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

Transcription

1 Annual Report December 31, 2016 Horizons Active Cdn Municipal Bond ETF (HMP, HMP.A:TSX) ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance...1 Financial Highlights...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...26

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

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

5 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Risk In order to manage the liquidity of the portfolio, Horizons HMP will generally invest between 10% and 20% of its net assets in cash and cash equivalents, Canadian provincial government bonds and/or bonds issued by Canadian federal government agencies. Please refer to the ETF s most recent prospectus for a complete description of Horizons HMP s investment restrictions. The Manager performs a review of the ETF s risk rating at least annually, as well as when there is a material change in the ETF s investment objective or investment strategies. The current risk rating for the ETF is: low. Risk ratings are determined based on the historical volatility of the ETF as measured by the standard deviation of its performance against its mean. The risk categorization of the ETF may change over time and historical volatility is not indicative of future volatility. Generally, a risk rating is assigned to the ETF based on the historical rolling ten-year standard deviation of its return, the return of an underlying index, or of an applicable proxy index. In cases where the Manager believes that this methodology produces a result that is not indicative of the ETF s future volatility, the risk rating may be determined by the ETF s category. Risk ratings are not intended for use as a substitute for undertaking a proper and complete suitability or financial assessment by an investment advisor. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the ETF may be subject. Prospective investors should read the ETF s most recent prospectus and consider the full description of the risks contained therein before purchasing units. The risks to which an investment in the ETF is subject are listed below and have not changed from the list of risks found in the ETF s most recent prospectus. A full description of each risk listed below may also be found in the most recent prospectus. The most recent prospectus is available at or from or by contacting AlphaPro Management Inc. directly via the contact information on the back page of this document. 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 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 2

6 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Results of Operations For the year ended December 31, 2016, the Class E units and Advisor Class units of the ETF returned 1.18% and 0.62%, respectively, when including distributions paid to unitholders. This compares to a return of 1.64% for the S&P Canada Provincial & Municipal Bond Index (the Index ) for the same period. 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 The Canadian bond market opened the year strongly with the Government of Canada 10-year bond ( Canada 10-Year ) yield briefly touching an all-time low yield of 0.91% in mid-february, before moving back to finish the first quarter at 1.23%. The strong opening was driven by continued softness in commodity prices and a weaker global outlook, led by slower growth in China and deflationary risks in Europe. Markets only began to recover as policy makers stepped up with renewed stimulative measures. The European Central Bank (ECB) pushed its policy rates further into negative territory and expanded its quantitative easing program to include purchases of corporate debt. The Bank of China cut bank reserve requirements to spur lending. Oil prices also found a floor after Saudi Arabia and Russia announced they would cap production levels. The second quarter was also strong for the Canadian bond market as both government and corporate bonds performed well. Much of the strength came late in the quarter when the Leave side won a surprising victory in the U.K. referendum on continued European Union membership ( Brexit ). Global bond markets rallied on the result, led by the U.K. and other European sovereign bonds. In Canada, the recovery in oil prices towards $50 per barrel provided some stability. By quarter end the yield on the Government of Canada 5-year bond was just 0.57%, down 11 basis points (bps) from the end of March and 16 bps for the six months ended June 30, Global bond markets began the third quarter facing a great deal of uncertainty in the aftermath of the U.K s surprising decision to leave the European Union and a continuing back drop of weak global expansion. The Canada 10-Year yield once again broke below 1.0% in early July and then settled into a tight trading range between 0.95% and 1.10% through the summer. Bond markets did suffer a brief correction in September when the European Central Bank ( ECB ) and Bank of Japan ( BoJ ) failed to add to their asset purchase programs, as had been expected, but then rallied back following the September Federal Open Market Committee ( FOMC ) meeting that once again failed to deliver on a much discussed interest rate hike. The Canadian economic backdrop also supported lower bond yields. In fact, the yield curve flattened modestly in the quarter with the Government of Canada 30-year bond yield ending the third quarter at 1.66%, down from 1.72% at the end of June. Finally, bond markets sold off sharply in the fourth quarter of Donald Trump s surprising victory in the U.S. presidential election was the key catalyst pushing bond yields higher as his plans for tax cuts and increased spending lifted market expectations for growth. Also contributing to rising yields was the anticipated rate hike by the U.S. Federal Reserve (the Fed ) at its December meeting which was signaled by continued labour market strength and economic expansion. For the quarter the U.S. 10-year Treasury bond yield rose 100 bps to hit a high for the year of on December 15, before settling back to end the year at 2.44%. Meanwhile, the Canada 10-Year yield followed suit, rising 84 bps to 1.83%, also on December 15, before ending December at 1.72%. In both markets the yield curve steepened. Credit markets were the best performers during the year as municipal, provincial and corporate bonds outperformed Government of Canada bonds. The average spread on corporate bonds in the narrowed 27 bps versus their respective Canada bonds, while rated-municipals spreads were relatively flat. 3

7 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Un-rated municipal bond spreads narrowed, albeit slowly, throughout the year as the hunt for yield continued to gain some traction, and was exacerbated by a lack of new issuances in early August as well as during the last half of December. The healthy position and path toward a balanced budget by the province of Québec, and the good financial conditions of its municipalities, also helped this sector to perform well during the year. Un-rated municipal bonds in that province outperformed by their higher carry, and tightened by close to bps versus Province of Québec bonds across the curve. Portfolio Review The ETF is overweight rated and non-rated municipal bonds in the province of Québec with a large allocation to this segment. Fiera continues to see much value in this area, taking into account the fundamentals and large liquidity premiums. This is due to the large carry over other municipalities in Canada and over the yield curve of Province of Québec bonds. The ETF participated in multiple new issues where Fiera was able to buy, for the ETF, at attractive levels and select good municipalities according to its credit process, benefiting the ETF. Fiera expects municipal bonds to outperform the provincial sector over the next year as it offers an attractive carry. Outlook At face value, the election of Donald Trump to the U.S. presidency is bearish for bonds. The key elements of his taxation and spending proposals will boost growth in the U.S. materially, should they come to pass. Given the relatively small amount of slack in the U.S. economy, this could push rate expectations higher and will need to be factored into future Fed rate decisions. Some of this is already reflected in the post-election move in yields. Further rises in bond yields will depend on how successful the new president is in pushing his agenda. With the Republican Party in control of both Congress and the presidency, it seems reasonable that some version of his program will be implemented. Other elements of the Trump s program are more ambiguous. Aggressive trade policies, for example, could interrupt global supply systems. Canada in particular may be vulnerable to disruptions should the North American Free Trade Agreement (NAFTA) be watered down or trade disputes interfere with cross-border activity. Global conditions also remain in doubt. The Eurozone is currently getting a lift from a weaker currency and stimulative monetary policies. However, long-term economic recovery remains a challenge and upcoming elections in France and Germany in 2017 could pour cold water on the Euro project. It is important not to become too alarmist about the Trump Effect. While there is room for yields to move higher, we think inflation expectations remain well contained and the positive impact from fiscal stimulus will be offset somewhat by tighter financial conditions in the form of a stronger U.S. dollar and rising long-term borrowing rates. Hence, Fiera s strategy continues to allocate risk to areas we believe offer the best compensated returns. We expect duration and curve positioning will remain slightly short to neutral. In this environment, yield enhancing strategy should continue to do well. The municipal bond market should benefit from this environment 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 rate trend. Finally, Fiera is still managing the ETF with a diversified laddered approach, which translates into a higher yielding strategy along with a well-diversified portfolio. We will continue to tactically take advantage of the positive carry offered by the asset class, by monitoring closely the municipal market and its underlying cyclicality. Other Operating Items and Changes in Net Assets Attributable to Holders of Redeemable Units 4 For the year ended December 31, 2016, the ETF generated gross comprehensive income (loss) from investments and derivatives of $1,453,135. This compares to $171,514 for the period from when the ETF effectively began operations on

8 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF August 12, 2015 to December 31, The ETF incurred management, operating and transaction expenses of $487,773 (2015 $85,082) of which $71,339 (2015 $51,546) 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 $2,182,115 to Class E unitholders and $11,613 to Advisor Class unitholders during the year (2015 Class E: $127,125, Advisor Class: $1,169). Unitholder Activity An ETF is a stock exchange listed, open-ended, continuously offered fund. All orders to purchase units directly from the ETF must be placed by designated brokers and/or underwriters. On any trading day, a designated broker or an underwriter may place a subscription order for a prescribed number of units ( PNU ) or integral multiple PNU. The ETF reserves the absolute right to reject any subscription order placed by a designated broker and/or an underwriter. No fees will be payable by the ETF to a designated broker or an underwriter in connection with the issuance of units. On the issuance of units, the Manager may, at its discretion, charge an administrative fee to an underwriter or designated broker to offset any expenses incurred in issuing the units. All unitholders of the ETF may exchange the applicable PNU (or an integral multiple thereof) of the ETF on any trading day for a prescribed basket of securities (as determined by the investment manager) and/or cash, subject to the requirement that a minimum PNU be exchanged. The Manager may, in its complete discretion, pay exchange proceeds consisting of cash only in an amount equal to the net asset value of the applicable PNU of the ETF next determined following the receipt of the exchange request. The Manager will, upon receipt of the exchange request, advise the unitholder submitting the request as to whether cash and/or a basket of securities will be delivered to satisfy the request. Investors are able to trade units of the ETF in the same way as other securities traded on the Toronto Stock Exchange ( TSX ), including by using market orders and limit orders. An investor may buy or sell units of the ETF on the TSX only through a registered broker or dealer in the province or territory where the investor resides. Investors may incur customary brokerage commissions when buying or selling units. Presentation The attached financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Any mention of total net assets, net assets, net asset value or increase (decrease) in net assets in the financial statements and/or management report of fund performance is referring to net assets or increase (decrease) in net assets attributable to holders of redeemable units as reported under IFRS. 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. 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 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. 5

9 Management Discussion of Fund Performance (continued) Horizons Active Cdn Municipal Bond ETF Termination of Advisor Class Units On December 29, 2016, the Manager announced that it plans to eliminate the Advisor Class units of the ETF. As of January 31, 2017, investment professionals will no longer be able to purchase Advisor Class units on behalf of their clients and this class of units is expected to be fully eliminated by the end of April, Related Party Transactions Certain services have been provided to the ETF by related parties and those relationships are described below. Manager, Trustee and Investment Manager The manager and trustee of the ETF is AlphaPro Management Inc., 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, a corporation incorporated under the laws of Ontario specializing in actively managed ETFs. AlphaPro is a subsidiary of Horizons ETFs Management (Canada) Inc., which also serves as the ETF s investment manager ( Horizons Management or the Investment Manager ), and both entities are members of the Mirae Asset Financial Group. If the ETF invests in the Horizons Management ETFs, Horizons Management may receive management fees in respect of the ETF s assets invested in such Horizons Management ETFs. The offices of the Manager and Investment Manager are the same. Other Related Parties An affiliate of National Bank of Canada ( NBC ) and National Bank Financial Inc. ( NBF ) holds an indirect minority interest in the Manager, and NBC holds an indirect minority interest in Fiera, the sub-advisor of the ETF. NBF acts or may act as a designated broker, an underwriter and/or a registered trader (market maker). These relationships may create actual or perceived conflicts of interest which investors should consider in relation to an investment in the ETF. In particular, by virtue of these relationships, NBF may profit from the sale and trading of the ETF s units. NBF, as market maker of the ETF in the secondary market, may therefore have economic interests which differ from and may be adverse to those of unitholders. NBF s potential roles as a designated broker and a dealer of the ETF is not as an underwriter of the ETF in connection with the primary distribution of units under the ETF s prospectus. NBF was not involved in the preparation of, nor did it perform any review of, the contents of the ETF s prospectus. NBF and its affiliates may, at present or in the future, engage in business with the ETF, the issuers of securities making up the investment portfolio of the ETF, or with the Manager or any funds sponsored by the Manager or its affiliates, including by making loans, executing brokerage transactions, entering into derivative transactions or providing advisory or agency services. In addition, the relationship between NBF and its affiliates, and the Manager and its affiliates may extend to other activities, such as being part of a distribution syndicate for other funds sponsored by the Manager or its affiliates. The ETF, in its course of normal business in seeking to achieve its investment objective, may enter into portfolio transactions that involve an investment in securities of an issuer that is a related party to the Manager. The Manager is permitted to execute these transactions without seeking advance approval from the ETF s Independent Review Committee ( IRC ), provided the Manager complies with the predetermined list of requirements agreed upon with the IRC. For the year ended December 31, 2016 and the period ended December 31, 2015, the ETF did not make any payments to NBF, and/or its affiliates in broker commissions on portfolio transactions. 6

10 Financial Highlights The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance since it effectively began operations on August 12, 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 (0.04) (0.02) Realized losses for the year (0.03) (0.01) Unrealized gains (losses) for the year (0.06) 0.01 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.19) (0.05) From return of capital (0.04) (0.01) Total annual distributions (3) (0.23) (0.06) 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 (0.10) (0.04) Realized losses for the year (0.03) (0.01) Unrealized gains (losses) for the year (0.09) 0.02 Total increase from operations (2) Distributions: From net investment income (excluding dividends) (0.14) (0.04) From return of capital (0.03) Total annual distributions (3) (0.17) (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 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. 8

12 Financial Highlights (continued) Ratios and Supplemental Data Class E Year (1) Total net asset value (000 s) $ 115,783 36,862 Number of units outstanding (000 s) 11,728 3,693 Management expense ratio (2) 0.43% 0.42% Management expense ratio before waivers and absorptions (3) 0.50% 1.11% Trading expense ratio (4) 0.00% 0.02% Portfolio turnover rate (5) % 75.00% 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) 0.99% 0.99% Management expense ratio before waivers and absorptions (3) 1.06% 1.67% Trading expense ratio (4) 0.00% 0.02% Portfolio turnover rate (5) % 75.00% Net asset value per unit, end of year $ Closing market price $ This information is provided as at December 31 of the 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 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. Since the ETF s inception, in consideration for the provision of these services, the Manager has received a monthly management fee at the annual rate of 0.35%, plus applicable sales taxes, of the net asset value of the ETF s Class E units and 0.85%, plus applicable sales taxes, of the net asset value of the ETF s Advisor Class units, calculated and accrued daily and payable monthly in arrears. 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 the Advisor Class units from 0.85% to 0.79%, both plus applicable sales tax, calculated and accrued daily and payable monthly in arrears. The Manager, and not the ETF, will pay to registered dealers a service fee equal to 0.50% per year of the net asset value of Advisor Class units held by clients of the registered dealer. No service fees are paid to registered dealers in respect of Class E units. The Investment Manager and Sub-Advisor are compensated for their services out of the management fees without any further cost to the ETF. Any expenses of the ETF which are waived or absorbed by the Manager are paid out of the management fees received by the Manager. The table below details, in percentage terms, the services received by the ETF from the Manager in consideration of the management fees paid during the year. Portfolio management fees, Waived/absorbed expenses general administrative costs of the ETF Marketing and profit 7% 74% 19% 10

14 Past Performance Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF. Please read the prospectus before investing. The indicated rates of return are the historical total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any investor that would have reduced returns. An investment in the ETF is not guaranteed. Its value changes frequently and past performance may not be repeated. The ETF s performance numbers assume that all distributions are reinvested in additional units of the ETF. If you hold this ETF outside of a registered plan, income and capital gains distributions that are paid to you increase your income for tax purposes whether paid to you in cash or reinvested in additional units. The amount of the reinvested taxable distributions is added to the adjusted cost base of the units that you own. This would decrease your capital gain or increase your capital loss when you later redeem from the ETF, thereby ensuring that you are not taxed on this amount again. Please consult your tax advisor regarding your personal tax situation. Year-by-Year Returns The following chart presents the ETF s performance for its Class E and Advisor Class units for the periods shown. In percentage terms, the chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period. 1.50% 1.25% 1.00% Rate of Return 0.75% 0.50% 0.25% 0.00% Class E 0.43% 1.18% Advisor Class 0.21% 0.62% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at August 12,

15 Past Performance (continued) Annual Compound Returns The following table presents the ETF s annual compound total return since inception and for the periods shown ended December 31, 2016 along with a comparable market index. The table is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the ETF or future returns on investments in the ETF. Period Class E Return % Advisor Class Return % S&P Canada Provincial & Municipal Bond Index Return % 1 Year 1.18% 0.62% 1.64% Since Inception 1.16% 0.60% 0.66% Class E units and Advisor Class units of the ETF have an initial net asset value of $10.00 as at August 12,

16 Summary of Investment Portfolio As at December 31, 2016 % of ETF s Asset Mix Net Asset Value Net Asset Value Canadian Fixed Income Securities $ 116,205, % Cash and Cash Equivalents 249, % Other Assets less Liabilities 315, % $ 116,770, % % of ETF s Sector Mix Net Asset Value Net Asset Value Municipal Bonds $ 106,020, % Provincial Bonds 10,182, % Government Bonds 2, % Cash and Cash Equivalents 249, % Other Assets less Liabilities 315, % $ 116,770, % 13

17 Summary of Investment Portfolio (continued) As at December 31, 2016 Top 25 Holdings* % of ETF s Net Asset Value City of Montreal 8.14% City of Quebec 5.64% Province of Ontario 4.95% City of Sherbrooke 4.32% Province of Quebec 3.77% Ville de Candiac 2.85% Ville de Granby 2.79% Ville de Repentigny 2.74% Municipal Finance Authority of British Columbia 2.62% Ville de Longueuil 2.57% Ville de La Tuque 2.35% Ville de Laval 2.24% Ville de Terrebonne 2.23% Municipality of Levis 1.97% City of Dorval 1.80% Ville de Beloeil 1.72% Ville de Drummondville 1.71% Ville de Rimouski 1.71% Ville de Magog 1.67% City of Mirabel 1.60% Ville de Kirkland 1.48% Ville de Mont-Saint-Hilaire 1.45% Reseau de Transport de la Capitale 1.29% Ville de Mont-Tremblant 1.28% Ville D Alma 1.15% * Note all of the Top 25 Holdings represent the aggregate debt instruments of that issuer in the ETF s portfolio. The summary of investment portfolio may change due to the ongoing portfolio transactions of the ETF. The most recent financial statements are available at no cost by calling , by writing to us at 26 Wellington Street East, Suite 700, Toronto, Ontario, M5E 1S2, by visiting our website at or through SEDAR at 14

18 MANAGER S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying audited annual financial statements of Horizons Active 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 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 Cdn Municipal Bond ETF (the ETF ) We have audited the accompanying financial statements of the ETF, which comprise the statements of financial position as at December 31, 2016 and 2015, the statements of comprehensive income, changes in financial position and cash flows for the year ended December 31, 2016 and for the period from inception on August 4, 2015 to December 31, 2015, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ETF s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the ETF as at December 31, 2016 and 2015, and its financial performance and its cash flows for the year ended December 31, 2016 and for the period from inception on August 4, 2015 to December 31, 2015, in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 15, 2017 Toronto, Canada 16

20 Statements of Financial Position As at December 31, Assets Cash and cash equivalents $ 249,198 $ 367,331 Investments 116,205,500 36,904,523 Amounts receivable relating to accrued income 575, ,413 Total assets 117,030,622 37,421,267 Liabilities Accrued expenses 44,413 12,483 Amounts payable relating to securities redeemed 1,272 Distribution payable 216,100 46,620 Total liabilities 260,513 60,375 Total net assets (note 2) $ 116,770,109 $ 37,360,892 Total net assets, Class E $ 115,782,558 $ 36,861,788 Number of redeemable units outstanding, Class E (note 9) 11,727,802 3,692,699 Total net assets per unit, Class E $ 9.87 $ 9.98 Total net assets, Advisor Class $ 987,551 $ 499,104 Number of redeemable units outstanding, Advisor Class (note 9) 100,020 50,000 Total net assets per unit, Advisor Class $ 9.87 $ 9.98 (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 Year Ended December 31, 2016 and For the Period from Inception on August 4 to December 31, Income Interest income for distribution purposes $ 2,339,520 $ 179,684 Securities lending income (note 8) 7 Net realized loss on sale of investments and derivatives (252,524) (19,163) Net change in unrealized appreciation (depreciation) of investments and derivatives (633,868) 10,993 1,453, ,514 Expenses Management fees (note 10) 384,841 29,878 Audit fees 10, Independent Review Committee fees Custodial fees 10, Legal fees 3,229 Securityholder reporting costs 32,730 37,274 Administration fees 40,633 15,373 Transaction costs 4,076 1,542 Other expenses 3 487,773 85,082 Amounts that were payable by the investment fund that were paid or absorbed by the Manager (71,339) (51,546) 416,434 33,536 Increase in net assets for the year $ 1,036,701 $ 137,978 Increase in net assets, Class E $ 1,035,361 $ 136,270 Increase in net assets per unit, Class E Increase in net assets, Advisor Class $ 1,340 $ 1,708 Increase in net assets per unit, Advisor Class (See accompanying notes to financial statements) 18

22 Statements of Changes in Financial Position For the Year Ended December 31, 2016 and For the Period from Inception on August 4 to December 31, Total net assets at the beginning of the year $ 37,360,892 $ 150,000 Increase in net assets 1,036, ,978 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 82,694,413 37,951,778 Aggregate amounts paid on redemption of securities of the investment fund (2,129,509) (750,570) Securities issued on reinvestment of distributions 1,340 Distributions: From net investment income (1,860,194) (110,847) Return of capital (333,534) (17,447) Total net assets at the end of the year $ 116,770,109 $ 37,360,892 Total net assets at the beginning of the year, Class E $ 36,861,788 $ 150,000 Increase in net assets, Class E 1,035, ,270 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 82,195,965 37,453,213 Aggregate amounts paid on redemption of securities of the investment fund (2,129,509) (750,570) Securities issued on reinvestment of distributions 1,068 Distributions: From net investment income (1,850,403) (109,678) Return of capital (331,712) (17,447) Total net assets at the end of the year, Class E $ 115,782,558 $ 36,861,788 Total net assets at the beginning of the year, Advisor Class $ 499,104 $ Increase in net assets, Advisor Class 1,340 1,708 Redeemable unit transactions Proceeds from the issuance of securities of the investment fund 498, ,565 Securities issued on reinvestment of distributions 272 Distributions: From net investment income (9,791) (1,169) Return of capital (1,822) Total net assets at the end of the year, Advisor Class $ 987,551 $ 499,104 (See accompanying notes to financial statements) 19

23 Statements of Cash Flows For the Year Ended December 31, 2016 and For the Period from Inception on August 4 to December 31, Cash flows from operating activities: Increase in net assets for the year $ 1,036,701 $ 137,978 Adjustments for: Net realized loss on sale of investments and derivatives 252,524 19,163 Net change in unrealized depreciation (appreciation) of investments and derivatives 633,868 (10,993) Purchase of investments (202,246,055) (52,471,938) Proceeds from the sale of investments 122,058,686 15,559,245 Amounts receivable relating to accrued income (426,511) (149,413) Accrued expenses 31,930 12,483 Net cash used in operating activities (78,658,857) (36,903,475) Cash flows from financing activities: Amount received from the issuance of units 82,694,413 37,951,778 Amount paid on redemptions of units (2,130,781) (749,298) Distributions paid to unitholders (2,022,908) (81,674) Net cash from financing activities 78,540,724 37,120,806 Net increase (decrease) in cash and cash equivalents during the year (118,133) 217,331 Cash and cash equivalents at beginning of year 367, ,000 Cash and cash equivalents at end of year $ 249,198 $ 367,331 Interest received, net of withholding taxes $ 1,913,009 $ 30,271 (See accompanying notes to financial statements) 20

24 Schedule of Investments As at December 31, 2016 Horizons Active Cdn Municipal Bond ETF Average Fair Security Par Value Cost Value CANADIAN FIXED INCOME SECURITIES (99.52%) Municipal Bonds (90.80%) City of Beaconsfield, 1.70%, 2019/04/05 235,000 $ 233,567 $ 233,593 City of Beaconsfield, 1.90%, 2020/04/05 245, , ,518 City of Brossard, 2.10%, 2017/07/31 318, , ,120 City of Dorval, 1.70%, 2019/03/16 500, , ,476 City of Dorval, 2.00%, 2020/03/16 500, , ,489 City of Dorval, 2.25%, 2021/03/16 1,100,000 1,111,715 1,097,787 City of Mirabel, 2.00%, 2018/09/09 1,220,000 1,233,176 1,221,208 City of Mirabel, 2.00%, 2020/08/26 650, , ,430 City of Montreal, 5.00%, 2018/12/01 2,970,000 3,275,923 3,175,106 City of Montreal, 5.45%, 2019/12/01 3,100,000 3,528,608 3,438,879 City of Montreal, 4.50%, 2021/12/01 2,600,000 2,954,433 2,896,946 City of Quebec, 2.10%, 2019/06/10 5,000,000 5,064,000 5,059,975 City of Quebec, 4.35%, 2019/12/16 300, , ,191 City of Quebec, 4.25%, 2020/02/17 600, , ,959 City of Quebec, 2.00%, 2020/12/08 560, , ,252 City of Sherbrooke, 2.35%, 2018/01/30 2,434,000 2,470,680 2,457,805 City of Sherbrooke, 1.25%, 2018/06/29 800, , ,564 City of Sherbrooke, 2.45%, 2019/02/20 450, , ,383 City of Sherbrooke, 1.95%, 2020/01/26 1,350,000 1,334,232 1,347,494 City of St-Georges Quebec, 1.40%, 2018/02/24 461, , ,317 City of St-Jean-sur-Richelieu, 1.40%, 2019/06/22 300, , ,515 City of St-Jean-sur-Richelieu, 2.20%, 2020/12/18 500, , ,970 City of Toronto, 4.50%, 2019/12/02 1,000,000 1,114,900 1,085,971 City of Vaudreuil-Dorion, 1.85%, 2018/11/03 718, , ,568 City of Vaudreuil-Dorion, 1.70%, 2020/07/20 473, , ,074 Gaspe Ville, 1.50%, 2018/02/16 300, , ,689 L Ancienne-Lorette, 1.25%, 2017/10/12 400, , ,696 Mascouche Ville, 1.50%, 2019/10/18 456, , ,843 Municipal Finance Authority of British Columbia, 2.05%, 2019/06/02 2,020,000 2,065,725 2,055,459 Municipal Finance Authority of British Columbia, 1.75%, 2020/10/15 1,000,000 1,010,420 1,003,763 Municipalite de Lac-Beauport, 1.50%, 2017/12/21 147, , ,841 Municipalite de Lac-Beauport, 1.90%, 2018/12/21 151, , ,001 Municipalite de Lac-Beauport, 2.15%, 2019/12/21 157, , ,188 Municipalite de Lac-Beauport, 2.40%, 2020/12/21 478, , ,627 Municipalité de Notre-Dame-du-Mont-Carmel, 2.00%, 2020/03/22 289, , ,940 Municipalite de Rawdon, 1.50%, 2017/09/01 172, , ,854 Municipalite de Saint-Anselme, 2.15%, 2021/01/19 1,000, , ,311 Municipalite de Saint-Damase, 1.60%, 2019/03/17 186, , ,411 Municipalite de Saint-Damase, 1.90%, 2020/03/17 300, , ,737 21