The Brookmont Catastrophic Bond ETF (ILS), saw 150,750 shares traded in its first day listed on the New York Stock Exchange (NYSE), resulting in $3.03 million of trading volume in dollar terms, which is well above the median for all exchange traded funds.
The Brookmont Catastrophic Bond ETF launched on the NYSE yesterday, April 1st, becoming the first catastrophe bond fund strategy to be US exchange-listed and traded.The goal has always been to make the insurance-linked securities (ILS) asset class more accessible to investors, although we understand the target audience is really smaller institutional investors, not retail.
While liquidity has been cited as a potential issue the fund could face, it is reported by Bloomberg to have launched without a dedicated market maker signed up.
On this, Ethan Powell, Principal & Chief Investment Officer of Brookmont Capital Management, LLC, commented to Bloomberg, “In an esoteric asset class such as catastrophe bonds where traditional ETF market makers don’t know how to price the risk, there’s reluctance to be on the hook from a statutory perspective.”
It’s said that without a lead market maker an ETF can experience wider bid ask spreads. More esoteric asset classes in ETF format can often have a wider bid-ask, as too can low volume ETF’s. However, we’re told the spread was narrower for Brookmont’s ILS ETF on its launch day than almost any comparable fund (although it’s very early days of course).
Powell told Bloomberg that the cat bond ETF has been talking with six so-called authorised participants, saying that AP’s and market makers are “super interested” in the product, but so far “don’t want to be on the hook if things go wide.”
The first catastrophe bond ETF is a learning experience even for the most sophisticated market makers it seems, which is perhaps no surprise given they have not featured as service providers to the cat bond market to-date.
With the cat bond ETF trading 150,750 shares in its first day, that is some 240% more than the median ETF’s average daily trade volume, data from Seeking Alpha data suggests.
In addition, the $3.03 million in dollar value of trading volume is shown to be some 80% higher than the median ETF as well.
We’re told this can indicate an ETF that is more attractive to institutional capital, given higher trading sizes are often required by more sophisticated capital providers, although again it’s important to note this was its opening day.
Eric Balchunas of Bloomberg commented on social media that the volumes traded by $ILS on its first day were way above average for an independent ETF issuer and for anything in the ETF world with the word bond in its name.
Powell told Bloomberg that he ultimately expects a market maker will step in, to support liquidity for the new fund.
It will take some time for the first catastrophe bond ETF to settle into a trading pattern and it’s worth remembering that it has launched into global financial markets that have been extremely volatile of late, with enormous swings in stock and other asset prices through the last few months that have continued into this week.
It’s going to be interesting to watch how trading patterns evolve over time, as well as how much investor interest the ILS ETF receives.
Also read: Cat Bond ETF liquidity Q&A: Brookmont Capital Management and King Ridge Capital Advisors.
