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The TSX Preferred Share Index rallied hard on July 8 and 9, 2020, up 6.7% over the two days combined, though it was down about 70 basis points (“bps”) as at July 17, 2020, with news of RBC issuing $1 billion worth of new Limited Recourse Capital Notes (“LRCNs”).

We will provide more details on this new structure in an upcoming update, but the basics are: the new note is legally a bond, so it’s considered to be debt by OSFI; its coupon resets and is redeemable every five years at the five-year Government of Canada yield, plus the initial credit spread, with a 60-year final maturity; it has recourse only to equivalent preferred shares that are concurrently issued to a special purpose vehicle, and is converted into those preferred shares upon any missed interest/principal payment, upon an event of default or if the bank does not pay the redemption price at maturity.

The notes are issued only to institutional investors, meaning retail investors won’t have access to them. They rank pari-passu to preferred shares; lower in the capital structure than bonds, but higher than common equity. The LRCN market is likely to be fairly liquid going forward, as institutional interest in the asset class should be strong (institutions are not huge holders of preferred shares).

Why the rally? As is not uncommon in the preferred share market, the story comes back to liquidity. With its consideration as debt, the payments from LRCNs become tax-deductible for the issuer, and thus, more attractive than issuing preferred shares in certain cases. Considering that, it’s safe to assume that, going forward, we may see reduced preferred share issuance by banks, so a scarcity premium is now being baked into the existing preferred share market.

Moreover, there will likely be redemptions on reset dates; any bank/insurer issues with resets over approximately 350 have a fairly high probability of being redeemed, so we’ve seen those issues rally particularly hard. With its interest income as opposed to tax-advantaged dividends, LRCNs are not quite as attractive for the retail crowd, but as mentioned, it’s not available to them anyway.

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Inflection Point: U.S Marijuana Stocks Rally

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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 values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. 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. 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.

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