, even those that are index-based. 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 $394,845. This compares to ($526,358) for the year ended December 31, The ETF incurred management, operating and transaction expenses of $235,950 (2015 $322,655). Of these expenses, the Manager either paid or absorbed $89,122 (2015 $97,245) 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 its discretion. The ETF did not make any distributions to unitholders during the years ended December 31, 2016 and 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 off set any expenses incurred in issuing the units. 5

9 Management Discussion of Fund Performance (continued) 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, Termination of Forward Agreements In early 2016, the Manager determined that the ETF s Forward Agreements were no longer providing material operational efficiency to unitholders of the ETF. As a result, the Manager decided to terminate the ETF s existing Forward Agreements at the end of March 2016 and to acquire, in the market, the same, or substantially the same, assets as those held by the HAP Managed Futures Fund at the time (to which the ETF was exposed through its Forward Agreements). The HAP Managed Futures Fund was terminated concurrent with the termination of the Forward Agreements. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. 6

10 Management Discussion of Fund Performance (continued) 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 and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. 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 s potential roles as a designated broker and a dealer of the ETF are 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. 7

11 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 April 2, 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 annual or interim financial statements. The ETF s Net Assets per Unit Class E Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.18) (0.23) (0.22) (0.10) (0.04) Realized gains (losses) for the year 1.27 (0.10) (0.31) (0.88) Unrealized gains (losses) for the year (0.81) (0.54) Total increase (decrease) from operations (2) 0.32 (0.81) 1.09 (0.19) (0.88) Total annual distributions (3) Net assets, end of year (4) $ Advisor Class Year Net assets, beginning of year (1) $ Increase (decrease) from operations: Total revenue Total expenses (0.26) (0.31) (0.29) (0.18) (0.10) Realized gains (losses) for the year 1.23 (0.10) (0.31) (0.87) Unrealized gains (losses) for the year (0.83) (0.53) Total increase (decrease) from operations (2) 0.18 (0.88) 0.80 (0.05) (0.90) Total annual distributions (3) 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 and Advisor Class units have an initial net asset value of $10.00 as at April 2, 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.

12 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 7,195 7,718 7,261 8,146 4,842 Number of units outstanding (000 s) Management expense ratio (2) (5) 1.12% 1.21% 1.22% 1.19% 1.18% Management expense ratio excluding proportion of expenses from underlying investment funds 1.09% 1.09% 0.98% 0.53% 0.51% Management expense ratio before waivers and absorptions (3) 2.24% 2.44% 2.52% 2.20% 4.64% Trading expense ratio (4) (5) 0.69% 1.39% 1.56% 0.68% 0.68% Trading expense ratio excluding proportion of costs from underlying investment funds 0.64% 1.26% 1.46% 0.53% 0.60% Portfolio turnover rate (6) 0.00% 0.00% % 58.61% 54.86% Net asset value per unit, end of year $ Closing market price $ Advisor Class Year (1) Total net asset value (000 s) $ 596 1,068 1,892 2,569 2,582 Number of units outstanding (000 s) Management expense ratio (2) (5) 1.99% 2.08% 2.09% 2.07% 2.02% Management expense ratio excluding proportion of expenses from underlying investment funds 1.96% 1.96% 1.85% 1.40% 1.35% Management expense ratio before waivers and absorptions (3) 3.12% 3.32% 3.40% 3.08% 5.48% Trading expense ratio (4) (5) 0.69% 1.39% 1.56% 0.68% 0.68% Trading expense ratio excluding proportion of costs from underlying investment funds 0.64% 1.26% 1.46% 0.53% 0.60% Portfolio turnover rate (6) 0.00% 0.00% % 58.61% 54.86% 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 their management fees, the Manager pays for such services to the ETF as portfolio 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 its discretion. 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 management expense ratio (MER) and trading expense ratio (TER) include an estimated proportion of the MER and TER for any underlying investment funds held in the ETF s portfolio during the year. 6. The ETF s portfolio turnover rate indicates how actively its portfolio investments are traded. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. Generally, the higher the 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. Futures transactions have zero transactional and marked-to-market value at the time they are entered into, either as a long or short transaction. Even though these futures have a long or short notional exposure to an underlying asset, because of this zero transactional value it always results in a portfolio turnover calculation, as prescribed by National Instrument , of zero. 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 and, prior to its termination, the Fund (together, the Funds ) 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 Funds; arranging for the maintenance of accounting records for the Funds; preparing reports to unitholders and to the applicable securities regulatory authorities; calculating the amount and determining the frequency of distributions by the Funds; preparing financial statements, income tax returns and financial and accounting information as required by the Funds; ensuring that unitholders are provided with financial statements and other reports as are required from time to time by applicable law; ensuring that the Funds comply with all other regulatory requirements, including the continuous disclosure obligations of the Funds under applicable securities laws; administering purchases, redemptions and other transactions in units of the Funds; and dealing and communicating with unitholders of the Funds. The Manager provides office facilities and personnel to carry out these services, if not otherwise furnished by any other service provider to the Funds. The Manager also monitors the investment strategies of the Funds to ensure that the ETF and the Fund each 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 0.95%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 1.70%, 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, pays to registered dealers a service fee equal to 0.75% 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 Manager paid substantially more than 100% of the management fees it received from the ETF during the year towards marketing and promotional costs, and towards the fees associated with the managerial, portfolio management and portfolio management and portfolio advisory services provided to the ETF. Fees related to the operation of the Forward Agreements are not included in the management fees or other operating expenses of the ETF. From the ETF s inception until their termination at the end of March 2016, forward fees related to the Forward Agreements, as described in the Fees and Expenses section of the ETF s prospectus, were payable to the Forward Counterparty based on the net assets of the HAP Managed Futures Fund. For the purposes of financial reporting, these expenses have been disclosed in transaction costs in the statements of comprehensive income and are included in the trading expense ratio in the management report of fund performance. 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, if any, 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 performance of the ETF 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 % 15.00% 10.00% Rate of Return 5.00% 0.00% -5.00% % Class E Short 0.00% -0.08% -0.07% 0.00% -3.71% Class E Long -7.20% 0.45% 15.64% -6.84% 7.01% Class E Total -7.20% 0.37% 15.57% -6.84% 3.30% Advisor Cl. Short 0.00% 0.46% -0.21% 0.00% -4.60% Advisor Cl. Long -7.80% -0.96% 14.78% -7.65% 7.01% Advisor Cl. Total -7.80% -0.50% 14.57% -7.65% 2.41% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at April 2,

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 compared with the ETF s applicable benchmark. 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 1 Year 3 Year Since Inception Class E Return % Advisor Class Return % Auspice Managed Futures Excess Return Index Return % Short -3.71% -4.60% Long 7.01% 7.01% Total 3.30% 2.41% 4.87% Short -1.28% -1.62% Long 4.88% 4.34% Total 3.61% 2.71% 4.26% Short -0.83% -0.93% Long 1.57% 0.81% Total 0.75% -0.12% 1.50% Class E and Advisor Class units of the ETF have an initial net asset value of $10.00 as at April 2,

16 Summary of Investment Portfolio As at December 31, 2016 % of ETF s Asset & Sector Mix Net Asset Value Net Asset Value Long Positions Futures Contracts Commodity Speculative* $ 205, % Futures Contracts Currency Index Speculative* 8, % Currency Forward Hedge* (11,721) -0.15% Cash and Cash Equivalents 6,685, % Margin Deposits 823, % Other Assets less Liabilities 3, % Short Positions Futures Contracts Commodity Speculative* 35, % Futures Contracts Currency Speculative* 32, % Futures Contracts Treasury Bond Speculative* 8, % $ 7,791, % *Positions in futures and/or forward contracts are disclosed as the gain/(loss) that would be realized if the contracts were closed out on the date of this report. 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 13

17 Summary of Investment Portfolio (continued) As at December 31, 2016 Top Holdings** % of ETF s Net Asset Value Long Positions Cotton Futures 8.52% Gasoline Futures 8.47% NY Harbor ULSD Futures 7.60% Crude Oil Futures 6.87% Copper Futures 6.48% Natural Gas Futures 5.54% U.S. Dollar Index Futures 5.29% Short Positions U.S. Treasury Bond Futures -2.60% British Pound Currency Futures -2.66% Japanese Yen Currency Futures -3.70% Australian Dollar Currency Futures -3.72% Euro Currency Futures -4.56% Canadian Dollar Currency Futures -5.13% Corn Futures -6.90% Sugar Futures -7.91% Wheat Futures -8.23% Silver Futures -8.27% U.S. 10-Year Treasury Bond Futures -8.57% Soybean Futures % Gold 100oz. Futures % U.S. 5-Year Treasury Bond Futures % ** All futures positions are speculative in nature. Positions in futures contracts are disclosed in terms of their notional exposure. Aggregate notional exposure of futures contracts equals % of the ETF s NAV. The summaries of investment portfolio may change due to the ongoing portfolio transactions of the ETF and of the Fund. 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 (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 (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 held for collateral $ $ 7,601,141 Cash and cash equivalents other 6,685, ,087 Margin deposits (note 13) 823,580 Amounts receivable relating to accrued income 13,251 5,074 Derivative assets (note 3) 363, ,437 Total assets 7,885,496 8,821,739 Liabilities Accrued expenses 9,633 18,181 Derivative liabilities (note 3) 84,420 18,260 Total liabilities 94,053 36,441 Total net assets (note 2) $ 7,791,443 $ 8,785,298 Total net assets, Class E $ 7,194,991 $ 7,717,510 Number of redeemable units outstanding, Class E (note 10) 694, ,500 Total net assets per unit, Class E $ $ Total net assets, Advisor Class $ 596,452 $ 1,067,788 Number of redeemable units outstanding, Advisor Class (note 10) 60, ,000 Total net assets per unit, Advisor Class $ 9.94 $ 9.71 (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 $ 30,762 $ 55,409 Securities lending income (note 9) 559 2,298 Net realized gain (loss) on sale of investments and derivatives 989,527 (89,288) Net realized gain on foreign exchange 21,949 Net change in unrealized depreciation of investments and derivatives (656,392) (494,777) Net change in unrealized appreciation of foreign exchange 8, ,845 (526,358) Expenses Management fees (note 11) 93, ,456 Audit fees 9,258 9,410 Independent Review Committee fees Custodial fees 3, Legal fees 6,712 15,092 Securityholder reporting costs 29,988 30,654 Administration fees 41,665 42,876 Transaction costs 52, , , ,655 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (89,122) (97,245) 146, ,410 Increase (decrease) in net assets for the year $ 248,017 $ (751,768) Increase (decrease) in net assets, Class E $ 234,436 $ (623,587) Increase (decrease) in net assets per unit, Class E 0.32 (0.81) Increase (decrease) in net assets, Advisor Class $ 13,581 $ (128,181) Increase (decrease) in net assets per unit, Advisor Class 0.18 (0.88) (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 $ 8,785,298 $ 9,153,453 Increase (decrease) in net assets 248,017 (751,768) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 4,073,751 3,046,560 Aggregate amounts paid on redemption of securities of the investment fund (5,315,623) (2,662,947) Total net assets at the end of the year $ 7,791,443 $ 8,785,298 Total net assets at the beginning of the year, Class E $ 7,717,510 $ 7,261,462 Increase (decrease) in net assets, Class E 234,436 (623,587) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 3,830,238 3,046,560 Aggregate amounts paid on redemption of securities of the investment fund (4,587,193) (1,966,925) Total net assets at the end of the year, Class E $ 7,194,991 $ 7,717,510 Total net assets at the beginning of the year, Advisor Class $ 1,067,788 $ 1,891,991 Increase (decrease) in net assets, Advisor Class 13,581 (128,181) Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 243,513 Aggregate amounts paid on redemption of securities of the investment fund (728,430) (696,022) Total net assets at the end of the year, Advisor Class $ 596,452 $ 1,067,788 (See accompanying notes to financial statements) 19