The booming catastrophe bond market is now open to retail investors
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- Everyday investors can now access catastrophe bonds through an ETF.
- The Brookmont Catastrophic Bond fund offers access to the $50 billion market.
- Cat bonds have boomed in recent years as investors eye attractive yields in the face of natural disasters.
A high-risk, high-reward market is opening its doors to mainstream investors.
The world's first catastrophe bond ETF will start trading on Tuesday, boosting accessibility to a market that's been booming alongside rising climate risks worldwide.
While cat bonds have boomed recently — sales jumped to a record $17.7 billion last year — they have been largely limited to private investors. Yet retailer traders now have an in: the Brookmont Catastrophic Bond ETF, listed on the New York Stock Exchange under the ticker ILS.
"If you look at the catastrophic bond asset class 15, 20 years ago, it was sub-$10 billion. Today, our investable universe sits at $50 billion," Ethan Powell, the firm's principal and chief investment officer, told Bloomberg TV.
His firm expects the market to reach $80 billion by the end of the decade.
Cat bonds are fixed-income securities meant to fund insurance payouts in the event of a disaster. Bond buyers are typically offered double-digit yields as long as they can stomach the possibility of losing their investment if a catastrophe forces insurers to pay out.
But the market is critical for reinsurers to offload the risk of climate disasters and be able to backstop the insurance industry to make sure payouts continue to flow to affected policyholders.
Even as disasters have swept the US over in recent years, investors have piled into the debt. The Swiss Re Global Cat Bond Index jumped 17% in 2024, despite extensive damage from Hurricanes Helene and Milton.
According to Bloomberg, 2022's Hurricane Ian was the last meaningful complication for the market.
Still, a few questions loom over the Brookmont ETF. Among them, it's unclear how the fund may hedge a catastrophe bond if losses do come up and how it will navigate the market's limited liquidity.