World’s First Catastrophe Bond ETF Braces for Hurricane Season 

What’s a catastrophe bond investor’s favorite Beatles song? Here Comes the Sun. 

Catastrophe bonds, or cat bonds, transfer the risk associated with climate disasters to the capital markets. Insurance companies essentially get to unload some of the risk of a disaster like a hurricane or wildfire, and investors can generate significant returns if the event doesn’t occur (and face large losses if it does). The appeal is diversification from stocks and bonds: The S&P 500 doesn’t care about severe weather because a storm isn’t going to cause a market crash. Last April, Brookmont Capital Management decided to package the debt up into the first-ever cat bond ETF in just another example of issuers putting a niche product into the easy-to-trade ETF structure.

“If there’s anything that’s more difficult to forecast than the financial markets, it’s the weather,” Ethan Powell, chief investment officer of Brookmont Capital Management said. “What I can say is meteorologists are expecting an average to below-average hurricane season, which should bode well for cat bond investors.” 

Getting the Job Done 

Brookmont’s ETF had a somewhat unconventional launch last year, hitting the market without a lead market maker. While the firm had wanted to launch with $25 million, it had generated just around $12 million by September. It has since reached more than $80 million in net assets, however, and Powell is happy with the fund’s first year, especially its 30-day median bid-ask spread of 0.15%. With one hurricane season under the Brookmont Catastrophic Bond ETF’s belt, investors are heading into a second.  

“Given that we don’t have an LMM, given the unique nature of the underlying asset class, I think it’s tremendous,” Powell said. 

Dave Nadig, president and director of research at ETF.com said that while the fund has had “very little interest,” it has accomplished basically what it was designed to do: 

• The fund is up roughly 7.5% over the past 12 months as of the end of April — a yield premium over Treasury bills comparable to what investors get from corporate bonds — which is what you expect cat bonds to do in a year without a major payable catastrophe, Nadig said. 
• However, “we still haven’t had a major event to test whether the fund delivers on the downside as we’d expect, and whether investors would tolerate that downside,” he added. “It’s so expensive, and I think it’s very hard to sell on spread.”

Y’all Street. Brookmont plans to continue offering “new and interesting alternative income products,” Powell said. Next up? An interval fund that invests in consumer credit instruments, which the firm filed last month to list on the Texas Stock Exchange.