Investors Can Leverage the Night to Take Smarter Risks

One way that investors are taking smarter risks is to leverage the night trading session to boost returns.

The overnight trading session tends to contribute most of the returns, while the day session contributes most of the volatility. By leveraging the overnight exposure, investors can enhance their risk-adjusted returns, demonstrated by a more favorable Sharpe ratio.

The night session, defined as buying at close and selling at the next open, has historically performed very differently than the daytime session. This powerful, persistent pattern observed in markets is referred to as the night effect.

Investors can leverage the night session with the NightShares 500 1x/1.5x ETF (NSPL). The fund aims to provide returns that correspond to 1x the performance of a portfolio of 500 large-cap U.S. companies (comparable to the S&P 500) during the day and 1.5x the portfolio performance at night.

See more: “Using NightShares’ NSPL to Tilt to the Night

Comparing the Sharpe ratios for the different trading session highlights the power of the night effect. The SPDR S&P 500 ETF Trust’s (SPY) Sharpe ratio is 0.49. Meanwhile, the night session Sharpe ratio is 0.59, while the day session Sharpe ratio is just 0.11. Conversely, the 1x/1.5x exposure’s Sharpe ratio is 0.55, the most appealing of the group when considering that it offers the greatest returns.

According to NightShares, the percentage of sessions when night was up in the 24-hour cycle has consistently been at 56%. This figure is consistent across five-, 10-, and 20-year periods as of December 31, 2022.

See more: “NSPL Outpaces S&P 500 Over 1- and 3-Month Periods

Notably, to capture the night effect, NSPL and other NightShares ETFs are not actively trading during the overnight session. Rather, it acts as a buy-and-hold during the overnight session, which tends to see a stable upward drift.

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