Everything Advisors Need to Know About the Night Effect | ETF Trends

Capturing the night effect is one way that advisors can enhance risk-adjusted returns and add value to client portfolios.

While the night effect has been studied academically for over two decades, many advisors are unaware of the phenomenon. Only 53% of advisors recently polled said they were aware of the difference between overnight and day session returns, according to “How the Night Effect Can Benefit Your Portfolio” (Date: February 21, 2023. Sample size: 222 respondents, 39.6% RIAs).

What Is the Night Effect?

The night effect is a persistent phenomenon whereby overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis. The overnight trading session has delivered much of U.S. large- and small-cap equities’ returns with much lower volatility than the day session over the past 20 years.

“What we see in the night is this relatively stable upward drift over time, but it’s the day that’s the volatile session, that sometimes drags it back,” NightShares CEO Bruce Lavine said.

Why Does It Work? 

The decreased volatility in the night session can be attributed to the significant decline in trading volume. Lavine said the market still reacts to news, typically out of Asia and Europe, but it’s just a much less volatile session. “The day looks really different — maybe you see big moves on the open, there’s a lot of algorithmic trading going on, there’s day trading, and so it looks much more volatile,” Lavine added.

Lavine said the day plays in the tails, and the night plays within 50 basis points of the benchmark. So, in the day, you see many more up days, many more down days, and a lot more volatility.

How Can Advisors Access the Night Effect?

The phenomenon became accessible to advisors in an efficient ETF wrapper for the first time with the NightShares 500 ETF (NSPY), the NightShares 2000 ETF (NIWM), and the NightShares 500 1x/1.5x ETF (NSPL)

NSPY offers exposure to the night performance of 500 large-cap U.S. companies, while NSPL offers exposure to both night and day sessions but tilts toward the night. The fund provides investment results, before fees and expenses, that correspond to 100% of the performance of a portfolio of 500 large-cap U.S. companies during the day and 150% of the portfolio performance at night.

NIWM provides exposure to the night performance of 2,000 small-cap U.S. companies.

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