The night effect has generated significant buzz recently, as advisors look for ways to enhance performance and reposition portfolios for the challenging market environment.
While the night effect has been studied academically for over two decades, many advisors are unaware of the phenomenon. Just 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.)
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 during the recent webcast.
The night effect became accessible to advisors in an efficient ETF wrapper for the first time with last year’s launch of 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 the NIWM provides exposure to the night performance of 2000 small-cap U.S. companies.
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.
The power of the night effect was demonstrated in last year’s performance. If an investor were to simply buy the SPDR S&P 500 ETF Trust (SPY) at close and sell the open every trading day, they would have lost 13.34%, outperforming buy and hold by approximately 480 basis points. In small caps, buying the close and selling the open would have outperformed the buy and hold session of the iShares Russell 2000 ETF (IWM) by 12%, according to Lavine.
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