Catastrophe bonds, which have consistently outperformed high-yield debt in recent years, are poised to become accessible to a broader set of investors.

Next month, an exchange-traded fund composed of up to 75 of the approximately 250 outstanding so-called cat bonds is set to begin trading on the New York Stock Exchange—making it the first ETF of its kind worldwide.

“It’s a very nuanced asset class and our goal is to demystify it,” Rick Pagnani, co-founder and chief executive of King Ridge Capital Inc. Inc., the firm that will manage the ETF. Brookmont Capital Management LLC, based in Texas, will oversee the fund’s operations.

Pagnani, who previously led the insurance-linked securities unit at Pacific Investment Management Co. until last year, noted that it’s “challenging to build a diversified catastrophe-bond portfolio for a typical investor on their own.” By packaging these instruments into an ETF, he explained, “we aim to lower some of the barriers to entry.”

Cat bonds have garnered increasing attention in recent years after outperforming other high-risk fixed-income segments by a wide margin. The Swiss Re Global Cat Bond Index climbed 17% in 2024, following a record 20% surge the previous year. In comparison, a Bloomberg benchmark for high-yield U.S. corporate bonds advanced 8% last year and 13% in 2023.

Insurers, reinsurers, and various government bodies issue cat bonds to shift risks tied to natural disasters onto the capital markets. Investors can reap substantial returns if a specified catastrophe does not materialize, but they also risk potentially large losses if it does occur.

With extreme weather events becoming more frequent, partly due to climate change, and urban expansion in areas vulnerable to natural hazards, the market for cat bonds is expanding rapidly.

“A lot of insurance companies are leaving high-peril areas as the risk of owning hard assets increases,” explained Ethan Powell, Brookmont’s chief investment officer. Consequently, “more capital needs to flow” to create an extra layer of protection against potential losses, he said.

Currently valued at around $50 billion, the market—heavily dominated by U.S. issuances—has experienced “exceptional” deal volumes in recent years, according to industry specialist Artemis. Just this week, Elementum Advisors LLC, an alternative investment manager focused on cat bonds, announced the launch of a new higher-yield fund to complement its existing product lineup. This fund targets U.S. wind events and is “aimed at capitalizing on the cat bond market’s robust growth and continued concentration in US-focused perils,” according to Elementum.

Pagnani noted that the pipeline of new issuances still appears “rich and continues to build,” and he projects the market could reach about $80 billion by the end of the decade.

So far, catastrophe bondholders have largely avoided significant losses despite substantial damage from recent natural disasters—such as Hurricanes Helene and Milton, along with wildfires in Los Angeles. Asset managers specializing in this area continue to refine their investment models to reduce the likelihood that the bonds’ payout triggers will be activated.

The last notable setback for cat bond investors came in September 2022, when Hurricane Ian hit Florida and caused around $65 billion in insured damages. Losses on cat bonds that year were limited to roughly 2%, according to the Swiss Re index.

Brookmont and King Ridge are in the final stages of bringing on launch partners and intend to secure $10 million to $25 million in initial capital, Pagnani said. Having recently fulfilled the necessary regulatory requirements, the ETF will begin trading on the NYSE under the ticker symbol ILS, he added.

According to the prospectus filed with the Securities and Exchange Commission, the fund will include exposure to a range of risks, from hurricanes in Florida and earthquakes in California to typhoons in Japan and windstorms in Europe. Because cat bonds often move independently of broader stock and bond markets, Brookmont highlighted in an email that the ETF will deliver “uncorrelated income” along with “resilience in volatile markets.”

The intricate structure of cat bonds has led some to question whether they are suitable for non-specialist investors. In Europe, where investors can access cat bonds via UCITS funds, these instruments are classified as securities whose complexity can make it challenging for clients to fully grasp the associated risks.

Cat bond investing “isn’t without risk,” Pagnani emphasized. However, through a diversified ETF, “you can dampen volatility while increasing returns.”

What Bloomberg Intelligence Says:

“We expect thematic fixed income to continue growing given that demand remains strong and performance of certain products such as catastrophe bonds has led among fixed income, with returns of about 17% in 2024 and 20% in 2023. The sustainable debt market continues to evolve and expand through specialized environmental or social products ranging from blue bonds to new or growing markets like debt-for-nature swaps and catastrophe bonds. We expect this trend to continue through 2025 in all three of these types.”

Disclaimer

This article is an independent publication by Bloomberg News and is provided for informational purposes only. The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of King Ridge Capital Inc., Brookmont Capital Management, or any affiliated entities. The article should not be construed as an offer to buy or sell any security, including catastrophe bonds or the referenced ETF. Investing in catastrophe bonds involves significant risks, including potential loss of principal, illiquidity, and exposure to natural disaster events that may trigger financial losses. Past performance is not indicative of future results, and there is no guarantee that catastrophe bonds or related investment strategies will achieve their intended objectives. King Ridge Capital Inc. and Brookmont Capital Management make no representations or warranties regarding the accuracy, completeness, or timeliness of the information contained in the article. Investors should conduct their own due diligence and consult with a financial professional before making any investment decisions. For more information on the risks and investment strategy of the catastrophe-bond ETF, please refer to the fund’s prospectus filed with the U.S. Securities and Exchange Commission (SEC).