Astoria’s John Davi on the Night Effect’s Role in Portfolios | ETF Trends

As markets remain increasingly complex and challenged, advisors need to work harder to generate attractive risk-adjusted returns for clients.

Each year for the past decade, Astoria Portfolio Advisors has released a dedicated year-ahead ETF outlook, highlighting ETFs the firm finds attractive on a per unit-of-risk basis. Astoria’s 2023 special report notably included more fixed income and alternatives products than equities for the first time, underscoring the economic regime shift.

“As we think about the uncertainty in the marketplace, we think that investors need to come up with other ways to manufacture risk return in the portfolio, like using alternatives,” John Davi, Astoria’s founder, CIO, and CEO told ETF Trends.

Two ETFs providing exposure to the night effect made it on Astoria’s 10 ETFs for 2023: the NightShares 500 1x/1.5x ETF (NSPL) and the NightShares 500 ETF (NSPY). The night effect is a persistent phenomenon whereby overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis.

“What’s interesting about the night effect is that there is all this research that shows that the day session is more volatile than the night session,” Davi said. “When I think about, ‘okay, how do I avoid the volatility that I’m not being paid for?’ It is by owning the night.”

Davi said NSPL may be more comfortable for investors in the current environment, as it leans into the night without missing out on gains during the day session. NSPL offers 100% (1x) exposure to the day session of the S&P 500 and 150% (1.5x) exposure to the night session.

“To me, it conceptually makes sense because, during the day, investors scramble – they de-lever, they de-risk, they react to an economic announcement,” Davi said. “Whereas we know over long periods of time, stocks tend to go up… The overnight session has the higher Sharpe ratio than the day session.”

Looking at the past 20 years (2003 through 2022) of performance history for the SPDR S&P 500 ETF Trust (SPY), the Sharpe ratio for 1x day exposure/1.5x night exposure is 0.65, higher than the Sharpe ratio for both buy and hold (0.58) and the day session (0.21), according to data from AlphaTrAI Research.

While NSPY and NSPL fit in many portfolios as a straight equity substitute, Davi said Astoria is using the funds in the alternatives sleeve of portfolios. Notably, day and night trading sessions are highly uncorrelated, explaining the night effect’s role as an alternatives holding.

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