Regulation, Risk and Retail: Investing in Cat Bonds Via ETFs

As investors increasingly look beyond traditional asset classes for true portfolio diversification, we believe that understanding the regulatory framework behind these products is just as important as understanding their returns.

In this blog post we intend to show why it’s important for investors to understand the regulatory and structural environments that cat bonds exist within today to better understand the landscape in which they operate. 

Cat bonds were rendered virtually untouchable by so-called “retail” investors for years, largely thanks to the Rule 144A of the Securities Act of 1933, which limits the resale of certain restricted securities to certain Qualified Institutional Buyers (QIBs). Some of the most common examples of QIBs include certain institutions managing at least $100 million in securities, broker dealers, and other entities like pension funds and insurance funds.

Since cat bonds are held in offshore Special Purpose Vehicles (SPVs) and the notes issued by those SPVs are sold into the US capital markets under Rule 144A, they are allowed to be held within funds registered by the Investment Company Act of 1940 (“40 Act”).

Most ETFs, like mutual funds, are 40 Act funds and thus have the ability to own the debt securities issued by the cat bond SPVs.  ETFs must adhere to additional regulatory requirements around diversification, liquidity, leverage, audit, transparency and reporting, and daily pricing and liquidity, which gives owners of these ETF shares an additional level of regulatory oversight and investor protection. The end result? Retail investors have the ability to access sophisticated investment vehicles while still being protected under 1940 Act regulations. 

The Brookmont Catastrophic Bond ETF (ILS) was listed on April 1, 2025 and was the first US-listed ETF providing investor access to a portfolio of cat bonds.

ILS, like all ETFs, is required to publish certain regular updates for current and prospective investors. Some of these documents include an external audit opinion, prospectus and annual reports, post daily NAVs, disclose their portfolio composition and alert investors to relevant risk factors. The SEC also calls for another layer of visibility regarding the material risks associated with cat bond ETFs, including event, modeling, liquidity, valuation and offshore structure risks. 

Brookmont Capital, the fund’s Adviser, launched ILS with the goal of improving investor access to this emerging asset class historically reserved for larger, typically institutional, investors. ILS is actively managed, so its portfolio manager team aims to bring an eye for risk management thanks to their experience in both the cat bond and ETF marketplaces.

We believe that doing due diligence on an ETF doesn’t stop at a review of performance metrics. The Brookmont Capital team is available to answer your questions and help you become a more thoughtful allocator. You can subscribe to our newsletter or ask our team to address your questions using this link.