The world’s first exchange-traded fund (ETF) focused on catastrophe bonds is struggling to attract the expected initial investments. Launched just before the Trump administration’s tariff war, the Brookmont Catastrophic Bond ETF (Ticker: ILS US) has faced challenges in securing seed capital, according to Ethan Powell, the chief investment officer of Brookmont Capital Management in Texas.
Powell noted that many potential investors are hesitant due to market instability, which has shifted their attention away from new investment opportunities. He described the current environment as chaotic and acknowledged that they do not want to pressure investors during this time.
The ETF started trading on April 1 on the New York Stock Exchange. Its goal is to make catastrophe bonds, a niche segment of the bond market, more accessible to everyday investors. This asset class has shown strong performance recently, with record issuance pushing its total market value to around $50 billion. In fact, catastrophe bonds returned 17% last year and saw a remarkable 20% rise in 2023. These bonds are issued by insurance companies seeking to transfer some of their risk to investors. While they can yield significant returns, investors also face the risk of substantial losses if disasters like hurricanes occur.
Despite their potential for profit, catastrophe bonds can be difficult for retail investors to understand. Many people mistakenly think investing in these bonds means bailing out insurers without adequate compensation for the risks involved. The name "catastrophe" itself can deter investors, as it implies danger.
The ETF’s launch was further complicated by the absence of a lead market maker, which typically helps stabilize trading by providing consistent bid and ask prices. Currently, the Brookmont ETF holds 16 bonds with a total asset value of only $6 million. The firm had hoped to raise $25 million in initial funding and expand its portfolio to include up to 75 bonds.
While there was initial interest from institutional investors, Powell mentioned that they have since retreated. However, other areas of the catastrophe bond market are still seeing growth, particularly among institutional investors, hedge funds, and family offices. Funds based in Europe that focus on catastrophe bonds now manage over $15 billion, a significant increase from $8.8 billion in 2022.
Powell believes that catastrophe bonds can be a valuable diversification tool during turbulent market times. He expressed some satisfaction that the ETF launched amid such volatility, as it highlights the resilience of these bonds compared to other safer assets that have struggled recently. Still, he wishes the launch had occurred earlier, allowing for a better narrative around the investment opportunity.