Horizons Active Emerging Markets Dividend ETF (HAJ, HAJ.A:TSX)

Transcription

1 Annual Report December 31, 2015 Horizons Active Emerging Markets Dividend ETF (HAJ, HAJ.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...7 Past Performance...11 Summary of Investment Portfolio...13 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING...15 INDEPENDENT AUDITORS REPORT...16 FINANCIAL STATEMENTS Statements of Financial Position...17 Statements of Comprehensive Income...18 Statements of Changes in Financial Position...19 Statements of Cash Flows...20 Schedule of Investments...21 Notes to Financial Statements...23

3 Letter from the Co-CEO: The story for investors in 2015 was one of a return to volatility, especially in the North American markets. Canadian equities declined noticeably and in the U.S., the S&P 500 experienced its first 10% correction in over three years, only to rally to end the year with a modest loss. Additionally, the Canadian Dollar had its worst performing year relative to the U.S. Dollar since 2008 and we saw very marginal returns from the fixed income markets. For Horizons ETFs, this year could be called The Year of the Active ETF, since many of our actively managed equity and fixed income ETFs delivered strong relative returns. Portfolio managers who can identify sectors or individual securities with better relative returns can, and do, deliver attractive results, assuming they are not burdened with the high management fees that can plague many actively managed mutual funds. Over the past year, we received many third party industry accolades and awards for our Active ETFs, which combine top-tier professional portfolio management with competitive management fees. This past year was also one where we demonstrated our unique market leadership position in indexing. The Horizons S&P/TSX 60 Index ETF ( HXT ) celebrated its five-year anniversary with an additional rebate, which lowered the ETF s effective management fee to 0.03% (from 0.05%), making it the lowest-cost fund in Canada. HXT was the first ETF that we launched with a unique total return swap structure that seeks to improve tracking error and tax efficiency by way of its synthetic structure. We now have six such ETFs in our benchmark family, including the Horizons US 7-10 Year Treasury Bond ETF ( HTB ) launched in April Most investment metrics suggest that we could be at or near the end of a five-year Goldilocks market a climate of perpetually higher returns and low volatility. As a firm, we re generally agnostic on the direction of where capital markets are headed, but we do think it s fair to say that an unprecedented era of easy returns is over. Since there isn t a single solution to investment success, we believe that our diverse suite of Canadian ETF solutions offers investors the flexibility to react efficiently to ever-changing market conditions into 2016 and beyond. Of course, you re not alone in your investment process. I urge you to visit our website at where we offer a range of resources designed to help you become a better ETF investor. Most importantly, it s our goal to help you find the best ETF solutions for your unique investment needs. Wishing you the best for 2016, Steven J. Hawkins Co-CEO Horizons ETFs Management (Canada) Inc.

4 MANAGEMENT REPORT OF FUND PERFORMANCE Horizons Active Emerging Markets Dividend ETF This annual management report of fund performance for Horizons Active Emerging Markets Dividend ETF ( Horizons HAJ or the ETF ) contains financial highlights and is included with the audited annual financial statements for the investment fund. You may request a copy of the ETF s unaudited interim or audited annual financial statements, interim or annual management report of fund performance, current proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures, at no cost, from the ETF s manager, AlphaPro Management Inc. ( AlphaPro or the Manager ), by calling toll free , or locally (416) , by writing to us at: 26 Wellington Street East, Suite 700, Toronto ON, M5E 1S2, or by visiting our website at or SEDAR at This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance, or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, and the effects of competition in the geographic and business areas in which the ETF may invest and the risks detailed from time to time in the ETF s prospectus. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. We caution that the foregoing list of factors is not exhaustive, and that when relying on forward-looking statements to make decisions with respect to investing in the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Manager does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Management Discussion of Fund Performance Investment Objective and Strategies The investment objective of Horizons HAJ is to seek long-term returns consisting of regular dividend income and modest long-term capital growth. Horizons HAJ invests primarily in equity and equity related securities of companies with operations in emerging market economies. To achieve Horizons HAJ s investment objectives, the ETF s sub-advisor, Guardian Capital LP ( Guardian Capital or the Sub-Advisor ), selects high quality dividend paying companies from different sectors located, or with a significant presence, in emerging economies, which in its view, demonstrate the potential for growth and consistent dividends. The portfolio investments are diversified among countries with emerging economies which offer the prospect of higher returns and faster economic growth measured through gross domestic product ( GDP ). Horizons HAJ may hedge some or all of its non-canadian dollar currency exposure at the discretion of the Sub-Advisor. To achieve its investment objective, the Sub-Advisor primarily invests in equity securities listed on North American exchanges including American Deposit Receipts ( ADRs ) and may also from time to time invest in preferred and fixed-income securities such as government bonds, corporate bonds or treasury bills. The Sub-Advisor may sell short equity securities it believes will underperform on a relative basis or to otherwise assist the ETF in meeting its investment objectives. Please refer to the ETF s most recent prospectus for a complete description of Horizons HAJ s investment restrictions. 1

5 Management Discussion of Fund Performance (continued) Horizons Active Emerging Markets Dividend ETF Risk The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before subscribing for units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. Stock market risk Specific issuer risk Legal and regulatory risk Exchange traded funds risk Reliance on historical data risk Corresponding net asset value risk Designated broker/dealer risk Cease trading of securities risk Exchange risk Early closing risk No assurance of meeting investment objective Tax risk Securities lending, repurchase and reverse repurchase transaction risk Loss of limited liability Reliance on key personnel Distributions risk Conflicts of interest No ownership interest Market for units Redemption price Net asset value fluctuation Restrictions on certain unitholders Highly volatile markets Multi-class risk No guaranteed return Derivatives risk Foreign currency risk Emerging markets risk Leveraged ETFs risk Foreign stock exchange risk Short selling risk Results of Operations For the year ended December 31, 2015, the Class E units and Advisor Class units of the ETF returned 4.71% and 3.83%, respectively, when including distributions paid to unitholders. By comparison, the MSCI Emerging Markets Index (the Index ) and the BNY Mellon Emerging Markets 50 ADR Index returned 1.29% and -0.40%, respectively, for the same period in Canadian dollar terms (-14.92% and %, respectively, in U.S. dollars), both on a total return basis. The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. With 838 constituents, the Index covers approximately 85% of the free float-adjusted market capitalization in each country. The BNY Mellon Emerging Markets ADR Index is capitalization-weighted and designed to track the performance of approximately 50 emerging market-based American Depository Receipts (ADRs). 2

6 Management Discussion of Fund Performance (continued) Horizons Active Emerging Markets Dividend ETF General Market Review The past year saw a clear divergence in global markets. While emerging economies continued to slump, dragged down by commodity prices, the picture was much more optimistic in developed markets where strong domestic demand buoyed equities. In both the U.S. and the Eurozone, growth in the service sector outpaced manufacturing, largely spurred by increased consumer confidence. However, the two regions find themselves at polar ends of the business cycle. The U.S. appears to be further along in its economic recovery, hence the divergence in monetary policies between their respective central banks. As the U.S. Federal Reserve (the Fed ) embarks on its first cycle of interest rate tightening since the financial crisis, the European Central Bank (the ECB ) is reacting to an environment of disinflationary pressures with yet more quantitative easing. In the U.S., an increasingly strong labour market along with a surge in housing starts in November gave the Fed the necessary fodder to execute a planned 25 basis points (bps) interest rate hike. Still, the path to normalization will be fraught with uncertainty, as pockets of the economy remain weak. The current landscape with its strong dollar and low inflation warrants only gradual increases according to Janet Yellen. Meanwhile, the commodities rout, which saw oil tumble another 12% in December, has spilled over into the high-yield bond market. Premiums widened to 700 bps in the last month of trading a level not seen since June Canada continues to languish from soft oil prices. Declining revenues have decimated investment spending amongst the country s energy producers and the weak Canadian dollar has curbed the import of capital goods in other industries. Meanwhile, the cost of borrowing is trending ever higher, triggered by the collapse of the high-yield bonds in the U.S. Within the Eurozone, upticks in domestic demand and consumer confidence, particularly in the problematic peripheries of Spain and Italy, led an equities rally. Year-over-year gross domestic product (GDP) grew by 1.5%, a trend that looks to continue as business lending and household credit expands for the first time since the global recovery took hold. Headwinds remain, however, as unemployment floats above historical averages, net exports struggle - declining by 0.8% - and inflation falls short of its 2% target. The ECB is doing what it can to circumvent these roadblocks, bringing its key policy rate further into negative territory to -0.3% while simultaneously announcing a 6-month extension to its quantitative easing program. Though the move expands the program by roughly a third of what was initially proposed, the market seems to have been left wanting. The Euro rallied immediately following the announcement as short- and long-term German Bunds sold off. Still, the currency ends the year 12% weaker against the dollar, which bodes well for equities moving forward. China, which saw a significant drop in its industrial output in 2015, continues to be a major source of deflationary pressure on the global economy. GDP is set to grow at 6.3%, the lowest since 1990, and China s official Purchasing Managers Index (PMI) stood at 49.7, indicating a fifth consecutive month of contracting manufacturing activity. All this has translated into weak demand for capital goods and commodities, the ramifications of which are bearish for the rest of the emerging markets. With investment winding down, consumption must now act as the key driver of growth. It remains to be seen whether the transition can be accomplished tactfully through widened social nets that encourage more spending and less saving. In the meantime, the government s interest in having the Yuan included as a major reserve currency will curb any drastic depreciation of the Yuan and avoid any currency volatility that that would entail. Portfolio Review The ETF s outperformance over the Index was largely driven by strong returns in the Industrial sector. In addition, positive performance from stock selection came from Mexican infrastructure stocks. For example, Grupo Aeroporturario Del Pacifico SA de CV returned 76% for the year. Underperformance came primarily from Brazilian utilities. While having slightly better stock selection, the portfolio did have an overweight relative to the Index, which caused negative allocation performance. 3

7 Management Discussion of Fund Performance (continued) Horizons Active Emerging Markets Dividend ETF A number of portfolio trades were done throughout the year to change the ETF s weightings relative to the Index. Positions were added to reduce the significant under exposure to China. A number of Brazilian positions were sold to reduce the Brazil weighting. Finally, the ETF increased its exposure to India which was showing relative outperformance relative to the Index. Geographically, the ETF s portfolio is underweight China (-14.0%) and South Korea (-9.2%) and overweight Mexico (+18.9%) and Chile (10.61%). In terms of sector allocations, the ETF maintains overweight positions in relation to the Index in the yield bearing areas of the market, which include Telecommunication Services (+12.9%), Consumer Staples (+8.8%), and Utilities (+6.7%). Underweight sectors include Financials (-13.1%), Information Technology (-8.6%), and Consumer Discretionary (-8.3%). In terms of portfolio characteristics, the portfolio exhibits a strong year over year revenue growth rate of 0.61% compared to -19.9% for the index. The portfolio has a large cap, high-quality bias. Outlook The global economic recovery remains fragile, particularly now that the U.S. is engaged in a cycle of tightening amidst a backdrop of low inflation and a dollar rally. With this in mind, shareholder yield and income oriented strategies should focus on downside protection as well as stable and sustainable yield. A stock selection framework built upon the cornerstones of growth, payout, and sustainability will be able to withstand any renewed market volatility. Rather than focusing on high-yield stocks, the portfolio that follows from such a strategy is well diversified across all sectors, with the goal of achieving better downside protection and reduced volatility. The portfolio is naturally geared towards dividend growth instead of dividend yield - where the certainty and visibility of cash flows is paramount. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units For the year ended December 31, 2015, the ETF generated gross comprehensive income (loss) from investments and derivatives of $367,809. This compares to $254,211 for the year ended December 31, The ETF paid management, operating and transaction expenses of $165,370 (2014 $183,980) of which $75,004 (2014 $85,180) 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 $121,376 to Class E unitholders and $8,564 to Advisor Class unitholders during the year (2014 Class E: $145,728, Advisor Class: $8,706). 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. 4

8 Management Discussion of Fund Performance (continued) Horizons Active Emerging Markets Dividend ETF All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance for periods starting on or after January 1, 2013 is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. Any information presented for periods prior to January 1, 2013 is in accordance with Canadian generally accepted accounting principles ( Canadian GAAP ). Recent Developments There are no recent industry, management or ETF related developments that are pertinent to the present and future of the ETF. Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. 5

9 Management Discussion of Fund Performance (continued) Horizons Active Emerging Markets Dividend ETF NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its affiliates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. For the years ended December 31, 2015 and 2014, the ETF paid $760 (2014 $5,421) to NBF and/or its affiliates in broker commissions on portfolio transactions. 6

10 Financial Highlights The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance since it effectively began operations on October 10, This information is derived from the ETF s audited annual financial statements. Please see the front page for information on how you may obtain the ETF s annual or interim financial statements. The ETF s Net Assets per Unit Class E Year Net assets, beginning of year (1) $ Increase from operations: Total revenue Total expenses (0.17) (0.16) (0.16) (0.02) Realized gains (losses) for the year (0.30) Unrealized gains (losses) for the year 0.22 (0.70) Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.25) (0.21) (0.31) From net realized capital gains (0.06) From return of capital (0.03) (0.05) Total annual distributions (3) (0.28) (0.27) (0.31) (0.05) Net assets, end of year (4) $

11 Financial Highlights (continued) Advisor Class Year Net assets, beginning of year (1) $ Increase from operations: Total revenue Total expenses (0.28) (0.26) (0.25) (0.04) Realized gains (losses) for the year (0.30) Unrealized gains (losses) for the year 0.20 (0.11) Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.17) (0.16) (0.21) From net realized capital gains (0.01) From return of capital (0.04) Total annual distributions (3) (0.17) (0.17) (0.21) (0.04) 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 of the ETF have an initial net asset value of $10.00 as at October 10, Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Net assets per unit and distributions are based on the actual number of units outstanding at the relevant time. The increase (decrease) from operations is based on the weighted average number of units outstanding over the financial period. 3. Income, dividend and/or return of capital distributions, if any, are paid in cash, reinvested in additional units of the ETF, or both. Capital gains distributions, if any, may or may not be paid in cash. Noncash capital gains distributions are reinvested in additional units of the ETF and subsequently consolidated. They are reported as taxable distributions and increase each unitholder s adjusted cost base for their units. Neither the number of units held by the unitholder, nor the net asset per unit of the ETF change as a result of any non-cash capital gains distributions. Distributions classified as return of capital, if any, decrease each unitholder s adjusted cost base for their units. The characteristics of distributions, if any, are determined subsequent to the end of the ETF s tax year. Until such time, distributions are classified as from net investment income (excluding dividends) for reporting purposes. 4. The Financial Highlights are not intended to act as a continuity of the opening and closing net assets per unit. 8

12 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 4,781 5,249 5,001 4,896 Number of units outstanding (000 s) Management expense ratio (2) 0.90% 0.91% 0.90% 0.89% Management expense ratio before waivers and absorptions (3) 2.14% 2.16% 2.41% 5.31% Trading expense ratio (4) 0.01% 0.14% 0.06% 0.18% Portfolio turnover rate (5) 11.01% 87.53% 35.46% 25.21% Net asset value per unit, end of year $ Closing market price $ Advisor Class Year (1) Total net asset value (000 s) $ Number of units outstanding (000 s) Management expense ratio (2) 1.75% 1.75% 1.75% 1.73% Management expense ratio before waivers and absorptions (3) 2.93% 2.94% 3.19% 6.14% Trading expense ratio (4) 0.01% 0.14% 0.06% 0.18% Portfolio turnover rate (5) 11.01% 87.53% 35.46% 25.21% Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the years shown. Information from 2013 onwards is in accordance with IFRS. Information for years prior to 2013 is reported under Canadian GAAP. 2. Management expense ratio is based on total expenses, including sales tax, (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the year. Out of its management fees, the Manager pays for such services to the ETF as investment manager compensation, service fees and marketing. 3. The Manager, at its discretion, may waive and/or absorb a portion of the fees and/or expenses otherwise payable by the ETF. The waiving and/or absorption of such fees and/or expenses by the Manager may be terminated at any time, or continued indefinitely, at the discretion of the Manager. 4. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the year. 5. The ETF s portfolio turnover rate indicates how actively its portfolio investments are traded. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. Generally, the higher the ETF s portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the ETF. 9

13 Financial Highlights (continued) Management Fees The Manager appoints the Investment Manager and provides, or oversees the provision of, administrative services required by the ETF including, but not limited to: negotiating contracts with certain third-party service providers, such as portfolio managers, custodians, registrars, transfer agents, auditors and printers; authorizing the payment of operating expenses incurred on behalf of the ETF; arranging for the maintenance of accounting records for the ETF; preparing reports to unitholders and to the applicable securities regulatory authorities; calculating the amount and determining the frequency of distributions by the ETF; preparing financial statements, income tax returns and financial and accounting information as required by the ETF; ensuring that unitholders are provided with financial statements and other reports as are required from time to time by applicable law; ensuring that the ETF complies with all other regulatory requirements, including the continuous disclosure obligations of the ETF under applicable securities laws; administering purchases, redemptions and other transactions in units of the ETF; and dealing and communicating with unitholders of the ETF. The Manager provides office facilities and personnel to carry out these services, if not otherwise furnished by any other service provider to the ETF. The Manager also monitors the investment strategies of the ETF to ensure that the ETF complies with its investment objectives, investment strategies and investment restrictions and practices. In consideration for the provision of these services, the Manager receives a monthly management fee at the annual rate of 0.80%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 1.55%, plus applicable sales taxes, of the net asset value of the ETF s Advisor Class units, calculated and accrued daily and payable monthly in arrears. The Manager, and not the ETF, will pay to registered dealers a service fee equal to 0.75% 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 advisory services provided to the ETF. 10

14 Past Performance Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF. Please read the prospectus before investing. The indicated rates of return are the historical total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any investor that would have reduced returns. An investment in the ETF is not guaranteed. Its value changes frequently and past performance may not be repeated. The ETF s performance numbers assume that all distributions are reinvested in additional units of the ETF. If you hold this ETF outside of a registered plan, income and capital gains distributions that are paid to you increase your income for tax purposes whether paid to you in cash or reinvested in additional units. The amount of the reinvested taxable distributions is added to the adjusted cost base of the units that you own. This would decrease your capital gain or increase your capital loss when you later redeem from the ETF, thereby ensuring that you are not taxed on this amount again. Please consult your tax advisor regarding your personal tax situation. Year-by-Year Returns The following chart shows the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period % 8.00% Rate of Return 6.00% 4.00% 2.00% 0.00% Class E 5.84% 8.54% 7.38% 4.71% Advisor Class 5.65% 7.62% 6.47% 3.83% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 10,

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, 2015 along with comparable market indices. The table is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the ETF or future returns on investments in the ETF. Period Class E Return % Advisor Class Return % MSCI Emerging Markets Index ($CAD) Return % BNY Emerging Markets ADR Index ($CAD) Return % 1 Year 4.71% 3.83% 1.29% -0.40% 3 Year 6.87% 5.96% 4.05% 3.29% Since Inception 8.26% 7.35% 6.36% 5.21% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at October 10,

16 Summary of Investment Portfolio As at December 31, 2015 % of ETF s Asset Mix Net Asset Value Net Asset Value Mexico Equities $ 1,303, % Taiwan Equities 739, % Chile Equities 634, % India Equities 603, % Brazil Equities 576, % Hong Kong Equities 347, % South Korea Equities 340, % China Equities 294, % Bermuda Equities 141, % Philippines Equities 130, % Indonesia Equities 129, % South Africa Equities 96, % Cash and Cash Equivalents 43, % Other Assets less Liabilities (5,044) -0.09% $ 5,377, % % of ETF s Sector Mix Net Asset Value Net Asset Value Telecommunication Services $ 1,009, % Consumer Staples 918, % Industrials 877, % Financials 822, % Information Technology 633, % Energy 495, % Utilities 219, % Materials 202, % Health Care 160, % Cash and Cash Equivalents 43, % Other Assets less Liabilities (5,044) -0.09% $ 5,377, % 13

17 Summary of Investment Portfolio (continued) As at December 31, 2015 Top 25 Holdings % of ETF s Net Asset Value Grupo Aeroportuario del Centro Norte SAB de CV, ADR 5.34% Grupo Aeroportuario del Pacifico SA de CV, ADR 5.00% Fomento Economico Mexicano SAB de CV, ADR 4.04% Siliconware Precision Industries Co., ADR 3.85% Taiwan Semiconductor Manufacturing Co. Ltd., ADR 3.63% China Mobile Ltd., ADR 3.62% Industrias Bachoco SAB de CV, ADR 3.55% Chunghwa Telecom Co. Ltd., ADR 3.48% SK Telecom Co. Ltd., ADR 3.42% Compania Cervecerias Unidas SA, ADR 3.40% Grupo Aeroportuario del Sureste SA de CV, ADR 3.26% ICICI Bank Ltd., ADR 3.16% Dr. Reddy s Laboratories Ltd., ADR 2.98% KT Corp., ADR 2.91% Advanced Semiconductor Engineering Inc., ADR 2.80% Endurance Specialty Holdings Ltd. 2.63% Ambev SA, ADR 2.60% Philippine Long Distance Telephone Co., ADR 2.42% PT Telekomunikasi Indonesia TBK, ADR 2.40% Enersis SA, ADR 2.28% Ultrapar Participações SA, ADR 2.20% Coca-Cola FEMSA SAB de CV, ADR 2.19% China Petroleum and Chemical Corp. (Sinopec), ADR 2.16% HDFC Bank Ltd., ADR 1.90% Corpbanca SA, ADR 1.90% The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent financial statements are available at no cost by calling , by writing to us at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through SEDAR at 14

18 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Active Emerging Markets Dividend ETF (the ETF ) are the responsibility of the manager and trustee to the ETF, AlphaPro Management Inc. (the Manager ). They have been prepared in accordance with International Financial Reporting Standards using information available and include certain amounts that are based on the Manager s best estimates and judgments. The Manager has developed and maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to produce relevant, reliable and timely financial information, including the accompanying financial statements. These financial statements have been approved by the Board of Directors of the Manager and have been audited by KPMG LLP, Chartered Professional Accountants, Licensed Public Accountants, on behalf of unitholders. The independent auditors report outlines the scope of their audit and their opinion on the financial statements. Steven J. Hawkins Director AlphaPro Management Inc. Taeyong Lee Director AlphaPro Management Inc. 15

19 INDEPENDENT AUDITORS REPORT To the Unitholders of Horizons Active Emerging Markets Dividend ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2015 and 2014, 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 ETF 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, 2015 and 2014, 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 9, 2016 Toronto, Canada 16

20 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 43,737 $ 271,921 Investments 5,339,160 5,572,431 Amounts receivable relating to accrued income 9,798 7,483 Total assets 5,392,695 5,851,835 Liabilities Accrued expenses 5,596 8,378 Distribution payable 9,246 11,304 Total liabilities 14,842 19,682 Total net assets (note 2) $ 5,377,853 $ 5,832,153 Total net assets, Class E (note 2) $ 4,780,887 $ 5,249,268 Number of redeemable units outstanding, Class E (note 9) 400, ,311 Total net assets per unit, Class E (note 2) $ $ Total net assets, Advisor Class (note 2) $ 596,966 $ 582,885 Number of redeemable units outstanding, Advisor Class (note 9) 50,000 50,000 Total net assets per unit, Advisor Class (note 2) $ $ (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 Dividend income $ 198,625 $ 194,860 Securities lending income 8,089 7,279 Net realized gain on sale of investments and derivatives 35, ,629 Net realized gain (loss) on foreign exchange 15,975 (675) Net change in unrealized appreciation (depreciation) of investments and derivatives 107,505 (376,804) Net change in unrealized appreciation (depreciation) of foreign exchange 1,814 (2,078) 367, ,211 Expenses Management fees (note 10) 59,414 65,753 Audit fees 11,180 14,911 Independent Review Committee fees Custodial fees 468 1,168 Legal fees Securityholder reporting costs 27,945 30,442 Administration fees 36,040 38,839 Transaction costs 815 9,622 Withholding taxes 29,287 22,194 Other expenses , ,980 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (75,004) (85,180) 90,366 98,800 Increase in net assets for the year (note 2) $ 277,443 $ 155,411 Increase in net assets, Class E (note 2) $ 254,798 $ 119,430 Increase in net assets per unit, Class E (note 2) Increase in net assets, Advisor Class (note 2) $ 22,645 $ 35,981 Increase in net assets per unit, Advisor Class (note 2) (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 (note 2) $ 5,832,153 $ 5,556,456 Increase in net assets (note 2) 277, ,411 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 4,560,653 Aggregate amounts paid on redemption of securities of the investment fund (603,995) (4,288,820) Securities issued on reinvestment of distributions 2,192 2,887 Distributions: From net investment income (118,284) (121,243) From net realized capital gains (33,191) Return of capital (11,656) Total net assets at the end of the year (note 2) $ 5,377,853 $ 5,832,153 Total net assets at the beginning of the year, Class E (note 2) $ 5,249,268 $ 5,000,846 Increase in net assets, Class E (note 2) 254, ,430 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 4,560,653 Aggregate amounts paid on redemption of securities of the investment fund (603,995) (4,288,820) Securities issued on reinvestment of distributions 2,192 2,887 Distributions: From net investment income (109,776) (113,021) From net realized capital gains (32,707) Return of capital (11,600) Total net assets at the end of the year, Class E (note 2) $ 4,780,887 $ 5,249,268 Total net assets at the beginning of the year, Advisor Class (note 2) $ 582,885 $ 555,610 Increase in net assets, Advisor Class (note 2) 22,645 35,981 Distributions: From net investment income (8,508) (8,222) From net realized capital gains (484) Return of capital (56) Total net assets at the end of the year, Advisor Class (note 2) $ 596,966 $ 582,885 (See accompanying notes to financial statements) 19

23 Statements of Cash Flows For the Years Ended December 31, Cash flows from operating activities: Increase in net assets for the year (note 2) $ 277,443 $ 155,411 Adjustments for: Net realized gain on sale of investments and derivatives (35,801) (431,629) Net change in unrealized depreciation (appreciation) of investments and derivatives (107,505) 376,804 Net change in unrealized depreciation (appreciation) of foreign exchange (1,456) 2,371 Purchase of investments (646,716) (5,737,770) Proceeds from the sale of investments 1,023,293 5,702,443 Amounts receivable relating to accrued income (2,315) 3,384 Accrued expenses (2,782) 3,038 Net cash from operating activities 504,161 74,052 Cash flows from financing activities: Amount received from the issuance of units 4,560,653 Amount paid on redemptions of units (603,995) (4,288,820) Distributions paid to unitholders (129,806) (183,636) Net cash from (used in) financing activities (733,801) 88,197 Net increase (decrease) in cash and cash equivalents during the year (229,640) 162,249 Effect of exchange rate fluctuations on cash and cash equivalents 1,456 (2,371) Cash and cash equivalents at beginning of year 271, ,043 Cash and cash equivalents at end of year $ 43,737 $ 271,921 Dividends received, net of withholding taxes $ 167,023 $ 176,050 (See accompanying notes to financial statements) 20

24 Schedule of Investments As at December 31, 2015 Horizons Active Emerging Markets Dividend ETF Average Fair Security Shares Cost Value EQUITIES (99.28%) Mexico (24.24%) Coca-Cola FEMSA SAB de CV, ADR, Series L 1,200 $ 146,498 $ 117,576 Fomento Economico Mexicano SAB de CV, ADR 1, , ,234 Grupo Aeroportuario del Centro Norte SAB de CV, ADR 5, , ,297 Grupo Aeroportuario del Pacifico SA de CV, ADR 2, , ,737 Grupo Aeroportuario del Sureste SA de CV, ADR, Series B , ,181 Industrias Bachoco SAB de CV, ADR 2, , ,735 Southern Copper Corp. 1,300 46,538 46, ,265 1,303,745 Taiwan (13.76%) Advanced Semiconductor Engineering Inc., ADR 19, , ,635 Chunghwa Telecom Co. Ltd., ADR 4, , ,986 Siliconware Precision Industries Co., ADR 19, , ,967 Taiwan Semiconductor Manufacturing Co. Ltd., ADR 6, , , , ,759 Chile (11.81%) Banco de Chile, ADR 1, , ,195 Compania Cervecerias Unidas SA, ADR 6, , ,822 Corpbanca SA, ADR 6, , ,993 Embotelladora Andina SA, ADR, Series A 3,100 82,142 69,833 Empresa Nacional de Electricidad SA, ADR 1,100 53,474 56,408 Enersis SA, ADR 7, , , , ,978 India (11.22%) Dr. Reddy s Laboratories Ltd., ADR 2, , ,129 HDFC Bank Ltd., ADR 1,200 96, ,283 ICICI Bank Ltd., ADR 15, , ,100 Infosys Technologies Ltd., ADR 3,500 67,850 81,119 Tata Motors Ltd., ADR 2,200 87,280 89, , ,342 Brazil (10.73%) Ambev SA, ADR 22, , ,088 Banco Bradesco SA, ADR 9, ,908 65,757 Braskem SA, ADR 3,000 47,269 56,206 Companhia de Saneamento Basico do Estado de Sao Paulo, ADR 6,200 73,341 39,463 Companhia Paranaense de Energia-Copel, ADR 3,700 56,865 30,053 CPFL Energia SA, ADR 2,689 49,877 27,608 Itau Unibanco Holding SA, ADR 7, ,739 71,973 Telefonica Brasil SA 2,200 47,387 27,489 Ultrapar Participações SA, ADR 5, , , , ,805 21

25 Schedule of Investments (continued) As at December 31, 2015 Average Fair Security Shares Cost Value Hong Kong (6.47%) China Mobile Ltd., ADR 2, , ,860 China Unicom (Hong Kong) Ltd., ADR 3,100 51,550 51,731 CNOOC Ltd., ADR , , , ,692 South Korea (6.33%) KT Corp., ADR 9, , ,559 SK Telecom Co. Ltd., ADR 6, , , , ,577 China (5.48%) China Life Insurance Co. Ltd., ADR 2,000 58,388 44,251 China Petroleum and Chemical Corp. (Sinopec), ADR 1, , ,191 Huaneng Power International Inc., ADR, Series N 1,000 56,899 47,461 PetroChina Co. Ltd., ADR ,817 63,530 SouFun Holdings Ltd., ADR 2,300 21,357 23, , ,952 Bermuda (2.63%) Endurance Specialty Holdings Ltd. 1,600 95, ,669 Philippines (2.42%) Philippine Long Distance Telephone Co., ADR 2, , ,137 Indonesia (2.40%) PT Telekomunikasi Indonesia TBK, ADR 2, , ,016 South Africa (1.79%) Sasol Ltd., ADR 2, ,824 96,488 TOTAL EQUITIES 4,900,193 5,339,160 Transaction costs (1,838) TOTAL INVESTMENT PORTFOLIO (99.28%) $ 4,898,355 $ 5,339,160 Cash and cash equivalents (0.81%) 43,737 Other assets less liabilities (-0.09%) (5,044) TOTAL NET ASSETS (100.00%) (note 2) $ 5,377,853 (See accompanying notes to financial statements) 22

26 Notes to Financial Statements For the Years Ended December 31, 2015 and REPORTING ENTITY Horizons Active Emerging Markets Dividend ETF ( Horizons HAJ or the ETF ) is an investment trust established under the laws of the Province of Ontario by Declaration of Trust and effectively began operations on October 10, The address of the ETF s registered office is: c/o AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2. The ETF is offered for sale on a continuous basis by its prospectus in both class E units ( Class E ) and advisor class units ( Advisor Class ) which trade on the Toronto Stock Exchange ( TSX ) under the symbols HAJ and HAJ.A, respectively. Advisors are directly compensated with a service fee on a trailing quarterly basis (the Service Fee ). The only difference between the Advisor Class and existing Class E units of the ETF is that the Advisor Class charges higher management fees that include the Service Fees paid to the advisor (see note 10). The purchase and sale process for the Advisor Class units is identical to that of any other ETF listed on the TSX. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors are able to trade units of the ETF in the same way as other securities traded on the TSX, including by using market orders and limit orders and may incur customary brokerage commissions when buying or selling units. The investment objective of Horizons HAJ is to seek long-term returns consisting of regular dividend income and modest long-term capital growth. Horizons HAJ invests primarily in equity and equity related securities of companies with operations in emerging market economies. AlphaPro Management Inc. ( AlphaPro or the Manager ) is the manager and trustee of the ETF. The Manager has appointed Horizons ETFs Management (Canada) Inc. ( Horizons Management or the Investment Manager ), an affiliate of the Manager, to act as the investment manager to the ETF. The Investment Manager is responsible for implementing the ETF s investment strategies and for engaging the services of Guardian Capital LP ( Guardian Capital or the Sub-Advisor ), to act as the sub-advisor to the ETF. The Manager and Investment Manager are both members of the Mirae Asset Financial Group ( Mirae Asset ). 2. BASIS OF PREPARATION (i) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. These financial statements were authorized for issue on March 9, 2016 by the Board of Directors of the Manager. (ii) Basis of measurement The financial statements have been prepared on the historical cost basis except for financial instruments at fair value though profit or loss, which are measured at fair value. (iii) Functional and presentation currency These financial statements are presented in Canadian dollars, which is the ETF s functional currency. 23