Leverage the Night to Enhance Risk-Adjusted Returns

The NightShares 500 1x/1.5x ETF (NSPL) is a powerful tool for advisors looking to enhance risk-adjusted returns for clients.

NSPL offers leveraged exposure to the night session of the S&P 500. The NightShares fund seeks to provide returns that correspond to 1x the performance of the S&P 500 during the day and 1.5x the portfolio performance at night.

The reason for leveraging the night session, defined as buying at close and selling at the next open, is that it historically performs very differently than the day session. This phenomenon is known as the night effect.

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, advisors can boost risk-adjusted returns in client portfolios.

Over 20 years 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.

See more: “S&P 500 Rallied Before Markets Opened, Falls During Day Session

Comparing the Sharpe ratios for the different trading sessions leveraging the night can enhance risk-adjusted returns.

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 Sharpe ratio for leveraging the night is 0.55, the most attractive of the group.

How Leveraging the Night Has Worked Recently

Notably, the overnight session has tended to be more reactive to macro updates and earnings releases than the day session. This has been a key driver of performance recently as the night session has rallied on the many earnings beats and better-than-expected macroeconomic updates.

“Mega growth companies are reporting results tonight, which should drive after-hours markets.  Some of those gains might be erased based on new information once the market reopens. Leveraging the night effect can provide a differentiated experience.”

As earnings season is well underway, investors should not overlook leveraging the night session to enhance risk-adjusted returns.

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