Understanding the ‘Night Effect’

Research has long suggested after-hours trading produces a better risk/return profile than investing during traditional market hours. With the launch of the NightShares exchange-traded funds, ETFs appear to be getting the message. 

NightShares CEO Bruce Lavine joined ETF.com’s Sumit Roy and Heather Bell on the Exchange Traded Fridays Podcast last week to talk about the new funds and the firm’s investing strategy. 

The first two NightShares ETFs, which debuted this summer, mainly use futures to capture the after-hours trading performance of the large cap and small cap segments of the U.S. stock market.  

“Much of the volatility is coming during the daytime session. The day and the night behave extremely differently, and we find that, over time, the night session is a better-rewarded session,” Lavine said. 

The strategy depends to a degree on market capitalization, he said.  

“What we found in the large cap space was that you were getting about 75% of the return of buy-and-hold coming into night, and you're getting only about 60% of a volatility if you just hold at night—so a very different-looking product,” he added. 

Lavine has a particular interest in the small cap space. He said returns there were somewhat better in after-hours trading, with roughly 55% of the volatility of a buy-and-hold strategy, which creates a better risk-adjusted return.  

Combined, the large-cap-focused NightShares 500 ETF (NSPY) and the small-cap-focused NightShares 2000 ETF (NIWM) manage $5.63 million. Both have declined further than the Standard & Poor’s 500 since they launched. Both have 0.55% expense ratios. 

The issuer also recently launched the NightShares 500 1x/1.5x ETF (NSPL), which offers long-only exposure to traditional trading hours and 1.5x exposure to overnight trading.  

“[The Night Effect] doesn’t work all the time,” Lavine said. “It’s more like a factor [such] that you have to be in it for a while.” 

The “Night Effect” has been fairly pronounced during the last five years through June 30, he added. NSPY investors should expect less volatility, and perhaps underperformance relative to the S&P 500. NSPL is more of “an outperformance vehicle,” he said.  

Ultimately, the strategy of getting exposure to after-hours trading only is less about replacing a traditional buy-and-hold investment and more about providing diversification to a portfolio.  

“It’s not that day never wins. It’s that, over time, day tends to have lots of big wins and lots of big losses by comparison to night,” Lavine noted. 

The effect holds true across multiple market segments, according to Lavine. Not only is the Night Effect present in markets in different geographies like Germany and Japan, it also shows up in different types of asset classes, including high yield bonds, which are more like equities, and in certain commodities.  

In some cases, an asset class will see the opposite of the Night Effect, with daytime trading outperforming the nighttime trading, such as in short-term bonds.  

Contact Heather Bell at [email protected]