Advisors can capture the night effect to dampen volatility in client portfolios.
The overnight trading session has outperformed on a risk-adjusted basis over the past 20 years, a phenomenon referred to as the night effect. The historically lower volatility of the overnight session may lead to better up/down capture ratios, allowing investors to maintain their target equity exposure more comfortably through periods of market turbulence.
The decreased volatility in the night session can be attributed to the significant decline in trading volume. NightShares CEO Bruce 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.
Investors Can Access the Night Effect with NSPL
The NightShares 500 1x/1.5x ETF (NSPL) captures the night effect in an efficient and cost-effective way. NSPL seeks to deliver 1x (100% correspondence) to the S&P 500 during the day, providing U.S. large cap exposure that advisors and investors are familiar with.
However, the fund also seeks to capture 1.5x leveraged exposure to overnight trading session, or 150% of overnight portfolio performance, for a single day — defined by the time between each NAV calculation.
Large caps’ performance last year highlighted the power of the night effect. 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 nearly 5%.
SPY’s Sharpe ratio is 0.54 for holding the fund for the past 20 years (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.
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