Catastrophe bond ETF navigates trading without lead market maker

By Henry Gale

April 9 - (The Insurer) - A new $6 million exchange-traded fund (ETF) for catastrophe bonds was launched without a lead market maker due to trading firms' limited experience with the asset class and challenges in hedging catastrophe bond risk, the fund's investment adviser told The Insurer.

It is highly unusual for an ETF to be launched without a lead market maker, usually a prime broker or investment bank. The organisation's role is to continuously quote prices it is prepared both to buy and sell shares at, helping ensure liquidity, efficient trading and tight spreads between bid and ask prices.

"Why we love the asset class is also what makes it so difficult to hedge for traditional market makers," said Ethan Powell, principal and chief investment officer of Brookmont Capital Management. Lead market makers typically use other investments as proxies to manage their positions, he explained, but the lack of correlation between cat bonds and other assets would make this challenging for a cat bond-focused ETF.

Even in the absence of a lead market maker, Powell said Brookmont and sub-adviser King Ridge's engagement with ETF and cat bond market makers had helped keep spreads tight so far, when he spoke to The Insurer on April 8.

Powell added that he believed if trading volumes pick up and the fund size grows, organisations that trade in the ETF's shares could start to feel comfortable becoming a lead market maker, which involves obligations such as requirements to keep the bid-ask spread in a particular range.

The Brookmont Catastrophic Bond ETF was listed on the New York Stock Exchange on April 1. A private equity firm provided $1.5 million of seed capital, Powell said, with secondary market activity bringing its assets under management to $6 million.

LSEG data showed the ETF's trading volumes were worth more than $3.1 million on its first day of trading, while it has continued to trade above its net asset value at close every day since April 10.

Additional reporting from Suzanne McGee.