Horizons 2X Commodity

Overview

After running through the applicable transitional periods respecting the new character conversion rules, the ETFs will replace existing forward contracts, for the sale of Canadian equities at a price based on the performance or inverse performance of the underlying commodity, with cash-settled forward contracts, and will use new unit proceeds to invest in cash equivalents (to be pledged under the cash-settled forwards) rather than in Canadian equities.

Existing Forward Contracts

The ETFs are double-leveraged exchange traded funds (i.e., on the TSX) which have acquired shares of Canadian public companies, made s. 39(4) elections and entered into forward agreements (the "Existing Forward Documents") for the sale of those shares to a Canadian bank (NBC or CIBC) for an amount which reflects the performance of a continually rolling position in forward contracts (long or short, as the case may be) for the subsequent delivery month, such that on any given day, the return will be approximately 200% or -200%, as the case may be, of that day's performance of the underlying futures contract. Such Existing Forward Documents are secured by the Canadian equities.

Proposed Forward Contracts

Each ETF will enter into multiple cash-settled "New Forward Documents" with an acceptable counterparty which will require a cash payment on maturity based on the performance of the referenced rolled position in future contracts (i.e., they no longer are for a forward sale of Canadian shares). Each ETF will invest the net proceeds of unit subscriptions in interest-bearing accounts or T-Bills (or, where appropriate, in reverse repo agreements), which generally will be pledged to secure the ETF's obligations under the New Forward Documents. Each New Forward Document is expected to have a remaining term to maturity of less than one year which, on consent, will be extended monthly. The forward expenses under the New Forward Documents may be lower than those under the Existing Forward Contracts.

Distribution policy

Distributions are expected to be made annually, at the end of each year, with such distributions automatically being reinvested in further units. The manager does not anticipate that any material amount of distributions will be made on units in 2013. "As long as the Existing Forward Documents remain in effect, and an ETF enters into New Forward Documents, the level of distributions paid by an ETF to its Unitholders will depend upon payments received by the ETF under the Existing Forward Documents and the New Forward Documents, as applicable."

Redemption rights

On any trading day, Unitholders may redeem units for cash at a redemption price equal to 95% of the closing price on the TSX on the effective day of the redemption, or PNUs (prescribed numbers of units) for their NAV less any applicable redemption charge – subject to specified rights to suspend redemptions. Income or capital gains can be allocated to redeeming unitholders.

Trustee/Manager

Horizons ETFs Management (Canada) Inc.

Canadian tax consequences

Holders. Holders may in certain circumstances elect for their units to be capital property under s. 39(4).

Existing Forward Documents

Provided the ETF makes a s. 39(4) election, gains realized on the sale of its common share portfolio (including under the Existing Forward Documents) will be taxed as capital gain or losses. If the Existing Forward Documents are cash-settled, this may be treated as giving rise to an income account outlay or receipt.

Grandfathering

The March 21, 2013 federal budget proposals respecting derivative forward agreements are not expected to apply to gains or losses realized by an ETF in connection with its Existing Forward Documents provided that their terms are not extended and that, prior to their expiration date, they are not increased (i.e., generally, the size of the basket of Canadian securities to be delivered to the counterparty is not increased). The Department of Finance is expected to release further guidance, which may permit additional Existing Forward Documents with a total term of up to 180 days from the expiry of Existing Forward Documents to become exempt. Manager has advised that all Existing Forward Documents were entered into prior to March 21, 2013 and their terms have not been extended, or Existing Forward Documents expired after March 21, 2013 and upon expiration the ETF entered into new Existing Forward Documents with a term of no more than 180 days.

New Forward Documents

Payments received by the ETFs under a New Forward Document upon partial settlement or upon maturity, will be received on income account which will be distributed to the unitholders in the year realized. There may be significant accrued gains in an ETF prior to the settlement of Existing Forward Documents (or New Forward Documents).