Advisors Misunderstand These 2 Things About the Night Effect

Many advisors misunderstand the night effect and how NightShares ETFs can enhance portfolios.

The night effect is a powerful, persistent pattern seen in markets. The night session, defined as buying at close and selling at the next open, looks very different than the daytime session. Notably, the night session tends to contribute most of the returns, while the day session contributes most of the volatility.

One of the leading misconceptions around the NightShares 500 1x/1.5x ETF (NSPL), the NightShares 500 ETF (NSPY), and the NightShares 2000 ETF (NIWM) is how the funds capture the night effect.

“Some people think it has something to do with trading in the overnight session, and it really doesn’t,” NightShares CEO Bruce Lavine said on June 12 during “Using NightShares’ NSPL to Tilt to the Night.”

“It’s really a buy and hold overnight. In some ways, history is more of an indictment of the day than anything else, which is when the markets are closed, they tend to drift higher,” Lavine said. “When the markets are open, a lot of noise shows up and the noise can be positive or negative, but in balance, it’s negative and detracts from the long run performance of markets essentially.”

How the Funds Fit in Portfolios

Another key misunderstanding is how the funds fit in portfolios. Many advisors think the funds are used as a tactical play; however, they are best positioned as long-term holdings.

“[The night effect] does not work all the time. We’ve had periods since we’ve launched that have rough on us,” Lavine said. “When we launched on June 28 of last year, the S&P was at 3,600 on June 30 and by August 15, the S&P was at 4300. There was a massive bear market rally that happened very quickly and it happened during the day.”

In the first half of the year, the night effect would have saved investors a lot of money, but in the second half of the year, it didn’t help as much.

“The point of that is there is a there is a lot of variability to when the day and the night work,” Lavine said. “But we just seen a great persistence to it over time and that’s what we recommend to people.”

Performance Shows Why the Night Effect Deserves a Long-Term Role in Portfolios

Over a 20-year period, the night effect has demonstrated its power in enhancing risk-adjusted returns. The SPDR S&P 500 ETF Trust (SPY) Sharpe ratio is 0.54 for holding the fund over from 2003 through 2022. Meanwhile, during the same period, the night session Sharpe ratio is 0.62, while the day session Sharpe ratio is just 0.16.

NSPY offers access to the night session of U.S. large-caps, while NSPL provides exposure to both night and day sessions but leverages the night exposure (1.5x).

During the same 20-year period, the power of the night effect is even more pronounced among small-caps. The iShares Russell 2000 ETF (IWM) Sharpe ratio is 0.46 for holding the ETF between 2003 and 2022. The night session Sharpe ratio is 0.90, while the day session Sharpe ratio is -0.08.

NIWM provides focused exposure to the performance of U.S. small-caps.

For more news, information, and analysis, visit the Night Effect Channel.