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The COVID-19 pandemic has accelerated many technologies in the workplace as most office employees have been pushed to work from home. From cybersecurity solutions to remote meeting software, many of these trends have already been part of a larger, emerging trend called Industry 4.0, which revolves around the idea of merging our physical world with the digital world.

In this Q&A, Hans Albrecht, VP and portfolio manager at Horizons ETFs, discusses important emerging trends in technology and how investors can get exposure to these trends through ETFs.

There’s growing interest in technology ETFs driven by the work-from-home (“WFH”) shift. What types of stocks could benefit from this trend?

Key WFH and quarantine sectors include healthcare, ecommerce, pantry plays, home entertainment, Industry 4.0 plays that use big data to build and power new solutions, such as cloud usage, and of course, technologies that enable work from home (WFH). But I believe that the COVID-19 pandemic has only accelerated digital transformation trends that were already well underway before COVID-19. In other words, the WFH stocks were already on an upward long term trajectory that the WFH movement has accelerated.

As WFH policies have been forced upon millions of businesses, I think many businesses approve of the trend, a savings of commute times and cost, good productivity and, arguably, a better work-life balance. Better work-life balance means happy employees, and that’s a good thing. In the long term, companies can save on real estate costs and even wages. As a result, companies like Facebook, Shopify and even BMO have expressed an intent to transition to WFH for a large part or all of their workforces.

The COVID-19 “fixes” may prove to be the beginning of a trend for many companies, so the trend (could be) here to stay.

Our three technology ETFs have been among our best-performing over the last year — what factors have helped drive this success?

I’ve long referred to these themes as “trends with staying power,” and I believe the current pandemic only serves to entrench that concept. If you set aside stock performance and look at broader equity profitability, a broad U.S. equity index like the S&P500 has been struggling over the past year.

One bright spot in the U.S .stock market has been technology, such as cloud businesses, ecommerce, data centre expansion, online software and platforms. These have been growth areas, and in the absence of growth and profitability in other areas, investors have been looking for growth anywhere they can find it.

Robotics and automation have emerged as heroes of the pandemic as they help with health and logistics efforts in, for example, drug and supply delivery, and hospital disinfecting. Artificial intelligence can derive health insight and accelerate drug discovery. 3D printing is making a big comeback as supply chain disruptions show businesses the value of self-sufficiency in manufacturing. Internet of Things trend (creating smart and internet-enabled devices and sensors) has become important for patient monitoring and interactive medicine. And, cyberattacks are soaring as companies implement work-from-home processes, putting a spotlight on the need to protect our expanding digital world.

Can you discuss the three ETFs, what are the major differences between FOUR, RBOT and HBGD?

The Horizons Industry 4.0 ETF (FOUR) invests in five categories, 10 equities in each, in an equal weighted mandate. In all, it owns 50 names across the categories of big data and cloud, robotics/automation and artificial intelligence, augmented reality and 3D printing, cybersecurity and finally, Internet of Things. This mandate enables investors to gain exposure to a cross-section of cutting-edge companies that reach into all corners of Industry 4.0. These are not startups – the average market capitalization in FOUR is about $60 billion – these are small and big firms that are current proven leaders in their respective categories.

The other two ETFs each break out one of the five themes from FOUR, and focus more on their respective categories.

The Horizons Robotics and Automation Index ETF (RBOT) goes deeper into the robotics, automation and artificial intelligence category. It currently holds 36 names, versus 10 in the same category in FOUR. So the selection starts to get more granular across a theme that encompasses the full range: robotics, smart automation, drones, autonomous vehicles, and the intelligence behind it all - software and algorithmic elements that bring it all together. Semiconductors are well represented as they make up much of the Lego bricks involved in making amazing things happen.

Importantly, because North American indices are lacking in some of these areas, exposure is about 50% in international (non-North American) names. Japan and Switzerland excel in the category as some of the best names in sensors and robotics are domiciled there. This may prove to be an added bonus to unitholders as it diversifies portfolio exposure a little more out of the usual Canadian and U.S. names.

The Horizons Big Data & Hardware Index ETF (HBGD)  delves deep into one of the other important themes in FOUR: big data and hardware. This category is of particular interest to me as it highlights a critical foundational layer to what makes Industry 4.0 tick. We are creating data at an exponential rate via smartphone usage and greater internet connectivity at work and in the home. But what we do with that data is what counts – and with today’s technology we can do a lot. We need to organize and make good use of it. Big data is now becoming a part of company strategy as it drives insight into what customers need now and potentially in the future.

In addition, cloud computing has gained prominence as many companies transition to cloud-hosted operations, desktops and applications, accelerated by COVID-19. Investing in this category is about the organization of data and the nuts and bolts of what makes the ever-expanding cloud possible: data centres and digital REITs, semiconductor manufacturers, and platforms that help to organize data and derive insight from it all.

What’s the benefit of owning an ETF rather than simply buying some of the sector leaders as individual stocks?

Well, competition in the technology space is very strong.

On the one hand, a few of the behemoths have significant power that will be difficult to overcome. We own Google, and they have an almost unassailable grip on data — along with Facebook to some extent — and have their fingers in virtually every corner of technology.

Unbeknownst to many, they are also quiet leaders in augmented reality and autonomous vehicles on top of their search business.

A company like Nvidia can focus on gaming but then shift to cryptocurrency rigs, and then shift to AI or self-drive vehicles. Firms in these ETFs need to have eyes all around their heads to make sure they understand both where they’re going and who’s nipping at their heels, or indeed, who is coming up with a better mousetrap. For these reasons we feel that the best way to gain exposure to the themes is in a diversified way. Unless you have your finger on the right pulse at the right time you may be better served owning a proper cross section of leading names.

We don’t believe investors should only have exposure to one or two names in the space, at the risk of owning the next Palm Pilot or Blackberry at the wrong moment. Competition can pivot more easily because of skill overlap and the IT-driven nature of the business. The technology space is merciless and moves rapidly. New York taxi medallions traded at an all-time high in 2015; three years later, Uber was well into decimating the industry.

Disruption can happen quickly and potentially without warning – investors can diversify their risk and their exposure to these incredible themes. We see a properly formulated and diversified basket within the theme as the way to go.

Investment Objectives

FOUR: The Horizons Industry 4.0 ETF (FOUR) seeks to replicate, to the extent possible, the performance of the Solactive Industry 4.0 Index, net of expenses. The Solactive Industry 4.0 Index is designed to provide exposure to the performance of equity securities of companies that are involved in the transformation of manufacturing and the industrial market through the development or implementation of new technologies and innovations. Horizons FOUR seeks to hedge the U.S. dollar value of its portfolio to the Canadian dollar at all times.

RBOT: The Horizons Robotics and Automation Index ETF (RBOT) seeks to replicate the performance of the Indxx Global Robotics & Artificial Intelligence Thematic Index (the “Index”). The Index is designed to provide exposure to the performance of equity securities of companies that are involved in the development of robotics and/or artificial intelligence (“A.I.”). Horizons RBOT seeks to hedge the U.S. dollar value of its portfolio to the Canadian dollar at all times.

HBGD: The Horizons Big Data & Hardware Index ETF (HBGD) seeks to replicate, to the extent possible, the performance of the Solactive Big Data & Hardware Index (“the Index”), net of expenses. The Index tracks a portfolio of global companies focused on data development, storage and data management-related services and solutions, as well as hardware and hardware-related services used in data-intensive applications such as blockchain.

Performance Tables

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Source: Bloomberg as at June 30, 2020.

The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all 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. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible.

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.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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Fiera HPR Commentary – July 2020

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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.

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.