World’s First Catastrophe-Bond ETF Falters in ‘Crazy’ Market

The Brookmont Catastrophic Bond ETF (ILS US), the world’s first publicly traded vehicle offering retail investors access to catastrophe bonds, has faced an unexpectedly rocky start. Launched in April 2025 with ambitions to democratize access to this niche asset class, the fund now holds just $6 million in assets—a fraction of its $25 million seed capital target. Institutional investors, initially courted for their deep pockets, have retreated amid market turbulence, leaving the ETF to grapple with liquidity concerns and a public wary of its high-risk profile.

Yet the broader catastrophe bond market—the ETF’s raison d’être—has never been stronger. First-quarter 2025 issuance hit a record $7.1 billion, pushing total outstanding cat bonds to $52.2 billion, a 17% year-over-year surge. These instruments, which pay investors to underwrite disaster risks for insurers, have proven remarkably resilient. In 2024, they returned 17%, and 2023’s 20% gain remains an all-time high.

Why the Disconnect?
The ETF’s struggles stem from a mix of structural and timing-related challenges. For one, it launched during a period of heightened volatility, with investors distracted by the lingering fallout from trade wars and broader financial instability. “Retail investors are overwhelmed,” said Ethan Powell, Brookmont’s CIO. “They’re not ready to engage with an asset class that requires understanding catastrophe risk.”

Compounding the issue is the lack of a lead market maker, a critical component for stabilizing bid-ask spreads. Without one, the ETF’s liquidity remains constrained, deterring further inflows. Meanwhile, the fund’s portfolio holds just 16 bonds—far fewer than the 75 planned—limiting diversification and amplifying risk perception.

The Case for Cat Bonds
Despite the ETF’s woes, the underlying asset class remains compelling. Cat bonds offer average yields of 12.7% (as of February 2025) and a low expected loss rate of 2.3%, translating to a net return of ~10.4%. Their appeal lies in their low correlation to stocks and bonds—a critical hedge during market selloffs—and their floating-rate coupons, which rise with interest rates.

Institutional investors, particularly in Europe, have embraced this. UCITS-compliant cat bond funds now hold over $15 billion, up from $8.8 billion in 2022. “Institutional demand is insatiable,” noted Powell. “The problem is translating that into a retail product.”

Risks and the Road Ahead
Cat bonds are not without peril. Investors face “catastrophe risk”—the chance that payouts triggered by disasters like hurricanes or earthquakes could erode principal. Climate change has increased such risks, but diversification across regions and perils mitigates losses. Brookmont’s ETF, for instance, targets a 2% maximum loss exposure per bond.

The ETF’s fate now hinges on stabilizing its asset base and securing a market maker. Powell acknowledges the timing was “unfortunate,” but argues the current environment is a litmus test for cat bonds’ durability. “If they can thrive in this market, they’ll thrive anywhere,” he said.

Conclusion
The Brookmont ETF’s struggles underscore the difficulty of scaling niche asset classes to retail investors. While the broader cat bond market is on track to set records in issuance and performance, the ETF’s $6 million asset base and structural hurdles suggest a mismatch between institutional enthusiasm and retail accessibility.

Yet the data is clear: cat bonds deliver high yields, diversification benefits, and resilience in volatile markets. For the ETF to succeed, it must navigate liquidity challenges, educate investors on risk-reward dynamics, and capitalize on the $52.2 billion market’s momentum. Until then, cat bonds will remain the province of sophisticated investors, leaving retail participants to wonder whether the risk—and the reward—are worth the leap.