World First: New Catastrophe Bond ETF Hits The Market

The Brookmont Catastrophic Bond ETF (ILS), the world's first-ever catastrophe bond exchange-traded fund, hit the market on Tuesday, offering more investors access to complex securities that pass the risk of disasters from issuers to investors.

The new ETF from Brookmont Capital Management only holds catastrophe bonds, or "cat bonds," that are tied to natural disasters—not other types of risks, like cybersecurity or terrorism. The expense ratio is relatively high at 1.58%, though the fund is the first of its kind to offer this high-yield asset class (typically only offered to institutional investors) in the accessible ETF wrapper. 

ILS shares fell 0.10% to $20.08 in Wednesday afternoon trading. 

ILS Offers Diversification

ILS comes at a time of immense market uncertainty and volatility stemming from investors’ concerns around trade policy, interest-rate risk and the possibility of a recession.

“In a world that is dominated by headlines that create additional uncertainty, this asset class and its non-correlated nature is somewhat of a haven,” Ethan Powell, principal and chief investment officer of Brookmont Capital Management, told etf.com.

As other assets like stocks are falling, catastrophic bonds are not. Powell said that’s mostly driven by the fact that the underlying risk you’re assuming with cat bonds is unique: the risk of a series of major catastrophic events occurring that might impair one or more of your holdings.

“We think [this asset class] is something that can benefit any diversified portfolio,” added Rick Pagnani, co-founder of King Ridge Capital Advisors, sub-adviser to ILS. 

The Unique Risk 

But the cat bond asset class is not the easiest to understand, and it takes a certain level of expertise—not just in managing an ETF but in understanding reinsurance and reinsurance contracts, Pagnani said.

There are also concerns over liquidity. Because an ETF can’t close to new investors, any liquidity or capacity problems, like if the fund is too big for this market, will require “drastic solutions,” Morningstar manager research analyst Lan Anh Tran told etf.com.

Notably, ILS launched without a lead market maker, which is very rare in the ETF market.

“Traditional ETF market makers don’t really know how to price the risk,” Powell said. But he didn’t seem too concerned. “We will probably have a lead market maker in the not-too-distant future because we have a lot of secondary market makers that are keeping an eye on it.”

The fund recorded trading volume of more than $3 million on its first day, way above average for an “indie issuer” and anything with “bond” in the name, Eric Balchunas, senior ETF analyst at Bloomberg, said on X.