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One-Ticket Solutions to a Globally Diversified ETF Portfolio

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Horizons ETFs offers three one-ticket ETFs: the Horizons Conservative TRI ETF Portfolio (“HCON”), the Horizons Balanced TRI ETF Portfolio (“HBAL”) and the Horizons Growth TRI ETF Portfolio (“HGRO”).

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Each of these ETFs offers exposure to a globally diversified portfolio of equity and fixed income ETFs, as applicable, from our suite of tax-efficient Total Return Index (“TRI”) ETFs.

Over the last three years, many ETF providers have launched similar one-ticket solutions, where they provide an all-in-one asset allocation comprised of their own underlying index ETFs. At Horizons ETFs, we have a noticeably different approach to how we built our asset allocation models compared to many of these competitor strategies. In addition, theunderlying ETFs for our one-ticket solutions are not anticipated to make taxable distributions, which can provide several efficienciesfor investors. 

HCON, HBAL and HGRO have outperformed other competitor Canadian-listed offerings in their respective categories, over multiple timeframes, as detailed in the table below, for the period ending December 31, 2020.
It should be noted that HBAL is categorized by Morningstar separately in the Canada Fund Global Equity Balanced category, and HCON is categorized in the Canada Fund Global Neutral Balanced category. Other balanced ETF competitors, such as iShares Core Balanced ETF Portfolio (“XBAL”), BMO Balanced ETF (“ZBAL”) and the Vanguard Balanced ETF Portfolio (“VBAL”) are also in the Global Neutral Balanced category alongside the “conservative” balanced solutions. The reason for this different Morningstar classification is that balance mandates with 70% or more allocation to equities are put in the Canada Fund Global Equity Neutral Balanced category. Mandates with 100% equity, like HGRO, are in the Canada Fund Global Equity category, while mandates with greater than 40% but less than or equal to 60% equity allocation, are classified within the Canada Fund Global Neutral Balanced category.

You can see in the table below that HCON, HBAL and HGRO outperformed all of their comparable competitor ETFs by a notable margin on a one-yearand, where applicable, two-year basis for the periods ending December 31, 2020. As at December 31, 2020, HBAL delivered a 14.86% one-year return versus a 10.59% return for XBAL; a 8.70% return for ZBAL; and a 10.25% for VBAL for the same period. Meanwhile, during the same period, HGRO delivered a one-year return of 17.29% versus an 11.42% return for XGRO; a 10.66% for ZGRO; and a 10.83% return for VGRO. On a two-year basis for the period ending December 31, 2020, HBAL delivered a 17.87% annualized return versus a 14.63% return for XBAL and a 12.47% return for VBAL (Note: ZBAL is less than two years old as at December 31, 2020, and does not have data for this period).

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Source: Morningstar Direct and Bloomberg as at December 31, 2020.  MERs are for the calendar year ending December 31, 2019 unless otherwise noted.
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. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.

TRI’s One-Ticket Advantages

Higher Equity Allocations: One of the key differentiators with our one-ticket-solutions is that, upon their launch, we made a strategic decision to increase the equity allocation of their strategies based on the long term Sharpe ratio (risk/return profile) of owning equities versus bonds over the last two decades.

It’s important to underscore that the respective 70/30 and 50/50 allocations were not chosen to simply capture upsize movement in the equity market. Rather, it’s our firm’s belief that a 60/40 split in a balanced portfolio, or a conservative 40/60 allocation, places too much emphasis on fixed income in a world where the nature of capital markets has changed dramatically, with interest rates on a multi-decade downward trajectory while investor longevity continues to increase.

It should be noted that having a higher equity allocation does increase the equity risk of the portfolio. We would expect that HBAL and HCON would likely decline further during periods of significant equity market declines, and potentially produce reduced returns compared to the similar iShares, BMO and Vanguard ETFs, which as noted above, have one-ticket funds which utilize higher fixed income allocations and would potentially provide more downside protection during periods of significant equity market decline.

There are three reasons why we chose higher equity allocations in our balanced and conservative ETFs over the traditional allocations used broadly by competitors:

Longevity Risk: Statistically, life expectancies are increasing as investors are living longer, which means that they likely can take on some additional equity risk, as they now have a longer time horizon for investment appreciation and will need to be able to fund a longer retirement period.

Declining Interest Rates and Low Yields: With interest rates at all-time lows and even negative in many countries, fixed income exposure isn’t providing the same advantages for portfolios as it used to. On December 31, 2000, 10-year U.S. Government bonds were yielding 5.11%, compared to 0.91% 20 years later. (Source: Bloomberg, as at December 31, 2020.)

The performance of this higher equity approach and deliberately meaningful weighting to key equity benchmarks like the NASDAQ-100 have resulted in attractive since inception return profiles.

HCON, HBAL and HGRO are structured to be more tax-efficient for Canadian investors. These ETFs have the added benefit of exclusively investing in the Horizons’ suite of TRI ETFs, which are not anticipated to pay out taxable distributions. While HBAL and HCON have paid out some taxable distributions in the past as a result of currency hedging and rebalancing the portfolios, however, the typical income and dividend distributions paid by the underlying index exposures simply accrued to the net asset value per unit price of these ETFs and were not distributed to end unitholders. This type of operation can result in efficiencies for investors, particularly if these ETFs are held in taxable accounts.

Investors have gravitated towards one-ticket ETF solutions as a simple and efficient way to achieve diversified asset allocation, and in some cases, diversified geographic exposure. We believe that there are a lot of structure considerations, that should be evaluated even within this simple product class, including whether the traditional 60/40 equity-fixed income allocation makes sense as a default balanced exposure.

For investors seeking long-term capital growth, the potential effectiveness of HBAL, HCON and HGRO should be considered.

We’re proud of HBAL’s 70/30 allocation, and HGRO and HCON’s differentiated portfolio exposure to some of the world’s largest equity markets. Their strong performance to date has largely been the result of a strategy we feel is built for today’s investment landscape.

Finally, with the potential efficiencies from owning our Corporate Class Total Return Index ETFs, the benefits of holding HBAL, HGRO and HCON in taxable accounts could be even greater for investors.

If you would like to learn more about these simple, yet innovative, one-ticket ETF portfolios, we urge you to contact one of our sales team. Our sales staff can explain how these ETFs might be used to potentially improve the after-tax performance of your client portfolios.

Learn more about HBAL, HCON and HGRO:

HBAL: www.horizonsetfs.com/hbal
HCON: www.horizonsetfs.com/hcon
HGRO: www.horizonsetfs.com/hgro
 

The Investment Objectives of the ETFs discussed are listed below:

HCON: HCON seeks moderate long-term capital growth using a conservative portfolio of exchange traded funds. HCON invests primarily in Horizons’ Total Return Index ETFs. The portfolio targets a long-term asset allocation of approximately 50% equity securities and 50% fixed income securities at the time of any rebalance. The portfolio will be rebalanced semi-annually in order to seek a consistent level of conservative risk. HCON will use currency forwards to hedge its non-Canadian dollar currency exposure to the Canadian dollar at all times.
HCON is subject to the fees of its underlying ETFs. Horizons ETFs currently anticipates that the management expense ratio of HCON will be approximately 0.15%, and will not exceed 0.16%, while the aggregate trading expense ratio of the portfolio of Horizons TRI ETFs held by HCON will be approximately 0.13% and is not expected to exceed 0.16%. As trading expense ratios include expenses outside of the Manager’s control, the trading expense ratio of HCON is subject to change at any time.  

HBAL: HBAL seeks long-term capital growth using a balanced portfolio of exchange traded funds. HBAL primarily invests in Horizons’ Total Return Index ETFs. The portfolio targets a long-term asset allocation of approximately 70% equity securities and 30% fixed income securities, and rebalances semi-annually to ensure the composition of HBAL reflects a consistent level of balanced risk. HBAL will use currency forwards to hedge its non-Canadian dollar currency exposure to the Canadian dollar at all times.
HBAL is subject to the fees of its underlying ETFs. Horizons ETFs currently anticipates that the management expense ratio of HBAL will be approximately 0.15%, and will not exceed 0.16%, while the aggregate trading expense ratio of the portfolio of Horizons TRI ETFs held by HBAL will be approximately 0.13% and is not expected to exceed 0.18%. As trading expense ratios include expenses outside of the Manager’s control, the trading expense ratio of HBAL is subject to change at any time.

HGRO: HGRO seeks long-term capital growth using a portfolio of primarily equity-focused total return index exchange traded funds. HGRO invests primarily in Horizons Total Return Index ETFs. The portfolio targets a long term asset allocation of at least 99% equity securities at the time of any rebalance, and the portfolio will be rebalanced semi-annually in order to seek a consistent level of risk from developed countries around the world.
HGRO is subject to the fees of its underlying ETFs. Horizons ETFs currently anticipates that the management expense ratio of HGRO will be approximately 0.17%, and will not exceed 0.19%, while the aggregate trading expense ratio of the portfolio of Horizons TRI ETFs held by HGRO will be approximately 0.28%. As trading expense ratios include expenses outside of the Manager’s control, the trading expense ratio of HGRO is subject to change at any time.

VCNS: Vanguard Conservative ETF Portfolio seeks to provide a combination of income and moderate long-term capital growth by investing in equity and fixed income securities.
Seeks to achieve its investment objective by primarily investing in equity and fixed income securities. It may do so either directly or indirectly through investment in one or more exchange traded funds managed by the manager or an affiliate or certain other investment funds.
In seeking to achieve the investment objective (under normal market conditions), the sub-advisor will strive to maintain a long-term strategic asset allocation of equity (approximately 40%) and fixed income (approximately 60%) securities. The portfolio asset mix may be reconstituted and rebalanced from time to time at the discretion of the sub-advisor.
The underlying funds are expected to be index funds that provide exposure to broad-based equity and fixed income markets.

VBAL: Vanguard Balanced ETF Portfolio seeks to provide long-term capital growth with a moderate level of income by investing in equity and fixed income securities.
In seeking to achieve the investment objective (under normal market conditions), the sub-advisor will strive to maintain a long-term strategic asset allocation of equity (approximately 60%) and fixed income (approximately 40%) securities. The portfolio asset mix may be reconstituted and rebalanced from time to time at the discretion of the sub-advisor.
The underlying funds are expected to be index funds that provide exposure to broad-based equity and fixed income markets.

VGRO: Vanguard Growth ETF Portfolio seeks to provide long-term capital growth by investing in equity and fixed income securities.
Seeks to achieve its investment objective by primarily investing in equity and fixed income securities. It may do so either directly or indirectly through investment in one or more exchange traded funds managed by the manager or an affiliate or certain other investment funds.
In seeking to achieve the investment objective (under normal market conditions), the sub-advisor will strive to maintain a long-term strategic asset allocation of equity (approximately 80%) and fixed income (approximately 20%) securities. The portfolio asset mix may be reconstituted and rebalanced from time to time at the discretion of the sub-advisor.
The underlying funds are expected to be index funds that provide exposure to broad-based equity and fixed income markets.

XBAL: The Fund seeks to provide long-term capital growth and income by investing primarily in one or more exchange-traded funds managed by BlackRock Canada or an affiliate that provide exposure to equity and/or fixed income securities.
The iShares ETFs in which XBAL invests are generally expected to employ indexing strategies that provide exposure to broad-based equity and fixed income markets. XBAL is managed in accordance with a long-term strategic asset allocation of approximately 60% equity exposure and approximately 40% fixed income exposure.

XGRO: The Fund seeks to provide long-term capital growth and income by investing primarily in one or more exchange-traded funds managed by BlackRock Canada or an affiliate that provide exposure to equity and/or fixed income securities. XGRO invests primarily in one or more iShares ETFs that provide exposure to equity and/or fixed income securities.
The iShares ETFs in which XGRO invests are generally expected to employ indexing strategies that provide exposure to broad-based equity and fixed income markets. XGRO is managed in accordance with a long-term strategic asset allocation of approximately 80% equity exposure and approximately 20% fixed income exposure.

ZBAL: The BMO Balanced ETF is designed to provide moderate long-term capital appreciation and income by investing in global equity and fixed income ETFs. The ETF will rebalance quarterly to strategic index asset allocation weights. The ETF will invest in broad indexed equity and fixed income ETFs. ZBAL is a fund of a fund; the management fees charged are reduced by those accrued in the underlying funds. BMO Balanced ETF will employ a strategic asset allocation strategy and is expected to primarily invest in other BMO ETFs. The BMO ETF’s asset class weightings will be approximately 60% in equity securities and 40% in fixed income securities.

ZCON: The BMO Conservative ETF is designed to provide income and moderate long-term capital appreciation by investing in global equity and fixed income ETFs. The ETF will rebalance quarterly to strategic index asset allocation weights. The ETF will invest in broad indexed equity and fixed income ETFs. ZCON is a fund of fund; the management fees charged are reduced by those accrued in the underlying funds. BMO Conservative ETF will employ a strategic asset allocation strategy and is expected to primarily invest in other BMO ETFs. The BMO ETF’s asset class weightings will be approximately 60% in fixed income securities and 40% in equity securities.

ZGRO: The BMO Growth ETF is designed to provide long-term capital appreciation by investing in global equity and fixed income ETFs. The ETF will rebalance quarterly to strategic index asset allocation weights. The ETF will invest in broad indexed equity and fixed income ETFs. ZGRO is a fund of fund; the management fees charged are reduced by those accrued in the underlying funds. BMO Growth ETF will employ a strategic asset allocation strategy and is expected to primarily invest in other BMO ETFs. The BMO ETF’s asset class weightings will be approximately 80% in equity securities and 20% in fixed income securities.

 

Commissions, management fees and expenses all may be associated with an investment in Horizons Balanced TRI ETF Portfolio or the Horizons Conservative TRI ETF Portfolio. (the “ETFs”) managed by Horizons ETFs Management (Canada) Inc. The ETFs are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETFs. Please read the prospectus before investing.

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 information contained herein reflects general tax rules only and does not constitute, and should not be construed as, tax advice. Investors should consult with their tax advisors before making any investment decisions.

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.

“Standard & Poor’s®” and “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “TSX®” is a registered trademark of the TSX Inc. (“TSX”). These marks have been licensed for use by Horizons ETFs Management (Canada) Inc. The ETF is not sponsored, endorsed, sold, or promoted by the S&P, TSX or their affiliated companies and none of these parties make any representation, warranty or condition regarding the advisability of buying, selling or holding units/shares of the ETF.

Nasdaq®,Nasdaq-100®,and Nasdaq-100 Index®, are trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Horizons ETFs and Horizons ETFs Management (Canada) Inc. The Fund(s) have not been passed on by the Corporations as to their legality or suitability. The Fund(s) are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE FUND(S).

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