Horizons ETFs – Canada’s Leader in Actively Managed ETFs Since 2009

Understanding Actively Managed ETFs

An exchange traded fund (“ETF”) provides the best of both worlds when it comes to mutual funds and stocks. Like a mutual fund, ETFs are open-ended, meaning that new units of the fund can be created or existing units redeemed at a price per unit that reflects the market value of the underlying securities the fund holds less the liabilities of the fund. Like a stock, ETFs trade on a stock exchange and can be purchased or sold throughout normal trading hours (9:30 a.m. to 4:00 p.m.) at or near its current market value.

The first ETFs launched were designed to seek to replicate a broad index of securities, such as the S&P/TSX 60TM Index or the S&P 500® Index, just to name two well-known examples. Since there is no expectation of trying to outperform these asset class benchmarks, these ETFs are called “passively managed”. Cost is a key component of passive index investing – it needs to be as low as possible since there is no expectation of achieving additional returns beyond the benchmark index but they are expected to return as close to the returns of their respective index as possible. Since ETFs are a cost-effective and flexible way to gain index exposure, the rise in the use of indexing amongst the investing public coincided with the rise of ETF usage.

Although ETFs have traditionally been associated with passive indexing, this doesn’t mean they can’t be actively managed like a typical mutual fund using a portfolio management team to seek better risk-adjusted returns. In fact, ETFs are an excellent vehicle to offer actively managed investment strategies, which is why Horizons ETFs is one of the largest providers of actively managed ETFs in Canada1. Our suite of actively managed ETFs offer the benefits of ETF investing, combined with the advantages of active management – which we believe offers the potential to deliver better risk-adjusted returns in many asset classes.

Unique Features of Actively Managed ETFs in Canada

A major reason that actively managed ETFs or “active ETFs” have been more successful in Canada than other developed ETF markets – representing about 37% of Canadian ETF assets2 – is due to the regulatory environment of the Canadian investment industry. The majority of active ETFs are regulated under National Instrument 81-102. This means that ETFs are governed under the same laws that govern most mutual funds.

In Canada, the disclosure for ETFs and mutual funds is generally the same. In the case of Horizons ETFs for example, the top 10-holdings of our actively managed ETFs are disclosed publicly on a monthly basis, our top-25 holdings are disclosed quarterly and our full portfolios are disclosed semi-annually. We view this as a suitable level of transparency.

A key feature of ETFs is their liquidity – as units can be bought and sold throughout the business day on an exchange. In order to ensure the units trade at (or very near) their current net asset value (“NAV”), an institutional capital markets trader, known as the “market maker”, holds an inventory of ETF units to facilitate their trading. The lead market maker acts to ensure the unit price at which the investor can buy or sell their ETF units, is close to the NAV of the ETF.

This process has worked well for actively managed ETFs, many of which now trade at bid/ask spreads equivalent to spreads observed on comparable index ETFs.

The Importance of Low Fund Management Fees

A central appeal of ETFs is their typically low management fees compared to regular mutual funds (see below). Fees can have a significant impact on investment performance, since they create an additional hurdle for the investment to overcome in order to be profitable. Simply put, the higher the fee on an investment fund, the better the fund needs to perform in order to generate a higher return than its benchmark.

We believe the single-largest obstacle to the performance of Canadian actively managed mutual funds is high fees. The cost disparity between Canadian actively managed ETFs and Canadian actively managed mutual funds can be dramatic. The average management fee of an actively managed Canadian ETF is approximately 0.57% versus 0.81% for Canadian actively managed F-class mutual funds.

Type of Fund Average Management Fee
Average Canadian ETF Fee 0.49%
Average Actively Managed Canadian Equity ETF 0.57%
Average Active F-Class Mutual Fund 0.83%

Source: Morningstar Direct as at March 12, 2019. Based on the Canadian universe of 780 ETFs, the average management fee is 0.49%. Based on the Canadian universe of 323 active ETFs, the average management fee is 0.57%. Based on the Canadian universe of F-class mutual funds, the average management fee is 0.81%.

The cost savings on ETFs can add significant value to the long-term returns of the fund, as highlighted in the chart below which uses a modest return trajectory of only 5%. The longer the time horizon and the larger the cumulative return, the more a return is lost to fees.


* Source: Morningstar Direct as at March 12, 2019. Based on the Canadian universe of 780 ETFs, the average management fee is 0.49%. Based on the Canadian universe of 323 active ETFs, the average management fee is 0.57%. Based on the Canadian universe of F-class mutual funds, the average management fee is 0.81%.

Active management presents opportunities to enhance returns and reduce risk through:

  1. Independent valuation analysis: Can conduct independent research on portfolio holdings, including cash flow analysis, risk analysis
    and earnings forecasts.
  2. Institutional access: Fixed income managers generally obtain favorable execution costs for bonds.
  3. Not forced to buy/sell: Actively managed ETFs can opt out of buying securities with questionable valuations or liquidity.
    They are not forced to buy or sell issues blindly when an index rebalances.
  4. Independent credit analysis: With fixed income investing, active managers will undertake full independent credit analysis of the underlying holdings of the portfolio. Credit analysis is a key determinant of the risk/return profile of fixed income investing and the likelihood of a issuer meeting its debt obligations.

*Relative to the typical MER of regular mutual funds. In Canada, the average management fee for F class mutal funds is 0.83% and 0.50% for ETFs, source: Morningstar Direct as at October 2018.
1Source: Strategic Insight, ETF and Index Funds report - Canada, as at September 30, 2018.
2Source: Morningstar Direct, as at January 2019.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.