Horizons Active Cdn Municipal Bond ETF (HMP:TSX)

Transcription

1 Interim Report June 30, 2017 Horizons Active Cdn Municipal Bond ETF (HMP: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...12 Summary of Investment Portfolio...13 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...15 FINANCIAL STATEMENTS Statements of Financial Position...16 Statements of Comprehensive Income...17 Statements of Changes in Financial Position...18 Statements of Cash Flows...19 Schedule of Investments...20 Notes to Financial Statements...25

3 Letter from the President and Co-CEO: The first six months of 2017 have been full of important developments for both the global capital markets, ETFs generally and, in particular, for Horizons ETFs Management (Canada) Inc. Much of the momentum for the world s equity markets from late 2016 has carried into the first half of From an economic perspective, the global economy seems to finally be in-sync in its recovery from the global financial crisis. While U.S. equities continued to rise, previously underperforming regions of the world such as Europe and a China-led recovery in emerging markets saw even stronger returns. Now with 77 ETFs listed, Horizons ETFs offers a breadth of actively and passively managed products to benefit from this global surge in equity prices. To date, Horizons ETFs has raised more than CAD$1.1 billion in net new assets this year, which are dispersed widely across a number of asset classes. Of particular note, more than half of these inflows have come into our benchmark family of ETFs, which are predominantly comprised of our innovative family of Total Return Index (TRI) ETFs. This is an important development for our firm because, although more than half of our assets are in our actively managed family of ETFs, we are becoming an important player in Canada in offering tax-efficient index ETF strategies. On the Canadian equity side, Horizons ETFs offers arguably the lowest-cost family of index ETFs in Canada. The Horizons S&P/TSX 60 Index ETF (HXT) is the lowest-cost ETF in Canada and the Horizons Cdn High Dividend Index ETF (HXH) is one of the lowest-cost Canadian dividend focused ETFs. For investors seeking more specific sector exposure, the Horizons S&P/ TSX Capped Energy Index ETF (HXE) and the Horizons S&P/TSX Capped Financials Index ETF (HXF) are the lowest-cost ETFs in Canada offering exposure to these two large segments of the Canadian economy. We are quickly becoming a go-to ETF provider for investors looking for tax efficient core equity allocations to add to their portfolios. Of course, we have also continued our tradition of being Canada s leading provider of innovative ETF solutions. April saw the most noteworthy ETF launch in our firm s history, with the listing of the Horizons Marijuana Life Sciences Index ETF ( HMMJ ). As the world s first marijuana-focused ETF, we received global news coverage from such publications as the Wall Street Journal and The Economist. It was also one of the fastest-growing ETFs in Canadian history, as HMMJ surpassed more than $100 million in assets a mere three days after its launch. Our undertaking to you is to continue to bring forward new and innovative ETF solutions to the Canadian market. The one constant about the Canadian investment landscape is that it is always evolving. We work hard to be the ETF provider of choice for investors looking for ETF strategies to take advantage of all market conditions. 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 for the rest of 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 ( 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 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 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 HMP s investment portfolio. 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 80% of the net assets of 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, HMP may invest up to 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 HMP s investment restrictions. The Manager performs a review of the ETF s risk rating at least annually, as well as when there is a material change in the ETF s investment objective or investment strategies. The current risk rating for the ETF is: low. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on a blend of the historical rolling 3-year and 5-year standard deviations of its return, the return of an underlying index, or of an applicable proxy index. In cases where the Manager believes that this methodology produces a result that is not indicative of the ETF s future volatility, the risk rating may be determined by the ETF s category. Risk ratings are not intended for use as a substitute for undertaking a proper and complete suitability or financial assessment by an investment advisor. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. 2 Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Restrictions on certain unitholders Highly volatile markets Multi-class risk (up to April 28, 2017) 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 Liquidity risk Municipal bond risk

6 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Results of Operations For the six-month period ended June 30, 2017, the Class E units of the ETF returned 0.74%, when including distributions paid to unitholders. This compares to a return of 2.80% for the S&P Canada Provincial & Municipal Bond Index (the Index ) for the same period. For the period from January 1 to their termination on April 28, 2017, Advisor Class units of the ETF returned 0.96%. For the same period, the Index returned 2.78%. 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. General Market Review Bond markets were range-bound in the first quarter of 2017 as investors adjusted to the new U.S. administration and balanced generally positive economic news against important near-term risks. In the U.S., the Federal Open Market Committee ( FOMC ) was confident enough in its growth outlook to hike its overnight lending rate by 25 basis points ( bps ) to 1.00% at its March meeting. This followed a similar move in December Short-term yields were under some upward pressure as markets discounted moderate rate hikes going forward, but longer-term yields fell modestly. The U.S. 10-year Treasury bond yield (the U.S. 10-Year ) traded as high as 2.63% in anticipation of the U.S. Federal Reserve s (the Fed ) rate action but rallied following the announcement as Chair Yellen s post-meeting remarks were more dovish than expected. The failure of President Trump and the Republican-led Congress to pass the Affordable Health Care Act (AHCA) was also taken as a warning that other important elements of his platform may meet a similar fate. Bond markets were further supported by weaker oil prices and elevated geopolitical risks as the U.K. made good on its Brexit decision by invoking Article 50 of the European Union Treaty. Canadian bond market sentiment swung dramatically in June as remarks by Bank of Canada Deputy Governor Wilkens and Governor Poloz indicated the Bank is contemplating removing the interest rate cuts it undertook in 2015 following the drop in oil prices. Both suggested the Canadian economy has adjusted to this shift and no longer requires this additional monetary stimulus. Up to then, markets had been very complacent about potential Bank actions with rate hikes not anticipated until next year. Following these remarks the market quickly built in a rate hike for as early as July (which ended up occurring) and perhaps two by the end of the year. International reaction was also swift as the Canadian dollar gained over 5 cents against the U.S. dollar over the balance of the second quarter. The sharpest adjustment in bond yields was seen in the front-end. From mid-june prior to the Governor s statements, the five-year Government of Canada bond yields (the Canada 5-Year ) rose 44 bps to 1.39%. The Bank of Canada s pivot to a more hawkish stance came as a surprise but was not an isolated event. Just as the Canadian economy has been performing above expectations for several quarters, similar results were being observed in Europe where the European Central Bank ( ECB ) has noted an improving inflation outlook. With the resounding defeat of the anti-euro party in the French elections markets may now contemplate an end to the central bank s asset purchase program. Similarly in the U.S., the Fed continued its moderate rate hike program with the second 0.25% move of the year, bringing the Fed funds target rate to %. The accompanying FOMC statement and subsequent remarks confirmed that further moderate rate hikes are planned and that a program to reduce the Fed s balance sheet over the coming years will likely commence this year. 3

7 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Canadian bond markets were influenced by these events. The Canada 5-Year yields began the first quarter at 1.12%, traded to a high of 1.31% in mid-march but then rallied to finish the quarter unchanged at 1.12%. During the second quarter, Canada 5-Year yields kept on trending lower, hitting a bottom of 0.92% in mid-may on softer economic data. Yields spiked back up following the very hawkish comments by the Bank of Canada in late June, to close the second quarter at 1.39%. Canada yields remain well below U.S. levels. Despite recent signs of stronger growth, the Canadian economy continues to face excess slack following the retrenchment in western Canada. The Bank of Canada s outlook continues to rely on foreign demand and improved business spending to close this gap and does not expect this will occur prior to the second half of As such markets do not expect the Bank will raise rates until well into next year. Unrated municipal spreads continued to grind in through the beginning of the year as the hunt for yield continued to gain some traction. This narrowing of spreads was compounded by a dearth of issuance during late December 2016 and early January The healthy position and path toward a balanced budget by the province of Quebec and the good financial conditions of its municipalities also helped this sector to perform well during the first quarter of Unrated municipals outperformed by their higher carry, and tightened by close to 10 to 13 bps across the yield curve. Quebec rated municipals outperformed provincials during the first quarter, mainly on the back on low supply. Sector spreads were relatively stable during the second quarter and showed continued resilience to headline grabbing geo-political risks, economic growth and policy uncertainties. The high quality infrastructure sector saw strong demand which was also reflected in provincial and municipal bond spreads. Ontario s progress towards a balanced budget and Quebec s ongoing (modest) surpluses has helped to raise confidence in these two benchmark issuers. Moreover, with all-in rates creeping higher late in the second quarter, demand for non-rated municipal bonds increased and spreads remained well bid across the curve. Within the short-term (maturities between 1-5 years) and mid-term (5-10 years) parts of the yield curve, municipal bonds proved to be the top performers in the overall Canadian bond universe during the second quarter. Portfolio Review Most of the performance came from the first quarter as interest rates trended lower and spreads tightened, both of which benefited the ETF s strategy. With all-in rates increasing significantly during the last few weeks of the second quarter, the portfolio s shorter duration delivered significant outperformance, in relative terms. Moreover, demand for non-rated municipals bonds remained firm, which kept spreads well bid throughout the quarter. The ETF s portfolio has a large allocation to rated and non-rated municipal bonds in the province of Quebec. While Fiera does acknowledge the significant spread compression since levels seen in 2016, we continue 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 provincial government yield curve. While new issue levels kept on grinding in tighter, we tactically bought on the secondary market at more attractive spreads, ultimately benefitting the ETF. We expect municipalities to outperform the provincial sector over the near future as it offers an attractive carry. Summer should be quiet in terms of supply and could lead to further spread compression. Outlook 4 The municipal bond market should benefit in this environment of rising rates, as it offers an attractive carry versus provincial bonds and interesting risk-reward compared to the corporate sector. With its attractive carry, the asset class usually performs well in a rising interest rates trend. Fiera is managing the ETF s portfolio with a diversified laddered approach, which translates into a higher yielding strategy along with a well-diversified portfolio. Fiera will continue to tactically take advantage of the positive carry offered by the asset class by closely monitoring the municipal market and its underlying cyclicality.

8 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the six-month period ended June 30, 2017, the ETF generated gross comprehensive income (loss) from investments and derivatives of $961,107. This compares to $1,051,552 for the six-month period ended June 30, The ETF incurred management, operating and transaction expenses of $254,610 (2016 $206,456) of which $41,056 (2016 $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 $1,166,535 to Class E unitholders and $5,086 to Advisor Class unitholders during the period (2016 Class E: $914,730, Advisor Class: $4,440). 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. Subject to regulatory and other necessary third party approvals, a stock exchange sponsored execution program may become available which would allow investors to purchase and sell Class E units of the ETF based on transaction prices calculated as at the end-of-day net asset value, plus any fee payable to the investor s dealer for the dealer s facilitation of the purchase or sale. The Manager will issue a news release announcing the details of any such stock exchange sponsored execution program. 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, is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. 5

9 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF 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. Conversion and Termination of Advisor Class units The Manager completed the previously announced conversion (the Conversion ) of the ETF s advisor class units ( Advisor Class units ) into the ETF s common class units ( Class E units ) at the close of business on April 28, 2017 (the Conversion Date ). The remaining unitholders of record of the Advisor Class units as at the Conversion Date received a number of whole Class E units of the ETF with an aggregate net asset value ( NAV ) equal to the aggregate NAV of the Advisor Class units converted, based on the respective NAVs of the two classes as at the Conversion Date (the Conversion Ratio ). The ETF s Conversion Ratio was , meaning, that for each Advisor Class unit of the ETF subject to the Conversion, the unitholder received Class E units of the ETF. The conversion of Advisor Class units into whole Class E units of the ETF did not give rise to a disposition by unitholders of converting Advisor Class units for tax purposes on any whole units converted. Any remaining fractional Advisor Class units were redeemed for cash and such redemption is considered a disposition for tax purposes. Immediately following the completion of the Conversion, the Advisor Class units were terminated. Change to the Management Fee Effective February 7, 2017, the Manager reduced the annual management fee rates payable by the ETF s Class E units from 0.35% to 0.29%, and by the ETF s Advisor Class units from 0.85% to 0.79%, both plus applicable sales tax. Please see the Management Fees section for a full description of the services rendered in consideration of the management fee. 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 wholly-owned 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. 6

10 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Other Related Parties During the period, an affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) held an indirect minority interest in the Manager, and NBC holds an indirect minority interest in Fiera, the sub-advisor of the ETF. NBF acted as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may have created an actual or perceived conflict of interest which investors may have considered in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may have profited from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have had economic interests which may have differed from and were adverse to those of unitholders. NBF s potential roles as a designated broker and a dealer of the ETF was 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 have extended 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 was a related party to the Manager during the period. The Manager was permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complied with the predetermined list of requirements agreed upon with the IRC. For the periods ended June 30, 2017 and 2016, the ETF did not make any payments to NBF and/or its affiliates in broker commissions on portfolio transactions. Effective June 30, 2017, Horizons Management acquired the minority interest of AlphaPro owned by an affiliate of NBC and as a result, is the sole shareholder of AlphaPro. Accordingly, NBC and NBF, along with Fiera, are no longer considered affiliates or related parties of AlphaPro or the Investment Manager. 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 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 (1) Net assets, beginning of period $ Increase from operations: Total revenue Total expenses (0.01) (0.04) (0.02) Realized losses for the period (0.02) (0.03) (0.01) Unrealized gains (losses) for the period (0.01) (0.06) 0.01 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.10) (0.19) (0.05) From return of capital (0.04) (0.01) Total distributions (3) (0.10) (0.23) (0.06) Net assets, end of period (4) $

12 Financial Highlights (continued) Advisor Class Period (1) Net assets, beginning of period $ Increase from operations: Total revenue Total expenses (0.03) (0.10) (0.04) Realized losses for the period (0.02) (0.03) (0.01) Unrealized gains (losses) for the period 0.07 (0.09) 0.02 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.05) (0.14) (0.04) From return of capital (0.03) Total distributions (3) (0.05) (0.17) (0.04) Net assets, end of period (4) $ This information is derived from the ETF s unaudited interim financial statements as at June 30, 2017, for Class E units, and the audited annual financial statements as at December 31 of the other years shown for both Class E and Advisor Class units. Unaudited Advisor Class information for 2017 is presented as at the termination date of those units on April 28, 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. 9

13 Financial Highlights (continued) Ratios and Supplemental Data Class E Period (1) Total net asset value (000 s) $ 118, ,783 36,862 Number of units outstanding (000 s) 12,003 11,728 3,693 Management expense ratio (2) 0.38% 0.43% 0.42% Management expense ratio before waivers and absorptions (3) 0.45% 0.50% 1.11% Trading expense ratio (4) 0.00% 0.00% 0.02% Portfolio turnover rate (5) 27.88% % 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) 0.95% 0.99% 0.99% Management expense ratio before waivers and absorptions (3) 1.02% 1.06% 1.67% Trading expense ratio (4) 0.00% 0.00% 0.02% Portfolio turnover rate (5) 27.88% % 75.00% Net asset value per unit, end of period $ Closing market price $ This information is provided as at June 30, 2017, for Class E units, April 28, 2017, for Advisor Class units (the termination date of those units) and December 31 of the other years shown. 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. Transaction costs related to the purchase and/or sale of fixed income securities are typically imbedded in the price of those transactions and are therefore not included in the trading expense ratio. 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. 10

14 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 0.29%, plus applicable sales taxes, of the net asset value of the ETF s Class E units, calculated and accrued daily and payable monthly in arrears. Up until the termination of the ETF s Advisor Class units on April 28, 2017, as described in the section on Recent Developments, the ETF also received a monthly management fee at the annual rate of 0.79%, 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. In addition, up until the termination of the Advisor Class units, the Manager, and not the ETF, paid 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. Prior to February 7, 2017, the annual management fee rates payable by the ETF s Class E units and Advisor Class units were 0.35% and 0.85%, respectively, plus applicable sales tax, calculated and accrued daily and payable monthly in arrears. 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 6% 73% 21% 11

15 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. 1.35% 1.10% Rate of Return 0.85% 0.60% 0.35% 0.10% -0.15% Class E 0.43% 1.18% 0.74% Advisor Class 0.21% 0.62% 0.96% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at August 12, The Advisor Class returns for 2017 are up to the termination date of that class of units on April 28,

16 Summary of Investment Portfolio As at June 30, 2017 % of ETF s Asset Mix Net Asset Value Net Asset Value Canadian Fixed Income Securities $ 117,636, % Cash and Cash Equivalents 877, % Other Assets less Liabilities (393,773) -0.33% $ 118,120, % % of ETF s Sector Mix Net Asset Value Net Asset Value Municipal Bonds $ 107,699, % Provincial Bonds 9,934, % Government Bonds 2, % Cash and Cash Equivalents 877, % Other Assets less Liabilities (393,773) -0.33% $ 118,120, % 13

17 Summary of Investment Portfolio (continued) As at June 30, 2017 Top 25 Holdings* % of ETF s Net Asset Value City of Quebec 5.52% City of Montreal 5.29% Province of Ontario 5.04% City of Sherbrooke 4.36% Province of Quebec 3.37% Reseau de Transport de la Capitale 3.22% Ville de Repentigny 3.10% Ville de Candiac 2.84% Ville de Longueuil 2.75% Ville de Granby 2.37% Ville de La Tuque 2.35% Ville de Laval 2.19% Municipal Finance Authority of British Columbia 2.09% City of Dorval 1.78% Ville de Rimouski 1.69% Ville de Magog 1.67% Ville de Drummondville 1.67% City of Mirabel 1.58% Municipality of Levis 1.56% Ville de Kirkland 1.47% Ville de Mont-Saint-Hilaire 1.43% City of Vaudreuil-Dorion 1.38% Ville D Alma 1.36% Ville de Mont-Laurier 1.33% Ville de Mont-Tremblant 1.26% * Note all of the Top 25 Holdings represent the aggregate debt instruments of that issuer in the ETF s portfolio. The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent financial statements are available at no cost by calling , by writing to us at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through SEDAR at 14

18 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying 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. 15

19 Statements of Financial Position (unaudited) As at June 30, 2017 and December 31, Assets Cash and cash equivalents $ 877,358 $ 249,198 Investments 117,636, ,205,500 Amounts receivable relating to accrued income 566, ,924 Amounts receivable relating to portfolio assets sold 3,877 Total assets 119,084, ,030,622 Liabilities Accrued management fees 32,549 40,173 Accrued operating expenses 5,135 4,240 Amounts payable relating to securities redeemed 3,356 Amounts payable for portfolio assets purchased 714,639 Distribution payable 208, ,100 Total liabilities 963, ,513 Total net assets (note 2) $ 118,120,098 $ 116,770,109 Total net assets, Class E $ 118,120,098 $ 115,782,558 Number of redeemable units outstanding, Class E (note 9) 12,002,876 11,727,802 Total net assets per unit, Class E $ 9.84 $ 9.87 Total net assets, Advisor Class $ $ 987,551 Number of redeemable units outstanding, Advisor Class (note 9) 100,020 Total net assets per unit, Advisor Class $ $ 9.87 (See accompanying notes to financial statements) Approved on behalf of the Board of Directors of the Manager: Steven J. Hawkins Taeyong Lee 16

20 Statements of Comprehensive Income (unaudited) For the Periods Ended June 30, Income Interest income for distribution purposes $ 1,273,425 $ 972,292 Securities lending income (note 8) Net realized loss on sale of investments and derivatives (257,240) (195,315) Net change in unrealized appreciation (depreciation) of investments and derivatives (55,296) 274, ,107 1,051,552 Expenses Management fees (note 10) 194, ,805 Audit fees 7,329 7,131 Independent Review Committee fees Custodial fees 4,510 5,293 Legal fees 3,229 Securityholder reporting costs 23,900 16,500 Administration fees 21,666 19,790 Transaction costs 1,883 2,501 Other expenses , ,456 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (41,056) (41,182) 213, ,274 Increase in net assets for the period $ 747,553 $ 886,278 Increase in net assets, Class E $ 738,100 $ 882,581 Increase in net assets per unit, Class E Increase in net assets, Advisor Class $ 9,453 $ 3,697 Increase in net assets per unit, Advisor Class (See accompanying notes to financial statements) 17

21 Statements of Changes in Financial Position (unaudited) For the Periods Ended June 30, Total net assets at the beginning of the period $ 116,770,109 $ 37,360,892 Increase in net assets 747, ,278 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 20,558,667 70,744,875 Aggregate amounts paid on redemption of securities of the investment fund (18,785,004) (150,369) Securities issued on reinvestment of distributions Distributions: From net investment income (1,171,621) (919,170) Total net assets at the end of the period $ 118,120,098 $ 107,922,984 Total net assets at the beginning of the period, Class E $ 115,782,558 $ 36,861,788 Increase in net assets, Class E 738, ,581 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 20,558,667 70,744,875 Aggregate amounts paid on redemption of securities of the investment fund (17,793,060) (150,369) Securities issued on reinvestment of distributions Distributions: From net investment income (1,166,535) (914,730) Total net assets at the end of the period, Class E $ 118,120,098 $ 107,424,510 Total net assets at the beginning of the period, Advisor Class $ 987,551 $ 499,104 Increase in net assets, Advisor Class 9,453 3,697 Redeemable unit transactions Aggregate amounts paid on redemption of securities of the investment fund (991,944) Securities issued on reinvestment of distributions Distributions: From net investment income (5,086) (4,440) Total net assets at the end of the period, Advisor Class $ $ 498,474 (See accompanying notes to financial statements) 18

22 Statements of Cash Flows (unaudited) For the Periods Ended June 30, Cash flows from operating activities: Increase in net assets for the period $ 747,553 $ 886,278 Adjustments for: Net realized loss on sale of investments and derivatives 257, ,315 Net change in unrealized depreciation (appreciation) of investments and derivatives 55,296 (274,568) Purchase of investments (32,292,857) (153,857,113) Proceeds from the sale of investments 31,260,070 88,670,146 Amounts receivable relating to accrued income 9,645 (285,612) Accrued expenses (6,729) 27,335 Net cash from (used in) operating activities 30,218 (64,638,219) Cash flows from financing activities: Amount received from the issuance of units 19,566,723 69,748,185 Amount paid on redemptions of units (17,789,704) (151,641) Distributions paid to unitholders (1,179,077) (759,466) Net cash from financing activities 597,942 68,837,078 Net increase in cash and cash equivalents during the period 628,160 4,198,859 Cash and cash equivalents at beginning of period 249, ,331 Cash and cash equivalents at end of period $ 877,358 $ 4,566,190 Interest received, net of withholding taxes $ 1,283,070 $ 686,680 (See accompanying notes to financial statements) 19

23 Schedule of Investments (unaudited) As at June 30, Horizons Active Cdn Municipal Bond ETF Average Fair Security Par Value Cost Value CANADIAN FIXED INCOME SECURITIES (99.59%) Municipal Bonds (91.18%) City of Beaconsfield, 1.70%, 2019/04/05 235,000 $ 233,567 $ 234,751 City of Beaconsfield, 1.90%, 2020/04/05 245, , ,535 City of Dorval, 1.70%, 2019/03/16 500, , ,595 City of Dorval, 2.00%, 2020/03/16 500, , ,790 City of Dorval, 2.25%, 2021/03/16 1,100,000 1,111,715 1,105,401 City of Mirabel, 2.00%, 2018/09/09 1,220,000 1,233,176 1,218,975 City of Mirabel, 2.00%, 2020/08/26 650, , ,675 City of Montreal, 5.45%, 2019/12/01 3,100,000 3,528,608 3,382,268 City of Montreal, 4.50%, 2021/12/01 2,600,000 2,954,433 2,870,691 City of Quebec, 2.10%, 2019/06/10 5,000,000 5,064,000 5,013,198 City of Quebec, 4.35%, 2019/12/16 300, , ,017 City of Quebec, 4.25%, 2020/02/17 600, , ,370 City of Quebec, 2.00%, 2020/12/08 560, , ,719 City of Sherbrooke, 2.35%, 2018/01/30 2,434,000 2,470,680 2,440,596 City of Sherbrooke, 1.25%, 2018/06/29 800, , ,720 City of Sherbrooke, 2.45%, 2019/02/20 450, , ,761 City of Sherbrooke, 1.20%, 2019/06/08 100,000 99,376 98,953 City of Sherbrooke, 1.95%, 2020/01/26 1,350,000 1,334,232 1,351,701 City of St-Georges Quebec, 1.40%, 2018/02/24 461, , ,650 City of Toronto, 4.50%, 2019/12/02 1,000,000 1,114,900 1,069,496 City of Vaudreuil-Dorion, 1.85%, 2018/11/03 718, , ,892 City of Vaudreuil-Dorion, 2.25%, 2019/07/22 450, , ,735 City of Vaudreuil-Dorion, 1.70%, 2020/07/20 473, , ,028 Mascouche Ville, 1.50%, 2019/10/18 456, , ,832 Municipal Finance Authority of British Columbia, 2.05%, 2019/06/02 1,450,000 1,482,822 1,469,286 Municipal Finance Authority of British Columbia, 1.75%, 2020/10/15 1,000,000 1,010,420 1,002,737 Municipalite de la Paroisse de St Barthelemy, 1.20%, 2018/04/18 181, , ,433 Municipalite de la Paroisse de St Barthelemy, 1.30%, 2019/04/18 185, , ,272 Municipalite de la Paroisse de St Barthelemy, 1.50%, 2020/04/18 189, , ,122 Municipalite de la Paroisse de St Barthelemy, 1.75%, 2021/04/18 194, , ,295 Municipalite de Lac-Beauport, 1.90%, 2018/12/21 151, , ,441 Municipalite de Lac-Beauport, 2.15%, 2019/12/21 157, , ,901 Municipalite de Lac-Beauport, 2.40%, 2020/12/21 478, , ,378 Municipalité de Notre-Dame-du-Mont-Carmel, 2.00%, 2020/03/22 289, , ,442 Municipalite de Saint-Anselme, 2.15%, 2021/01/19 1,000, , ,220 Municipalite de Saint-Damase, 1.60%, 2019/03/17 186, , ,066 Municipalite de Saint-Damase, 1.90%, 2020/03/17 300, , ,398 Municipalite de Saint-Jacques, 2.40%, 2018/02/20 376, , ,166 Municipalite de Saint-Lambert-de-Lauzon, 1.75%, 2021/08/23 799, , ,496 Municipalite de Saint-Philippe, 1.60%, 2019/03/22 113, , ,598