It’s important that advisors using the night effect in portfolios can explain the phenomenon to clients.
Advisors can leverage the night effect to enhance risk-adjusted returns for clients. There are currently three ETFs available to investors that efficiently and cost effectively capture the night effect, including the NightShares 500 ETF (NSPY), the NightShares 500 1x/1.5x ETF (NSPL), and the NightShares 2000 ETF (NIWM).
With research dating back about 20 years, the night effect is a fascinating pattern where the majority of large and small cap returns come in during the overnight session. Meanwhile, most of the volatility was comes during the daytime session.
The overnight session refers to buying the close and selling the open — not actively trading throughout the night. Conversely, the daytime session means buying the open and selling the close.
NightShares CEO Bruce Lavine said instead of thinking about roughly 250 trading sessions a year, NightShares thinks of it as there’s more like 500 sessions. It’s easier to think of the night and day sessions as two separate entities, considering the night and the day have historically behaved extremely differently.
Night Session Performance Over 20 Years
Over a 20-year period from 2003 through 2022, the S&P 500 buy and hold (day and night sessions) returned about 10.29%. Notably, about three quarters of that return came during the night session and about one quarter came during the day. Meanwhile, the volatility for the night session is substantially below the day and buy and hold.
Essentially, during that 20-year period, the S&P 500 night session offered 75% of the return with just 60% of the volatility — an attractive risk-adjusted trade for many investors.
It’s important to understand the night effect is a long-term pattern. The night was up 56% of the time over that 20-year period; however, performance can diverge when looking at shorter durations. Year to date in 2023, the night has been up about 48% — slightly lagging its historical performance.
Thus, the night effect is best looked at like a factor (think value, momentum, growth), as factors rotate in and out of favor. Despite this, the night effect is generally used a long-term holding as history has shown most investors will improperly time the market and miss out on returns when trying to be tactical.
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