Horizons Stock Index

Overview

Each ETF, which will trade on the TSX, seeks to replicate the performance of its "Underlying Index" through entering into a total return swap (the "Swap") with National Bank of Canada or another bank. Any (income account) gains on the Swap generally will only be distributed to redeeming unitholders so that such income generally will not be allocated to unitholders who only trade their units.

Structure

TRS. Each of the ETFs have entered into or will enter into a total return swap (the "Swap") with NBC (or other Canadian chartered banks, "Counterparties") pursuant to which the ETFs each gain exposure to its Underlying Index. Under each Swap, the ETFs will pay the Counterparty a floating amount based on prevailing short-term market interest rates and an equity amount based upon any negative return of the applicable Underlying Index and, in return, the Counterparty will pay the ETFs an equity amount based upon any positive return of the applicable Underlying Index. The ETFs also each intend to invest the net proceeds of Unit subscriptions in cash and short-term debt obligations to earn prevailing short-term market interest rates.

TRS collateral

Each ETF will invest the net proceeds of Unit subscriptions in cash and short-term debt obligations, and pledge those assets as collateral under the applicable Swap. The income earned on such cash and short-term debt obligations is expected to be sufficient to fund the required floating payments by the applicable ETF (other than HXS) under the current Swaps.

Net TRS value limitation

Under a Swap, the daily marked-to-market value of the exposure of an ETF to any one Counterparty will, generally, not exceed 10% of the net asset value of that ETF and will, at all times, be in accordance with NI 81-102.

Trustee/Manager

Horizons ETFs Management (Canada) Inc.

Distribution Policy

On an annual basis, an ETF will ensure that the net income and net realized capital gains of the ETF have been distributed to Unitholders of the ETF to such an extent that the ETF will not be liable for ordinary income tax thereon, and distributions will only be made to accomplish such distribution of income. Any such distributions will be automatically reinvested in further units at the end of the calendar year, with the number of units then consolidated to the pre-distribution number.

As long as a Swap is used as the sole investment strategy of the ETFs, the Manager anticipates that, prior to termination of the Swap, an ETF should only realize income for purposes of the Tax Act in a taxation year if the Swap has to be partially settled as a result of a redemption of Units. If this occurs, then the Manager intends, on behalf of the ETF, to allocate for purposes of the Tax Act any income realized by the ETF from such partial settlement in a taxation year to the Unitholders who redeemed their Units in the taxation year. Based on the foregoing, provided a Unitholder does not redeem its Units while the applicable ETF uses a Swap as its sole investment strategy, the Unitholder is not expected to receive any distributions of income for purposes of the Tax Act in a taxation year throughout which the Swap is in effect.

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.

Canadian tax consequences

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

Non-resident ownership of Units

At no time does the Manager expect or believe that the property of either ETF will consist of property specified in s. 132(7) (the "Specified Property") that would impact the ability of (i) non-residents of Canada or (ii) partnerships that are not Canadian partnerships, to beneficially own units of an ETF. If the Manager believes that more than 10% of an ETF's property is Specified Property and if the Manager determines that more than 40% of the Units of such ETF are beneficially held by non-residents and/or partnerships that are not Canadian partnerships, the Manager may send a notice to such non-residents and/or partnerships requiring them to sell their Units of such ETF or a portion thereof within a specified period of not less than 30 days.

Income recognition

The ETFs will each recognize income under a Swap when it is realized by such ETF upon partial settlements or upon maturity of the Swap. This may result in significant gains being realized by the ETF at such times and such gains would be taxed as ordinary income. To the extent such income is not offset by any available deductions, it would be distributed to applicable Unitholders in the taxation year in which it is realized and included in such Unitholder's income for the year.