Investor access to catastrophe bonds continues to become easier as the first cat bond ETF began trading in April of 2025. The ETF wrapper brings some key benefits thanks to its structure, including intra-day liquidity, portfolio transparency, and a fee structure that is typically less expensive than private fund and hedge fund offerings.
Investors are often drawn to cat bonds because their floating-rate yields can be greater than the yields of other bonds, and because their total returns are based on randomly-occurring nature-related events and not economic or market-driven factors. We believe it’s important for investors to have a clear understanding of how cat bonds work and risks and rewards that accompany them so that they can be educated investors in any investment product that holds them. Including a cat bond ETF.
Let’s break down the core facets of cat bonds.
It’s true that cat bonds can often offer better yields than other high-yielding bonds, but they are unlike traditional fixed income instruments because their underlying exposure to insurance assets make it more difficult to predict potential losses. Since cat bonds are tied to natural devastation, they are susceptible to principal loss if and when that event occurs. This reality likely adds complexity to investors who need to understand the risks being taken by each fund or position in their overall portfolio. Understanding portfolio risk is particularly important for investors who intend to own cat bonds as part of their fixed income portfolio.
In our opinion, the very way that cat bonds are structured - only incurring losses if a specific weather event achieves highly-detailed, pre-determined thresholds - is a protective benefit for investors. Developing an understanding of how these losses might be incurred will make for a smarter, more informed investor approach.
Accessing an asset class through an ETF or other 40 Act Fund will generally improve diversification and spread out risk, especially compared to the alternative of directly owning the underlying asset(s).
Within an ETF, cat bond exposure can be diversified across many event types and locations to alleviate the fund’s total risk. When doing product due diligence, investors should generally look for funds with portfolio managers (or underlying indexes, if the product is not actively managed) that invest in a variety of bonds with multiple exposures: like hurricanes, earthquakes, wildfires, other weather events and spread across different geographies.
Investing across a variety of events will continue to offset concentration risk, and it can improve a fund’s risk file by attempting to address seasonality and avoid periods where loss-potential might be more concentrated. For example: North American hurricanes happen in late summer and early fall, whereas wildfires are typically common in the spring. Earthquakes aren’t tied to any time of year or season. An ETF with exposures across many perils and regions, each with varying probability, further helps protect its investors.
We recognize that any investment in a cat bond ETF is by definition a concentrated investment position. But thoughtful investors can and should do some basic due diligence about how the fund is constructed so that they can gain a better understanding of the risk they might be introducing to their portfolio.
Cat bonds can be a lucrative investment, but no two are the same and each investment vehicle has pros and cons. As we’ve just laid out, there are many factors that can expose investors to potential risk. If you’re interested in allocating to cat bonds, here are some questions you might want to understand:
The Brookmont Capital team is always available to answer your questions and help you become a more thoughtful allocator. You can subscribe to our research or bring questions to our monthly office hours here or call us directly at 855.682.2229.
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Key Sources
Brookmont Capital Management Research, 2025
Marin Post “Catastrophe (CAT) Bonds, a fascinating diversification investment vehicle,” March 2025
Federal Reserve Bank of Chicago, Chicago Fed Letter, No. 405, 2018: “Catastrophe Bonds: A Primer and Retrospective”
Artemis BM